<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 March 31, 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 May 15,
2000 was 5,909,296
---------
Transitional Small Business Disclosure Format (check one):
Yes No XXX
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<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE NINE MONTH PERIODS ENDED
MARCH 31, 2000 AND 1999
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2000 3
Condensed Consolidated Statements of Operations -
Three month periods ended March 31, 2000 and 1999, 4
Nine month periods ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows -
Nine month periods ended March 31, 2000 and 1999 6
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Outlook 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 14
Signature Page 14
Financial Data Schedule
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,115
Accounts receivable - net 750,131
Inventory - net 444,168
Prepaid royalties 1,034,426
Prepaid expenses and other 669,847
------------
Total current assets 2,907,687
Property and equipment - net 171,185
Other assets 13,733
------------
TOTAL ASSETS $ 3,092,605
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 2,362,303
Accrued royalties 1,494,254
Capital lease obligations 4,025
Deferred revenues 280,100
------------
Total current liabilities 4,140,682
------------
Long Term Liabilities
Capital lease obligations 4,360
Deferred revenues 3,230,000
Stockholders' Deficit:
Common stock - $.001 par value, 20,000,000
shares authorized, 5,887,370 shares issued
and outstanding 5,888
Warrants 559,928
Additional paid-in capital 14,314,186
Accumulated deficit (19,162,439)
------------
Total stockholders' deficit (4,282,437)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,092,605
============
</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 MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Net revenues $ 469,418 $ 967,769
Cost of sales 551,406 361,457
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Gross profit (loss) (81,988) 606,312
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Operating costs and expenses:
Marketing and sales 56,683 404,355
Other general and administrative 361,572 411,371
Research and development 247,390 361,524
---------- ----------
Total operating costs and expenses 665,645 1,177,250
Operating loss (747,633) (570,938)
Other income (expense) (2,241) (16,770)
---------- ----------
Loss before provision for income taxes (749,874) (587,708)
Provision for income taxes 4,820 0
---------- ----------
Net loss $ (754,694) $ (587,708)
========== ==========
Basic loss per share $ (0.13) $ (0.10)
========== ==========
Diluted loss per share $ (0.13) $ (0.10)
========== ==========
Weighted average number of common
shares outstanding - Basic 5,887,370 5,869,272
========== ==========
Weighted average number of common
shares outstanding - Diluted 5,887,370 5,869,272
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net revenues $ 2,117,184 $ 3,957,584
Cost of sales 1,812,527 1,657,837
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Gross profit 304,657 2,299,747
----------- -----------
Operating costs and expenses:
Marketing and sales 688,969 1,832,056
Other general and administrative 1,157,963 1,361,666
Research and development 826,783 1,197,835
----------- -----------
Total operating costs and expenses 2,673,715 4,391,557
Operating loss (2,369,058) (2,091,810)
Other income (expense) (55,258) (48,582)
----------- -----------
Loss before provision for income taxes (2,424,316) (2,140,392)
Provision for income taxes 5,620 3,200
----------- -----------
Net loss $(2,429,936) $(2,143,592)
=========== ===========
Basic loss per share $ (0.41) $ (0.37)
=========== ===========
Diluted loss per share $ (0.41) $ (0.37)
=========== ===========
Weighted average number of common
shares outstanding - Basic 5,886,715 5,800,194
=========== ===========
Weighted average number of common
shares outstanding - Diluted 5,886,715 5,800,194
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,429,936) $(2,143,592)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 94,349 133,540
Allowance for sales returns - 410,478
Allowance for bad debt reserves (6,666) -
Changes in operating assets and liabilities:
Accounts receivable (167,944) 1,776,773
Inventories (114,800) (106,817)
Prepaid royalties 209,464 170,419
Prepaid expenses and other (404,532) (11,302)
Accounts payable and accrued expenses 375,271 (827,077)
Accrued royalties (256,347) 42,134
Deferred revenues 2,196,184 (33,058)
----------- -----------
Net cash used by operating activities (504,957) (588,502)
----------- -----------
Cash flows from investing activities-
Purchases of property and equipment (20,260) (3,824)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 11,327 5,224
Payments on capital lease obligations (1,638) (2,118)
Net borrowings under Line of Credit (332,500) 110,640
----------- -----------
Net cash provided by (used in) financing
activities (322,811) 113,746
Net change in cash and cash equivalents (848,028) (478,580)
Cash and cash equivalents, beginning of period 857,143 693,741
----------- -----------
Cash and cash equivalents, end of period $ 9,115 $ 215,161
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information -
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash paid during the period for:
Interest $ 64,525 $ 51,040
=========== ===========
Income taxes $ 5,620 $ 3,200
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its
wholly-owned subsidiaries (collectively referred to as the Company). The
operating results for interim periods are unaudited and are not necessarily an
indication of the results to be expected for the full fiscal year. In the
opinion of management, the results of operations as reported for the interim
period reflect all adjustments which are necessary for a fair presentation of
operating results.
Note B - Accounts Receivable
- ----------------------------
The Accounts Receivable balance at March 31, 2000 was $750,131. This balance
was primarily due to a receivable of $725,000 from TDK Recording Media Europe
S.A., the Company's international republisher and distributor. Effective May 1,
2000, the Company's domestic PC CD ROM distribution agreement with Macmillan
Digital Publishing ("MDP") has been terminated. Consequently, the Company's
transition from MDP to a Company-direct distribution model, coupled with a
seasonal driven product release policy, eliminated new product releases for the
quarterly period ended March 31, 2000 and therefore limited the Company's
ability to generate adequate sales and related accounts receivable amounts.
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). In fiscal 1998 the Company adopted the
Financial Accounting Standards Board's SFAS No. 128 "Earnings per Share"
("EPS"). During the three month and nine month periods ended March 31, 2000 and
1999, the Company incurred a loss from operations. Accordingly, all potentially
dilutive incremental shares are antidilutive and are therefore excluded from the
computations of EPS.
Note E - Deferred Revenue
- -------------------------
On February 28, 2000, the Company had entered into a new distribution Agreement
whereby TDK has been granted continual international republishing and
distribution rights for five years. In consideration for the grant of rights,
TDK agreed to pay a one time signing fee of $1,000,000 upon execution of this
agreement. Of this signing fee, $50,000 was taken into revenue within the 3
month period ended March 31, 2000 while the remaining $950,000 signing fee is
recorded as deferred revenue as of March 31, 2000 and will be amortized as
revenue on a pro rata basis for the remaining 5 year term of the contract.
A balance of $2,530,000 of deferred revenue from TDK remains on the Company's
books at March 31, 2000. This amount of deferred revenue represents advance
republishing monies received by the Company on negotiated titles still in
production. These monies will be recognized as revenue once the development of
each title is completed and the republishing gold master copy is delivered to
TDK.
Note F - Going Concern
- ----------------------
The Company has prepared the financial statements included herewith assuming
that the Company will continue as a going concern. However, the Company
continues to experience recurring losses from operations as of March 31, 2000,
and has not generated sufficient revenue producing activity to sustain its
operations. The Company's prior independent auditors had included an
explanatory paragraph in their report for the year ended June 30, 1999
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of any
uncertainty.
