Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2/A Pre-Effective Amendment to Registration of 142 740K
Securities by a Small-Business Issuer
2: EX-1 Underwriting Agreement 54 225K
3: EX-4.2 Instrument Defining the Rights of Security Holders 31 107K
4: EX-4.3 Instrument Defining the Rights of Security Holders 38 141K
5: EX-4.4 Instrument Defining the Rights of Security Holders 9 46K
6: EX-5 Opinion re: Legality 3 14K
7: EX-9.1 Voting Trust Agreement 6 27K
8: EX-9.2 Voting Trust Agreement 1 10K
9: EX-9.3 Voting Trust Agreement 1 10K
10: EX-9.4 Voting Trust Agreement 1 10K
11: EX-10.1 Material Contract 17 57K
12: EX-10.2 Material Contract 16 57K
13: EX-10.3 Material Contract 13 47K
14: EX-10.35 Material Contract 12 55K
15: EX-10.36 Material Contract 12 55K
16: EX-10.37 Material Contract 12 55K
17: EX-10.38 Material Contract 11 45K
18: EX-10.39 Material Contract 10 40K
19: EX-10.40 Material Contract 1 10K
20: EX-10.41 Material Contract 23 81K
21: EX-10.42 Material Contract 6 22K
22: EX-10.43 Material Contract 5 23K
23: EX-10.44 Material Contract 6 25K
24: EX-10.45 Material Contract 7 30K
25: EX-10.46 Material Contract 2 11K
26: EX-23.1 Consent of Experts or Counsel 1 8K
SB-2/A — Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer
Document Table of Contents
As filed with the Securities and Exchange Commission on May 9, 1996
Registration No. 33-80827
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SOUND SOURCE INTERACTIVE, INC.
(Name of Small Business Issuer in its Charter)
[Download Table]
DELAWARE 7372 95-4264046
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
2985 E. Hillcrest Drive, Suite A
Westlake Village, California 91362
(805) 494-9996
(Address and Telephone Number of
Principal Executive Offices)
Vincent J. Bitetti
Chief Executive Officer
2985 E. Hillcrest Drive, Suite A
Westlake Village, California 91362
(805) 494-9996
(Name, Address and Telephone Number
of Agent for Service)
_____________________
Copies to:
[Download Table]
Sean P. McGuinness, Esq. Catherine DeBono Holmes, Esq.
McDermott, Will & Emery Jeffer, Mangels, Butler & Marmaro LLP
1850 K Street, N.W. 2121 Avenue of the Stars
Suite 500 10th Floor
Washington, D.C. 20006 Los Angeles, California 90067
(202) 887-8000 (310) 203-8080
Fax: (202) 778-8087 Fax: (310) 203-0567
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / x /
__________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
(Continued on next page)
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
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Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered Per Security(1) Offering Price(1) Registration Fee
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Common Stock, $.001 par value
("Common Stock")(2) . . . . . . . . . 2,867,500 (sh) $ 4.00 $11,470,000.00 $3,955.17
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Common Stock Purchase Warrants
(the "Redeemable Warrants")(3) . . . . 7,069,665 (wt) .25 1,767,416.25 609.45
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Common Stock issuable upon
exercise of Redeemable Warrants and
ASSI Warrants(4) . . . . . . . . . . . 9,069,665 (sh) 4.40 39,906,526.00 13,760.87
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Representative's Warrants. . . . . . . . 2 (wt) 50.00 50.00 .02
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Common Stock issuable upon
exercise of Representative's Warrants . 240,000 (sh) 4.80 1,152,000.00 397.24
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Redeemable Warrants issuable upon
exercise of Representative's Warrants 120,000 (wt) .30 36,000.00 12.41
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Common Stock issuable upon exercise
of Redeemable Warrants issuable
upon exercise of Representative's Warrants 120,000 (sh) 4.80 576,000.00 198.62
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Total Registration Fee . . . . . . . . . $18,933.78(5)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes: (i) 2,400,000 shares of Common Stock registered for the account
of the Registrant, (ii) 340,000 shares of Common Stock registered for the
account of the Registrant and 20,000 shares of Common Stock registered for
the account of certain selling stockholders which the Underwriters have the
option to purchase to cover over-allotments, if any, and (iii) 107,500
shares of Common Stock registered for the account of certain Selling
Security Holders.