Note G - Net Operating Loss Carry-forwards
- ------------------------------------------
As of March 31, 2000, the Company has available federal net operating loss
("NOL") carry-forwards that may be applied against future taxable income through
2020. State NOL carry-forward are approximately 50% of federal amounts and
expire through 2005. Since management can not determine if it is more likely
than not that the deferred tax asset will be realized, a 100% valuation reserve
has been set up to entirely offset the deferred tax asset. The utilization of
NOL's may be subject to limitations imposed by the Internal Revenue Code.
Temporary differences other than the NOL are not material. The current tax
expense is due to payment of state minimum taxes.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Net Sales. Net sales decreased by 51.5 percent from $967,769 for the three
months ended March 31, 1999 to $469,418 for the three months ended March 31,
2000. This is primarily attributable to the termination of the Company's
exclusive PC CD ROM distribution agreement with Macmillan Digital Publishing and
the subsequent transition to a direct distribution business model to facilitate
the sales of Video Game software. In addition, a general downturn in the PC CD
ROM marketplace as well as an absence of new products released during the
quarter contributed significantly to the loss for the three month period ending
March 31, 2000.
Cost of Sales. Cost of sales increased 52.6 percent from $361,457 for the three
months ended March 31, 1999 to $551,406 for the three months ended March 31,
2000. The increase in cost of sales is primarily due to (i) the write-off of
$328,577 of prepaid royalties deemed unrecoverable in future periods and (ii)
various PC CD ROM product price protection claims and allowances given to
customers within the period.
Marketing and Sales. Marketing and sales expenses significantly decreased by
86.0 percent from $404,355 for the three months ended March 31, 1999 to $56,683
for the three months ended March 31, 2000. This decrease in sales support
expenses and marketing costs during the three month period is principally due to
the absence of new product title releases as the Company transitions to a new,
seasonal driven direct distribution model and the Company's decision to shift
the majority of future product development and sales to console based video
games (i.e., Sony and Nintendo) to facilitate our new business plan.
Research and Development. Research and development costs decreased by 31.6
percent from $361,524 for the three months ended March 31, 1999 to $247,390 for
the three months ended March 31, 2000. However, as a result of the Company's
significant decrease in total revenue, research and development expenses as a
percentage of sales increased from 37.4 percent to 52.7 percent, respectively.
The decrease in dollar costs is primarily associated with (i) the lack of new
product title releases during the three month period and (ii) the reduction of
new product development costs as compared to that of the prior comparable
period. The Company anticipates that future research and development costs will
increase as the Company refocuses its development and sales efforts from the PC
platform toward the more costly video game console based titles (i.e., Sony
Playstation and Nintendo Game Boy). In the event the Company develops and
releases such products for these new platforms, there is no assurance that sales
of these products may offset any increased research and development costs.
General and Administrative. General and administrative expenses decreased from
$411,371 during the three months ended March 31, 1998 to $361,572 for the three
months ended March 31, 1999, reflecting a decrease of 12.1 percent for the
respective periods. This decrease was primarily due to (i) the reducing payroll
and related costs and (ii) stabilizing overhead and administrative costs during
the transition period as compared to that of the prior comparable period.
8
<PAGE>
Nine Months Ended March 31, 2000 Compared to the Nine Months Ended March 31,
1999
Net Sales. Net sales decreased by 46.5 percent from $3,957,584 for the nine
months ended March 31, 1999 to $2,117,184 for the comparable period ended March
31, 2000. This is primarily attributable to the restructuring of the Company's
North American PC CD ROM distributor, Macmillan Digital Publishing, and eventual
termination of the exclusive distribution agreement and the subsequent
transition to a direct distribution business model to facilitate the sales of
Video Game software. In addition, a general downturn in the PC CD ROM
marketplace as well as lower than expected sales figures on existing titles and
higher returns contributed significantly to the loss for the nine months ending
March 31, 2000.
Cost of Sales. Cost of sales increased by 9.3 percent from $1,657,837 for the
nine months ended March 31, 1998 to $1,812,527 for the nine months ended March
31, 1999. Cost of sales also increased as a percentage of sales from 41.9
percent to 85.6 percent during these respective periods. The increase in cost
of sales is primarily due to (i) the write-off of prepaid royalties determined
not to be recoverable in future periods in the amount of $328,577 and (ii)
various PC product price protection claims and allowances given to customers
within the period.
Marketing and Sales. Marketing and sales expenses significantly decreased by
62.4 percent from $1,832,056 for the nine months ended March 31, 1999 to
$688,969 for the nine months ended March 31, 2000 and also decreased as a
percentage of sales from 46.3 percent to 32.5 percent, respectively. This
decrease in sales support expenses and marketing costs during the nine month
period is principally due to cost cutting measures designed to limit our
exposure in the PC CD ROM marketplace and assist the Company as it transitions
to a new, seasonal driven direct distribution model with an emphasis on video
game titles.
Research and Development. Research and development costs decreased by 31.0
percent from $1,197,835 during the nine months ended March 31, 1999 to $826,783
for the nine months ended March 31, 2000, however increased as a percentage of
sales from 30.3 percent to 39.1 percent, respectively. The decrease in dollar
costs is primarily associated with (i) the lack of new product title releases
during the nine month period and (ii) the reduction of new product development
costs as compared to that of the prior comparable period. The Company
anticipates that future research and development costs will increase as the
Company refocuses its development and sales efforts from the PC CD ROM platform
toward the more costly video game console based titles (i.e., Sony Playstation
and Nintendo Game Boy). In the event the Company develops and releases such
products for these new platforms, there is no assurance that sales of these
products may offset any increased research and development costs.
General and Administrative. General and administrative expenses decreased from
$1,361,666 during the nine months ended March 31, 1999 to $1,157,963 for the
nine months ended March 31, 2000, reflecting a decrease of 15.0 percent for the
respective periods. This decrease was primarily due to (i) the reduction of
payroll and related costs and (ii) stabilizing overhead and administrative costs
during the transition period as compared to that of the prior comparable period.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had a negative working capital balance of
$982,995 in comparison with negative working capital of $823,364 at June 30,
1999, a variance of $159,631. Cash and cash equivalents decreased by $848,028,
also as a result of the Company's net loss for the nine months ended March 31,
2000 and reduction of outstanding accounts payable. Accounts receivable
increased by $174,610 in comparison at June 30,1999, due primarily to the
receivable balance from TDK regarding foreign republishing revenue. However,
the Company's transition to a direct distribution model, coupled with the lower
than anticipated sales figures of new product releases for the nine month period
ended March 31, 2000, directly impacted the Company's cash resources and related
accounts receivable amounts.
During the nine months ended March 31, 2000, current liabilities increased by
1.2 percent from $4,091,572 at June 30, 1999 to $4,140,682 at March 31, 2000.
In 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 March
31, 2000, the Company had not utilized the line of credit and the outstanding
available borrowings under the agreement remained at $1,500,000. The Company is
currently seeking additional banking resources to finance the manufacturing of
Sony and Nintendo titles.
The Company has experienced a significant decrease in sales during the last nine
month period, as compared to the same period of time in the prior fiscal year.
This decrease is principally due to the Company's transition to a new, seasonal
driven direct distribution model, the restructuring of its North American
distributor and the Company's decision to shift the majority of future product
development and sales to console based video games (i.e., Sony and Nintendo) to
facilitate our new business plan.
The Company continues to search for new opportunities to obtain interactive
software licenses and develop and sell video game products. Additionally, the
Company is seeking new and innovative ways to deliver its products to consumers,
some of which may require large up-front cash resources. If the Company enters
into agreements in such business opportunities in the future, the Company will
require additional financing to fund its growth.
Based on the Company's current proposed plans and assumptions, the Company
anticipates that the net proceeds from sales of operations and distribution
advances will be sufficient to satisfy its contemplated cash requirements
through this fiscal year end and the twelve months ending June 30, 2001. In the
event that the Company's plans change or its assumptions prove to be inaccurate
(due to unanticipated expenses, increased competition, unfavorable general
economic conditions, decreased demand for its services or otherwise), the
Company could be required to seek additional financing sooner than currently
anticipated. Consequently, there can be no assurance that any additional
financing will become available to the Company when needed, or at all.
YEAR 2000 DISCLOSURE
The Company was successful in actively addressing the potential impact of the
Year 2000 (Y2K) problems by establishing a pro-active approach to ensure that
the Company's critical systems operated before, during and after the century
date rollover.
The Company had taken steps to increase the awareness of its employees and
associated persons with respect to the Y2K problems and what actions would be
taken to address such problems. The Company formed an internal Y2K team, which
included senior management and experienced programmers, which met on a regular
basis to carry out the monitor the Company's Y2K project. The cost of the
Company's Y2K project totaled less than $10,000. The Company expects this cost
to be a one-time event which will not be reflected in future periods.
10
<PAGE>
The Company identified all of its mission-critical systems and completed an
inventory of all hardware, software, networks, and other various processing
platforms, and also customer and vendor interdependencies. The Company
completed an assessment of the systems inventoried to determine their
susceptibility to Y2K issues. This assessment included inquiries to service
providers, vendors, and manufacturers of all systems inventoried to determine
and document if such systems are Y2K compliant. All of the Company's mission
critical service providers, vendors and manufactures responded that they were
Y2K ready. The Company also completed the testing of its mission-critical
systems and made the necessary upgrades to ensure that all mission-critical
systems and software were Y2K compliant.
The Company designed its contingency plan to mitigate the risks to its
operations or its core business resulting from any failure to successfully
complete its Y2K project. The Company updated its contingency plan to include
alternatives that could have been used in case there had been any business
interruptions.
The Company does not expect any remaining risk with respect to the year 2000
issue to have a material adverse effect on the Company.
OUTLOOK
The statements contained in this report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include, but are not limited to: statements regarding the Company's sales and
future revenues, statements regarding future research and development costs and
products, and statements regarding the future flexibility of the Company's cash
reserves. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below. Please consult the
risk factors listed from time to time in the Company's reports on Form 10-QSB
and 10-KSB and Annual Reports to Stockholders.
The Company does not provide forecasts of potential future financial
performance. The Company believes that its new business plan - developed to
provide both domestic and international products for the dedicated game console
marketplace, has the potential to yield significant revenues. The lead time
required to develop video games can be a lengthy process and it will be at least
two years before a complete product line is available. The Company plans to
introduce its first Sony PlayStation titles during holiday 2000 and already has
products in development for holiday 2001. While management of the Company is
cautiously 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
March 31, 2000.
11
<PAGE>
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.
The Company is and has been experiencing decreasing sales in the PC CD ROM
marketplace. The Company is transitioning to a new business plan which includes
products for the video game console business. TDK has provided the Company with
significant capital to produce products for this transition. The Company
recently announced the signing of a new, enhanced, exclusive five year
distribution agreement with the Company's international distributor and
republisher, TDK Recording Media Europe S.A. The Company is also seeking
investment capital in the form of equity sale of securities, convertible loan,
merger or sale of the Company and/or its assets. There can be no assurance that
the Company will succeed in achieving its business plan.
Dependence on Retailers. The Company's retail customers include toy stores,
computer stores, office supply stores, warehouse clubs, consumer electronic
stores, bookstores, video stores, e-commerce sales 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 for any 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 secure and/or retain adequate retail
shelf space for its products.
Licensed Properties. There is a risk factor inherent in any venture involving
licensed properties. Not every licensed product is guaranteed success; only the
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. The Company has recently
amended its business plan and strategy and has adopted a seasonally driven
approach to product releases which it believes will focus the sales and
marketing efforts to provide enhanced sell through and improve customer
relations. The video game business is more seasonal that the PC CD ROM business
and demand for products peak in the month of December.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors have been, and in the future may be,
involved in suits and actions incidental to the Company's business. On April
26, 1999, a lawsuit was filed naming the Company as defendant for recovery of
certain bonus and salary claims by its former Vice President of Sales. At
present, a settlement meeting is set for May 22, 2000. The Company believes that
the claims are without merit and intends to defend its position vigorously.
On December 9, 1999, a lawsuit was filed by the Company's former public
relations consultant, naming the Company as defendant for payment of an
outstanding invoice. The Company has filed a cross-complaint and believes that
the claims are without merit and intends to defend its position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company has entered into an amended Succession Agreement with Vincent J.
Bitetti, its Chief Executive Officer and Chairman, dated as of April 15, 2000,
extending the previously existing Succession Agreement through December 31,
2002. The Board of Directors approved the amended agreement following the
successful signing of the new TDK distribution agreement.
The Company also recently announced the engagement of BDO Seidman, LLP as its
independent auditors.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.1 Amendment #1 to Succession Agreement,
dated April 15, 2000, between
Vincent J. Bitetti and Registrant, filed
herewith
10.2 Exclusive Distribution Agreement,
dated February 28, 2000 between
TDK Recording Media S.A. and Registrant,
filed herewith
27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K On May 5, 2000, the Company filed a Form 8-K
report to acknowledge the engagement of new
independent auditors, BDO Seidman, LLP.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/Vincent J. Bitetti Date May 22, 2000
---------------------- ------------
Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Jeffrey Court Date: May 22, 2000
---------------- ------------
Jeffrey Court
Vice President, Finance
Acting Chief Financial Officer
14
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 1 TO
SUCCESSION AGREEMENT
This AMENDMENT NO. 1 TO SUCCESSION AGREEMENT (this "Amendment") is made as
---------
of April 15, 2000 by and between Vincent J. Bitetti ("Bitetti") and SOUND SOURCE
-------
INTERACTIVE, INC., a Delaware corporation ("SSI/DE"), and SOUND SOURCE
------
INTERACTIVE, INC, a 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 Succession Agreement dated as
of November 12, 1999 (as amended and restated, the "Succession Agreement").
--------------------
B. Since entering into the Succession Agreement, Bitetti has guided Sound
Source into an expanded strategic relationship with TDK Recording Media Europe
S.A., and overseen the development of several new product offerings intended for
use on the Sony Playstation product.
C. Sound Source and Bitetti have mutually agreed to amend the Succession
Agreement to provide for Bitetti's continued management services to Sound
Source, subject to 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. Paragraph 1 of the Succession Agreement is hereby amended by
substituting "December 31, 2002" in place of "December 31, 2000" in the first
sentence thereof.
2. Paragraph 5 of the Succession Agreement is hereby amended by
substituting "December 31, 2002" in place of "December 31, 2000" in subparagraph
(a) thereof.
3. Paragraph 5 of the Succession Agreement is further amended by adding a
new subparagraph (k) and (l) thereto as follows:
(k) to pay Bitetti a bonus of $35,000 for each calendar quarter,
commencing with the quarter ending June 30, 2000, during which Sound Source
realizes a profit; and
(l) to pay Bitetti additional compensation of $100,000 during the
remainder of calendar year 2000, such amount to be paid ratably over the
remainder of calendar year 2000 commencing with the first regular pay
period after the date hereof (provided that such additional amount shall
not be payable in calendar year 2001 or 2002).
<PAGE>
4. Paragraph 5 of the Succession Agreement is further amended by deleting
the word "and" at the end of subparagraph (i) thereof, and substituting a ";"
for the "." at the end of subparagraph (j) thereof.
5. The Succession Agreement shall remain in full force and effect in
accordance with its terms, except as expressly set forth above.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 to
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
<PAGE>
EXHIBIT 10.2
SOUND SOURCE INTERACTIVE, INC
&
TDK RECORDING MEDIA EUROPE S.A.
INTERACTIVE COMPUTER SOFTWARE
-----------------------------
CHILDREN EDUCATION & EDUTAINMENT SOFTWARE
-----------------------------------------
This Agreement is made and entered into as of this twenty-eight day of February,
2000, is by and between:
Sound Source Interactive, Incorporated, a California Corporation, and carrying
on business at:
26115 Mureau Road, Suite B
Calabasas, CA 91302-3126
United States of America
Hereinafter referred as "SSII"
And
TDK Recording Media Europe S.A., a Luxembourg Corporation, and carrying on
business at:
Z.I. Bommelscheuer
L-4902 Bascharage
Grand Duchy of Luxembourg
Hereinafter referred as "TDK"
WHEREAS:
SSII is engaged in licensing, creating, developing and marketing computer
software products (hereinafter referred as "Articles"). SSII is or may become
the sole and exclusive owner and/or licensee of Articles.
SSII proposes to grant to TDK the exclusive license for the existing or coming
Articles in the purpose to republish, market, distribute and sell Localized
<PAGE>
Language Versions of the Articles within the countries (hereinafter referred as
the "Territory") as set forth in Schedule A, which is made a part hereof, and in
accordance with conditions as set forth herein and attached hereto.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, TDK and SSII agree as follows:
1. GRANT OF RIGHTS/SERVICES
1.1 SSII hereby grants to TDK and TDK hereby accepts the exclusive rights to
republish, adapt and amend the Articles for the purpose of creating
Localized Language Versions of the Articles and to republish,
manufacture, market, distribute, display, sell the Localized Language
Versions throughout the Territory (as set forth in Schedule A). The
exclusive right shall apply to all existing or future titles of the
Articles. However, both parties shall negotiate and co-operate in the
selection of the most valuable titles of the Articles. The Articles,
which have been chosen by the parties, shall be regarded as a constituent
part of this Agreement and added by Addendum hereto.
1.2 SSII hereby grants to TDK and TDK hereby accepts the exclusive rights to
republish, manufacture, distribute, display, and sell the Localized
Language Versions of the Articles in all formats currently existing and
new formats that may come into existence during the Term of this
Agreement that are under license or may come under license by SSII,
including, but not limited to the following:
. PC/Mac CD-ROM and DVD;
. Sony PlayStation 1;
. Sony PlayStation 2;
. Nintendo Game Boy Color;
. Nintendo Game Boy Advance;
. Nintendo Dolphin;
. Sega Dreamcast.
1.3 SSII shall not itself nor through agents or third parties knowingly
publish, republish, manufacture, market, distribute, display, sell
Localized Language Versions or American English language versions in the
Territory while this Agreement is in force. TDK shall have the right to
use, distribute or otherwise dispose of the American English Version or
UK English Versions within the Territory. In no event shall TDK be
permitted to sell, distribute or otherwise dispose of the Articles
outside of the Territory. For the avoidance of doubt SSII hereby
acknowledges that there is a so-called "grey market" in software and that
the availability of Localized Language Versions produced by TDK outside
the Territory will not, of itself, constitutes a breach of this
Agreement.
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1.4 SSII shall not be liable to TDK for any loss or damage incurred as a
result of any unauthorized republishing, manufacturing, marketing,
distribution, displaying or of Articles in the Territory during the term
of this Agreement.
1.5 SSII grants to TDK the right to make such adaptations (pending original
licensor approval) to the Articles as are necessary to develop Localized
Language Versions of them and allow TDK to exercise its rights under
Article 1 and without prejudice to the generality of the foregoing the
right to use discs, manuals, CD's and read only memories and the right to
translate the Articles into any language approved by SSII as listed in
and in accordance with Schedule A of this Agreement. Adaptations mean
also the right for TDK to adapt the Articles by making such changes as
TDK deems appropriate to bring the Articles in live with the specific
cultural requirements of each country within the Territory. However, in
exercising its rights herein, TDK is not authorized to make any change to
the function or content (audio and/or visual) of the Articles without the
written consent of SSII (such consent not to be unreasonably withheld)
except for necessary adaptations required by each localized language. All
approvals shall be deemed given unless TDK is notified to the contrary
within twenty-one (21) calendar days of SSII receipt of localized
adaptation requirements. Once given, approval shall be irrevocable.
1.6 SSII does not grant to TDK any rights under Article 1 to publish,
republish, manufacture, market, distribute, sell, nor in any way use the
Articles through time-sharing services or networks or rentals except on-
line demos of products for promotional purposes as set forth in Article 7
unless pre-approved by SSII.
1.7 For all titles of the Articles proposed by SSII to TDK, TDK is hereby
granted a right of first refusal and shall have sixty (60) calendar days
from receipt of a SSII Beta CD to exercise such right of first refusal.
That period can be extended up to ninety (90) calendar days if requested
in writing by TDK and if then agreed to in writing by SSII to accept such
offer. Titles of the Articles accepted by TDK shall be regarded as a
constituent part of this Agreement and added by Addendum hereto.
2. TERM
2.1 This Agreement shall enter into force the date set forth on the front
page and shall continue for a period of sixty (60) months. Ninety (90)
days prior to the end of this initial period the parties may elect to
renegotiate the term of this Agreement for another period of one year, or
may elect to terminate this Agreement by sending a written notice of
termination, unless sooner terminated pursuant to Clause 16.1 or 16.2.
2.2 It is understood by the parties that SSII's license agreements are not
indefinite and that from time to time licenses expire and that in the
event a license expires prior to the expiration date herein, all
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<PAGE>
terms and conditions of the original licensor will be adhered to.
Notwithstanding, any license SSII and TDK mutually agree is beneficial
beyond the term will be negotiated with the original licensor to obtain a
renewal or extension
2.3 However, SSII hereby undertakes to provide TDK with a copy of its license
agreements with original licensors in the purpose for TDK to be aware of
the expiry dates of licenses.
2.4 Both parties shall use their best efforts to reach a mutual agreement on
any disputes, controversies or differences which may arise between the
parties, out of or in connection with this Agreement.
3. LOCALISATION KIT & TECHNICAL ASSISTANCE
3.1 SSII shall forthwith upon execution of this Agreement furnish TDK with
two Localization Kit of each agreed Article and reproducible copies of
all available file maintenance documentation, drawings, data, upgrade and
"bug" lists that are necessary to enable TDK to republish, manufacture,
market, distribute, sell and support the Articles. Each Localization Kit
delivered to TDK shall comply with the checklist mentioned in Schedule B
"Localization Kit & Technical Information" attached hereto.
3.2 SSII shall keep TDK fully informed of and issue TDK with any changes,
additions or modifications to the master disk and to such documentation,
drawings, data upgrade and "bug" lists that have affect on marketing,
operations, performance, cost or support by furnishing TDK with one
reproducible copy of the modified master disk, within a fortnight (14
days) of release of such revisions by SSII.
3.3 SSII shall use its best endeavor to assist TDK in the management and
administration of all phases of localization integration when requested
by TDK. SSII agrees to provide quality control of localized product for
TDK with master licensors and technical assistance and expertise to
authorized TDK localization developers throughout the world.
4. CONSIDERATION AND ROYALTY
4.1 In Consideration for the Grant of Rights/Services (Section 1) and Term
(section 2), TDK agrees to pay a one time signing fee of $1 million USD
upon execution of this agreement. It is mutually understood that this one
time signing fee shall be used by SSII primarily for the development of
future titles.
4.2 TDK hereby agrees to pay a royalty fee for the Localized Language
Versions of the Articles sold by TDK within the Territory. Since no
titles and no formats have been decided for the Articles, only the
general terms will be defined hereinafter.
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<PAGE>
The royalty payment shall be based on total invoiced sales less return.
For the avoidance of doubt no royalties shall be payable on review,
advertising, samples or other promotional copies. Except as otherwise
set forth herein, royalties shall be due and payable within forty-five
(45) days of the close of each calendar quarter.
In consideration of the above, TDK agrees to pay to SSII the following
royalty advance amount which shall be recoupable against royalties paid
to SSII:
(a) Five million United States dollars ($5,000,000) as a minimum title
guarantees for SSII over the Term of the Agreement;
(b) Title delivery and guarantees/advances per product shall follow the
basic guidelines set forth herein but will be subject to mutual
negotiation:
. PC/MAC CD ROMs
$100,000- to $150,000- range per title
$1.50 to $2.50 Republishing Fee per title
. Sony PlayStation 1
$450,000- to $500,000- range per title
$1.50 - $2.50 Republishing Fee per title
. Sony PlayStation 2
$1,000,000- to $1,700,000- range per title
$1.00 - $2.00 Republishing Fee per title
. Nintendo Color Game Boy
$50,000- to $65,000- range per title
$1.50 - $2.50 Republishing Fee per title
. Additional Formats (Advances. Republishing Fees and
Schedules)
Nintendo Dolphin, Sega Dreamcast, and all other formats that
exist now and / or may be introduced during the term of this
agreement have to be defined and negotiated in good faith by the
parties.
Exact titles of the Articles, amounts and payment schedules will
be mutually determined by the parties and defined in Addendum,
such Addendum shall be regarded as a constituent part of this
Agreement.
It is also understood by the parties that so called "original"
titles and characters may require higher development costs than
contemplated here and that the parties will work in good faith
on a case by case basis to determine costs and advances on such
titles.
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4.3 SSII and TDK acknowledge that the minimum royalty advance amount of five
million United States dollars ($5,000,000) mentioned in Clause 4.1.(b)
shall represent a cumulated royalty advance amount of titles (reported on
a per product basis) of the Articles which are expected to be selected
during the Term of this Agreement. It means that TDK has no obligation to
pay the $5,000,000 in case that (i) the cumulated royalty advance amount
of titles selected during the Term of this Agreement does not match
$5,000,000 or (ii) due to a disagreement on the conditions which create a
discrepancy between the total royalty advance amount and the $5,000,000.
4.4 Within thirty (30) days after the 31/st/ March, the 30/th/ June, the
30/th/ September and the 31/st/ December of each year during the period
this Agreement shall be in force and effect, TDK hereby undertakes to
submit to SSII, even in case of no sales, a statement in writing, setting
forth with respect to the preceding quarterly period:
(a) the quantities of Articles manufactured by TDK;
(b) the quantities of Articles sold country by country, specifying the
quantities for each type of Articles as referred in the Addendum;
(c) The royalty amount of each type of said Articles sold due to SSII.
4.5 In case of expiration or termination of this Agreement, all Articles
manufactured prior but remaining in stock with TDK at the date of
expiration or termination can be sold, distributed, used or disposed by
TDK as set forth in Clause 16.6. TDK shall respect the reporting
obligation as set forth in Clause 4.4.
4.6 All payments to SSII referred to in this Agreement shall be effected by
wire transfer in US dollar to Sound Source Interactive, INC., account
number:
WELL FARGO BANK, 8812 CORBIN AVENUE,
NORTHRIDGE, CALIFORNIA 91324, USA
Name of Account: Sound Source Interactive, Inc., Business Checking Acct.
Account n(Degree): 0747-563716 ABA Routing # 121-000248
4.7 All stamp duties, taxes and other similar levies originating from or in
connection with the execution of this Agreement under Luxembourg law
shall be borne by TDK. However, in the event that the government of a
country imposes any income taxes on payments hereunder by TDK to SSII and
requires TDK to withhold such tax from such payments, TDK may deduct such
tax from such payments. In such event, TDK shall promptly furnish SSII
with tax receipts issued by appropriate tax authorities so as to enable
SSII to support a claim for credit against income taxes which may be
payable by SSII in United States of America.
Page 6
<PAGE>
4.8 In order that the royalties and reports provided for in article 4 may be
verified, TDK agrees to ensure that full, complete and accurate books and
records shall be kept covering all sales or other disposals of Articles
by TDK, for a period of two (2) years following each quarterly report.
4.9 It is agreed that the books and records of TDK may be audited from time
to time, but not more than once in each calendar year, by an independent
certified public accountant appointed by SSII and reasonably acceptable
to TDK, to the extend necessary to verify the accuracy of the
aforementioned statements and payments. Such inspection shall be
completed at SSII's own expense.
5. INDEMNIFICATION
5.1 SSII hereby indemnifies TDK and shall hold it harmless from any loss,
liability, damage, cost or expense arising out of any claims or suits
which may be brought or made against TDK by reason of the breach by SSII
of the warranties, intellectual property rights or representations as set
forth.
5.2 TDK hereby indemnifies and agrees to hold SSII and its agents, servants,
employees, officers and directors harmless from any loss, liability,
damage, cost or expense arising out of any claims or suits which may be
made against SSII by reason of or alleging any unauthorised or infringing
use by TDK of any patent, process, trade secret, copyright or other
similar property in connection with the Articles or the Trademarks
covered by this Agreement or by reason of any alleged defects (design,
manufacturing, handling or other) of the Articles manufactured by TDK
other than as a result of any breach of this Agreement by SSII.
6. APPROVAL / QUALITY / SAMPLES
6.1 TDK agrees that the Articles as well as all packaging, labels, press
releases, advertising, promotion display or other material prepared in
connection with the Articles ("Collateral Materials"), shall be of a
similar standard and quality to that of the Articles delivered to TDK by
SSII and shall ensure that all Articles and the distribution thereof,
comply with all applicable laws throughout the Territory.
6.2 TDK will send the golden masters for the Localized Language Versions (the
"Golden Masters") to SSII in a timely fashion to permit SSII to complete
the acceptance described in this Article 6.2 prior to the initial
publication of the localized language version. Acceptance shall be deemed
given unless TDK is notified to the contrary within twenty-one (21)
calendar days of SSII's receipt of Golden Masters. The Golden Masters
will be deemed acceptable when (i) they perform at a level of performance
similar than that of the SSII title; and (ii) the changes in the Articles
have been made in accordance with the requirements mentioned in Article
1. In
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addition to the Golden Masters, TDK will send samples of printed
documentation, packaging to SSII for approval in a timely fashion to
permit SSII to review such materials such acceptance not to be
unreasonably withheld. Acceptance shall be deemed given unless TDK is
notified to the contrary within twenty-one (21) calendar days of SSII's
receipt of such materials. Once given, approval shall be irrevocable. All
such material submitted by TDK to SSII shall be at TDK's expense.
6.3 TDK shall supply SSII with twenty-five (25) samples of each Article in
each localized language produced, at the time of first distribution. A
Republishing Fee shall not be payable on such samples.
6.4 SSII may purchase from TDK localised language versions of Articles as
authorised and produced hereunder at a reasonable price (such price shall
include costs, sales expense and a reasonable margin) for direct sale
outside the Territory. The License Fee shall not be payable on such
purchases.
7. ADVERTISING AND PROMOTIONAL ACTIVITIES
7.1 Advertising
TDK shall be entitled for the term of this Agreement to realise advertising
campaigns of the Articles by printed media, radio and TV advertising throughout
the Territory.
TDK has the right to use free of charge SSII's name, image, likeness, software
characters, software animations and other elements of the Articles for printed
media, on-line, radio and TV advertising throughout the Territory.
TDK shall also be entitled to establish an Internet site (or create a page(s) in
connection with TDK's Internet site) subject in all respects to approval in
accordance with Clause 7.4 below, containing information and advertising related
to the Articles.
7.2 Promotional Activities
TDK shall be entitled for the term of this Agreement to create marketing
communication material and Press release to promote the Software throughout the
Territory.
TDK shall be entitled to use, at its own expense, SSII's name, image, likeness,
software characters, software animations and other elements of the Articles for
production of promotional items like posters, stickers, header cards, leaflets,
catalogues, demos, and any other promotional item that TDK deems necessary for
promotional activities.
TDK shall also be entitled to use software characters, software animations,
demos and other elements of the software on TDK products in the purpose to
promote the Articles.
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7.3 Material
SSII will provide TDK, free of charge, with sufficient existing photographs,
logos, software character pictures and software animations and other elements of
the Articles for the purpose contemplated in clause 7.1 and 7.2. This material
will be delivered to TDK forthwith upon delivery of the Localisation Kit.
SSII will provide TDK, free of charge, with necessary guidelines on material
delivered to TDK in the purposes to allow TDK an appropriate usage of the
material.
7.4 Approval
All material produced by TDK shall be submitted to SSII's prior approval. All
approvals shall be deemed given unless Licensee is notified to the contrary
within twenty-one (21) calendar days of Licensor's receipt of material. In the
event that any request for approval is denied, Licensor shall give its reasons
therefore and suggest how to alter same to make it acceptable. Once given,
approval shall be irrevocable.
8. COPYRIGHT AND TRADEMARK
8.1 All ownership of copyrights and trademarks in Articles republished
hereunder, as well as all artwork, packaging, copy, literary text,
advertising material of any sort other than in the product of the
localisation development carried out by TDK, shall be in such names and
all such items shall bear copyright and trademark notices and any other
legal notice as SSII may reasonably direct.
8.2 TDK shall furnish all applicable notices and markings as appropriate and
as otherwise required by local governments within the Territory.
9. RESERVATION OF RIGHTS
9.1 Subject to SSII's ownership of the rights to the Articles as set forth
above, TDK shall own all right, title and interest and intellectual
property rights (except SSII's trademarks as set forth in Clause 9.2),
including without limitation all copyrights, in the Localised Language
Versions. It being understood and agreed that TDK may not make any use
whatsoever of the Localised Language Versions, including without
limitation the production, marketing and distribution of such Localised
Language Versions after the expiration or termination of this Agreement
unless otherwise specifically provided herein. After the expiration or
termination of this Agreement all rights, title, interest, intellectual
property rights and copyrights in the Localised Language Versions shall
remain TDK's property. TDK may grant SSII the right to use all rights,
titles, interest, intellectual property rights and copyrights in the
Localised Language Versions under license agreement.
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9.2 TDK acknowledges that the right to republish as granted herein, does not
include any right, title, or interest in or to the Proprietary Subject
Matter nor to any copyrights, patents, and/or trademarks therein or
associated therewith other than any copyright in the product of the
localization development carried out by TDK.
9.3 TDK acknowledges that this Agreement relates solely to the Proprietary
Subject Matter. TDK is not, by virtue of this Agreement acquiring any
right whatsoever in any motion picture or television production or other
endeavor which is based upon, derivative of, or otherwise related to the
Proprietary Subject Matter, including without limitation, remakes,
sequels, sound recordings, publications, or copyrights and/or trademarks
in the Proprietary Subject Matter.
9.4 With respect to the Proprietary Subject Matter, SSII reserves unto itself
and/or its designees the right to manufacture, sell, advertise, promote,
display and otherwise exploit software product similar and/or identical to
the Articles outside Territory.
10. UNDERTAKINGS BY SSII
10.1 SSII undertakes to facilitate the introduction of TDK to the Hollywood
Studios and Publishing content owners as well as Licensing Divisions, Home
Video Divisions, Theatrical and Publishing units as applicable.
Content Owners include but are not limited to: Warner Bros., Universal,
Harvey Entertainment, Jim Henson Productions, Viacom/Paramount, Random
House, Candlewick Press, United Media, MGM, Fox, Saban, and others as
applicable.
10.2 SSII shall respond to requests from TDK for end user software support in
accordance with the level of support specified in Schedule C as attached
hereto and incorporated herein. For such purposes SSII shall employ and
maintain employment of suitably qualified personnel (English speaking
only) to operate an efficient support via e-mail or Internet.
10.3 SSII shall prepare, compile, maintain and update the master disks and
related documentation at its own cost to enable TDK to satisfactorily
develop Localized Language Versions and to market, distribute, sell and/or
otherwise support the Articles in accordance with the terms of this
Agreement and to provide TDK with such documentation or sufficient access
thereto or to the appropriately qualified personnel for such purposes.
10.4 SSII shall satisfactorily resolve any defect in the Article and for such
purpose shall forthwith take all such action and/or make available all
such facilities to rectify the defect. This only extends to operation on
systems as used in the USA. Any factors unique to other nations is the
responsibility of TDK to adjust or compensate for.
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10.5 SSII shall provide TDK at mutually agreed intervals or at such reasonable
times or at the request of TDK with information concerning Articles,
enhancements, current developments, support and any changes relating to
ultimate users, customers and activities of competitors and such other
matters and information in any way relating to the constructive
performance of this Agreement.
10.6 SSII warrants to TDK that each master disk of the software issued to TDK
upon execution hereof or from time to time hereafter shall be free from
such faults, defects, "bugs" or inadequacies as would restrict TDK from
marketing and/or supporting the Articles.
10.7 SSII agrees that within a period of five (5) working days from
notification of the same and in any other case, as soon as possible, to
rectify or replace free of charge a Master Disk of an Article found
faulty, defective or inadequate, upon receipt of TDK, and shall forthwith
replace each such Master Disk of the Article with one incorporating
appropriate corrections.
11. MUTUAL UNDERTAKINGS OF SSII AND TDK
It is mutually understood and agreed that neither SSII nor TDK shall incur any
liability on behalf of the other or in any way to pledge to the others credit or
accept any order or make any contract binding upon the other without the other
without obtaining prior written consent and that nothing in this Agreement
should be interpreted as creating a partnership between the parties.
12. UNDERTAKINGS BY TDK
12.1 TDK agrees to use its reasonable endeavors and optimum abilities in its
endeavors to republish, manufacture, market, distribute and sell copies of
the Articles and generally market the Articles in a form which at least
meets the same standards of quality as that established by SSII in the
original SSII released product.
12.2 TDK agrees to use its reasonable endeavors to support the Articles in good
operational order to such standards of quality as are generally accepted
throughout the PC software application industry for applications of
similar nature and quality to the Articles.
12.3 TDK agrees not to market or deal with the Articles in any way with any
party so as to bring the Article or its name nor SSII's name into
disrepute or in which would otherwise affect the marketability of the
Article.
12.4 TDK agrees to use its reasonable endeavors to republish, manufacture,
distribute and sell the Articles throughout the Territory provided always
that, in the exercise of TDK's reasonable
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judgement, it makes good commercial sense to do so; specifically, it
shall:
(a) Republish, manufacture, distribute and sell Articles in such price
and quality brackets as are required to meet competition by reputable
manufacturers of similar articles;
(b) Make and maintain adequate arrangements for the distribution of the
Articles throughout the Territory;
(c) Will not knowingly deliver or sell Articles outside the Territory.
13. LIABILITY
SSII shall not be liable to TDK or any other person for loss or damage arising
directly in connection with any adaptation to the Articles developed by TDK or
any modification, variation, enhancement or upgrade thereof, and any
documentation, manual or training relating specifically thereof.
14. COPYRIGHT
SSII agrees to protect and save harmless and defend at its own expense (i) from
and against any and all claims of infringement of copyrights, patents,
trademarks, industrial designs or other property rights issued under the laws of
any country affecting the Article; (ii) from and against any and all claims of
infringement of copyrights, patents, trademarks, industrial designs or other
property rights hold by third parties.
15. CONFIDENTIAL INFORMATION
15.1 The parties have imparted and may from time to time impart to the other
certain confidential information relating to the Articles, successor
Articles or other software, marketing or support thereof including
specifications and copyright manual thereof.
15.2 Each party hereby agrees that it will use such confidential information
solely for the purposes of this Agreement and that it shall not disclose,
whether directly or indirectly, to any third party such information other
than as required to carry out the purposes of this Agreement.
16. EXPIRATION OR TERMINATION OF AGREEMENT
16.1 SSII may terminate this Agreement with immediate effect by registered mail
notice in any of the following circumstances:
(a) TDK defaults in due and punctual payment of any amount due to SSII
pursuant to this Agreement for more than thirty (30) days after
written notice of summons to pay from SSII;
(b) TDK is in breach of any other provision contained in this Agreement
and such breach has not been remedied within thirty (30) days from
SSII written notice;
Page 12
<PAGE>
(c) TDK is declared bankrupt or put under receivership;
(d) TDK or any of its employees deliberately make false statements in
reports.
(e) If employees, officers or directors of TDK commit or are under formal
investigation for allegedly having committed criminal acts or other
acts of moral turpitude which could damage SSII's reputation.
16.2 TDK may terminate this Agreement with immediate effect by registered mail
notice in any of the following circumstances:
(a) SSII is in breach of any other provision contained in this Agreement
and such breach has not been remedied within thirty (30) days from
TDK written notice; especially for the breach of SSII's obligation to
license all the rights to TDK;
(b) SSII is declared bankrupt or put under receivership;
(c) If any dispute arises between any of the persons directly or
indirectly interested in the management or shareholdership of SSII's
business which affects the business relationship between TDK and
SSII;
(d) If employees, officers or directors of SSII commit or are under
formal investigation for allegedly having committed criminal acts or
other acts of moral turpitude which could damage TDK's reputation.
16.3 In the event SSII commits a material breach of this Agreement, SSII shall
reimburse TDK (i) 50% of the Localization costs expended to date of
termination; (ii) 100% of the advance payment if termination date is
within the Term of this Agreement. The remedies set out in this section
16.3 are in addition to and not instead of remedies provided by law.
16.4 In the event TDK does not commence the distribution or the sale of one
licensed Article or one licensed format within the Territory twelve (12)
months after the delivery of the Localization Kit, TDK grants SSII the
right to republish, manufacture, market, distribute, and sell the Article
or the format that TDK failed to distribute in the Territory within the
period mentioned above.
16.5 Upon termination pursuant to Article 16.1, TDK shall immediately cease any
further license, sale, distribution, use or disposal of any Articles, if
applicable, and TDK may at its discretion (i) return all units in TDK's
possession or control to SSII or destroy such units, in which case no
royalty for said returned units will be due and payable, or (ii) retain
said units for sale or distribution and pay the royalty due as if all such
units had been sold during the calendar quarter prior to the quarter in
which SSII delivered notice of termination.
16.6 Upon termination pursuant to Article 16.2, TDK may at its discretion sell,
distribute, use or otherwise dispose of all units already manufactured and
pay the royalty due pursuant to this Agreement. Under no circumstances
shall either party be liable to the other for incidental or consequential
damages, whether
Page 13
<PAGE>
foreseeable or not, including lost profits, direct or indirect damages,
costs of goods, promotion, advertising or any other cost, charge or
damage.
17. WARRANTIES:
17.1 SSII represents, warrants and covenants to TDK as follows:
(a) SSII has the full right and legal authority to enter into and fully
perform this Agreement in accordance with its terms;
(b) SSII is fully able to grant TDK the rights it grants herein and
represents that these rights are granted free and clear of any and
all claims and encumbrances and that the exercise by TDK of such
rights will not infringe the rights of any third party;
(c) SSII declares that it is authorised to grant the rights of use
concerning the Articles of this Agreement and attached Addendum and
which are the subject of this Agreement and it vouches for the TDK's
right to the same.
(d) SSII guarantees that referring to the production, utilisation and
exploitation of the Articles, all rights of manufacture and use
required for the exploitation of the Articles as contemplated in this
Agreement and attached Addendum have been duly acquired and do not
infringe upon any personal or other rights of software utilisation by
a third party. SSII must hold TDK harmless in this matter from and
against claims made by third parties related to third parties holding
rights on such Articles .
(e) For the avoidance of doubt all rights wholly controlled by SSII shall
be licensed to TDK for use in accordance with this Agreement without
charge.
(f) SSII declares and warrants that the rights hereby granted have
neither been granted in whole nor in part to a third party, that a
third party neither has the right to exercise them nor has been
entrusted with the care of such rights and that SSII will not seek to
exploit such rights itself. SSII indemnifies TDK as well as any other
party who may obtain the rights granted in this Agreement from claims
of a third party, which may be imposed in connection with the
utilisation of rights granted in this Agreement.
(g) This Agreement when executed and delivered by SSII and TDK will be
legal, valid and binding obligations enforceable against SSII in
accordance with its terms, except to the extent that enforcement
thereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally;
(h) The execution, delivery and performances of this Agreement by SSII
does not and will not violate or cause a breach of any other
agreements or obligations to which it is a party or by which it is
bound, and no approval or other action by any governmental authority
or agency is required in connection herewith;
(i) Each of the foregoing representations, warranties and covenants shall
be true at all times. SSII acknowledges that each of such
representations, warranties and covenants are
Page 14
<PAGE>
deemed to be material and have been relied upon by TDK
notwithstanding any investigation made by TDK;
(j) SSII has not entered and will not enter into any agreement,
commitment or other arrangement which affects or diminishes any of
the rights herein granted to TDK.
(k) The SSII Localisation Kit will be free from faults, bugs or other
defects and capable of performing in accordance with the requirements
imposed on developers of games for all formats granted to TDK and, to
the extend that TDK is granted the relevant rights.
(l) There is no litigation and SSII is not aware of any pending or
threatened litigation in respect of the Articles.
17.2 TDK represents, warrants and covenants to SSII as follows:
(a) TDK has the full right and legal authority to enter into and fully
perform this Agreement in accordance with its terms;
(b) This Agreement when executed and delivered by TDK and SSII will be
legal, valid and binding obligations enforceable against TDK in
accordance with its terms, except to the extent that enforcement
thereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally;
(c) The execution, delivery and performances of this Agreement by TDK
does not and will not violate or cause a breach of any other
agreements or obligations to which it is a party or by which it is
bound, and no approval or other action by any governmental authority
or agency is required in connection herewith;
(d) Each of the foregoing representations, warranties and covenants shall
be true at all times. TDK acknowledges that each of such
representations, warranties and covenants are deemed to be material
and have been relied upon by SSII notwithstanding any investigation
made by SSII;
(e) TDK is not entitled to transfer sub-license or assign any rights
granted in this Agreement to a third party without SSII's prior
written consent (such consent not to be unreasonably withheld).
18. SUCCESSORS AND ASSIGNS:
Neither party shall assign its rights and/or obligations under this Agreement
without the prior written approval of the other party (such approval not to be
unreasonably withheld). This Agreement and all of the terms and provisions
hereof will be binding upon, and will inure to the benefit of, the parties
hereto, and their respective successors and approved assigns.
19. MISCELLANEOUS:
(a) Each of the individuals executing this Agreement certifies that he or
she is duly authorised to do so.
(b) The rights and remedies set forth herein are intended to be
cumulative, and the exercise of any one right or remedy by
Page 15
<PAGE>
either party shall not preclude or waive its exercise of any other
right or remedies hereunder or pursuant to law.
(c) This Agreement may be executed in counterparts.
20. FORCE MAJEURE
TDK shall be under no liability to SSII in any way whatsoever for destruction,
damage, delay or any other matters of the nature whatsoever arising out of war,
rebellion, civil commotion, strikes, lock-outs and individual disputes, fires,
explosion, earthquake, act of God, flood, drought or bad weather, the
unavailability of delivers or supplies or requisitioning or other constituted
body that could not have been reasonably foreseen by a reasonably prudent
business officer in the Territory. At any time following ninety (90) days after
commencement of a force majeure event, either may elect to terminate the term of
this Agreement pursuant to Clause 16.6.
21. NOTICES
Any notice required or permitted under the terms of this Agreement or required
by statute, law or regulation shall (unless otherwise provided) be in writing
and shall be delivered in person, sent by registered mail or by DHL or Federal
Express, properly posted and fully pre-paid in an envelope properly addressed to
the address set out at the head of this Agreement or to such other address as
may from time to time be designated by notice hereunder. Any such notice shall
be in English language and shall be considered to have been given at the time
when actually delivered, or any event within fourteen (14) days after it was
mailed in the manner as herein provided.
22. AGREEMENT
This Agreement supersedes any arrangements, understandings, promises or
agreements made or existing between the parties hereto prior to or
simultaneously with this Agreement and constitutes the entire understanding
between the parties hereto. Except as otherwise provided herein, no addition,
amendment to or modification of this Agreement shall be effective unless it is
in writing and signed by and on behalf of both.
23. HEADINGS
The headings of the paragraphs of this Agreement are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
24. SEVERABILITY
In the event that any of these terms, conditions or provisions shall be
determined invalid, unlawful or unenforceable to any extent such term,
condition, or provision shall be severed from the remaining terms, conditions
Page 16
<PAGE>
and provisions which shall continue to be valid to the fullest extent permitted
by law.
25. LAW AND JURISDICTION:
25.1 This Agreement is governed by and construed in accordance with the laws of
the Grand Duchy of Luxembourg.
25.2 Any dispute arising in connection with the conclusion, the validity, the
interpretation or the performance of this Agreement shall be under the
exclusive jurisdiction of the Courts of Luxembourg, Grand Duchy of
Luxembourg.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
the day and year as herein set forth at the effectivity date.
Sound Source Interactive, Inc. TDK Recording Media Europe S.A.
/s/ Mr. Vincent Bitetti /s/ Masatoshi Shikanai
______________________________ _______________________________
Mr. Vincent Bitetti Masatoshi Shikanai
CEO President
Page 17
<PAGE>
SCHEDULE A: "Language & Territory"
- -----------
- --------------------------------------------------------------------------------
LANGUAGE:
- ---------
Articles licensed and approved by SSII to be developed and manufactured by TDK
in the Localised Languages as set forth herein below ONLY, is made a part of and
is incorporated into the Agreement as follows:
French German
Spanish UK English
Italian Swedish
Dutch Danish
In case that SSII and TDK agree to introduce other languages in the Territory,
TDK is granted the right of first refusal and shall have sixty (60) days from
receipt of SSII proposal to exercise such right of first refusal. If TDK wants
to introduce other languages in the Territory, TDK and SSII will negotiate in
good faith the terms and conditions of the Agreement.
<PAGE>
- --------------------------------------------------------------------------------
TERRITORY:
- ----------
SSII authorises the Localised Language version of Articles to be distributed for
sale by TDK in the following countries, which constitute the Territory as
referred to herein and is incorporated into and made part of the Agreement;
All countries except North America (United States and Canada).
<PAGE>
SCHEDULE B: "Localization Kit & Technical Assistance"
- -----------
- --------------------------------------------------------------------------------
SSII will supply to TDK information on:
1. Program files on disk;
Where the files are to be found; menu files and control programs.
2. Data files on disk;
Where the files are to be found; their structure, e.g. records, field,
characters (enough information to enable TDK to access the data).
3. Interaction of program/data files.
4. Utility programs/recovery programs to look at data files; for the
reconstruction of data/records and executables.
A. Bug list on current release and updates;
B. Documentation;
C. Information on future plans/developement
<PAGE>
SCHEDULE C: "Support Level"
- -----------
- --------------------------------------------------------------------------------
A. Call SSII Control desk (0730 to 1700 M-F).
B. Way Forward Technologies.
C. Other.
<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 MARCH 31,
2000N 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> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,115
<SECURITIES> 0
<RECEIVABLES> 754,225
<ALLOWANCES> (6,666)
<INVENTORY> 444,168
<CURRENT-ASSETS> 2,907,687
<PP&E> 736,366
<DEPRECIATION> (565,181)
<TOTAL-ASSETS> 3,092,605
<CURRENT-LIABILITIES> 4,140,682
<BONDS> 0
0
0
<COMMON> 5,888
<OTHER-SE> (4,288,325)
<TOTAL-LIABILITY-AND-EQUITY> 3,092,605
<SALES> 469,418
<TOTAL-REVENUES> 469,418
<CGS> 551,406
<TOTAL-COSTS> 665,645
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,241
<INCOME-PRETAX> (749,874)
<INCOME-TAX> 4,820
<INCOME-CONTINUING> (754,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754,694)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