(3) Includes: (i) 1,200,000 Redeemable Warrants registered for the account of
the Registrant, (ii) 5,689,665 Redeemable Warrants registered for the
account of certain Selling Security Holders, and (iii) 180,000 Redeemable
Warrants registered for the account of the Registrant which the
Underwriters have the option to purchase to cover over-allotments, if any.
(4) Includes: (i) 1,200,000 shares of Common Stock issuable by the Registrant
upon exercise of Redeemable Warrants which Redeemable Warrants are being
registered for the account of the Registrant, (ii) 5,689,665 shares of
Common Stock issuable by the Registrant upon exercise of Redeemable
Warrants which Redeemable Warrants are being registered for the account of
certain Selling Security Holders, (iii) 2,000,000 shares of Common Stock
issuable by the Registrant upon issuance of warrants held by ASSI, Inc.,
and (iv) 180,000 shares of Common Stock issuable by the Registrant upon
exercise of Redeemable Warrants which the Underwriters have the option to
purchase to cover over-allotments, if any.
(5) A registration fee of $23,318.76 was paid with the initial filing of this
Registration Statement. Consequently, no registration fee is being paid
with this filing.
Pursuant to Rule 416, there are also being registered hereby such
additional indeterminate number of shares of such Common Stock as may become
issuable by reason of stock splits, stock dividends and similar adjustments as
set forth in the provisions of the Redeemable Warrants and the Representative's
Warrant.
EXPLANATORY NOTE
This Registration Statement contains two Prospectuses.
The first Prospectus forming a part of this Registration Statement is to be
used in connection with the underwritten public offering of: 2,760,000 shares
of the Registrant's Common Stock (including 360,000 shares of Common Stock
subject to the Underwriters' over-allotment option); and 1,380,000 of the
Registrant's Redeemable Warrants (including 180,000 Redeemable Warrants subject
to the Underwriters' over-allotment option), and immediately follows the Cross
Reference Sheet.
The second Prospectus forming a part of this Registration Statement is to
be used in connection with the sale from time to time by the Company and certain
nonaffiliated selling security holders of the Company of: 107,500 shares of
Common Stock being sold by the nonaffiliated selling security holders; 5,689,665
Redeemable Warrants being sold by the nonaffiliated selling security holders;
5,689,665 shares of Common Stock underlying the nonaffiliated selling security
holders' Redeemable Warrants issuable by the Company upon exercise of such
Redeemable Warrants; 2,000,000 shares of Common Stock underlying the ASSI
Warrants issuable by the Company upon exercise of such ASSI Warrants; and
1,380,000 shares of Common Stock underlying the Registrant's Redeemable Warrants
issuable by the Company upon exercise of such Redeemable Warrants. The second
Prospectus will consist of (i) the cover page and inside cover page of the
second Prsospectus, (ii) pages 3 through 76 of the first Prospectus (other than
the sections entitled "Resale of Outstanding Securities" and "Underwriting") and
pages F-1 through F-32 of the first prospectus, (iii) pages SS-3 through SS-5
(which will appear in place of the section entitled "Resale of Outstanding
Securities"), (iv) page SS-6 (which will appear in place of the section entitled
"Underwriting") and (v) the back cover page, which is the last page of the
second Prospectus.
SOUND SOURCE INTERACTIVE, INC.
Cross-Reference Sheet
showing location in each Prospectus of
Information Required by Items of Form SB-2
[Enlarge/Download Table]
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUSES
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1. Front of Registration Statement and
Outside Front Cover of Prospectus . . . . . . . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus . . . . . Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information and Risk Factors. . . . . . . . . . . . . . . Prospectus Summary;
Risk Factors; Business
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . . . . . . Outside Front Cover Page;
Risk Factors; Underwriting
6. Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilution
7. Selling Security-Holders. . . . . . . . . . . . . . . . . . . . . Selling Security Holders
8. Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page;
Risk Factors; Underwriting
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Business -- Legal Matters
10. Directors, Executive Officers, Promoters and Control Persons. . . Business; Management --
Executive Officers and Directors
11. Security Ownership of Certain
Beneficial Owners and Management. . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . . . . . . Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . . . . . . . . Underwriting
15. Organization Within Last Five Years . . . . . . . . . . . . . . . Business
16. Description of Business . . . . . . . . . . . . . . . . . . . . . Business
17. Management's Discussion and Analysis or Plan of Operation . . . . Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property . . . . . . . . . . . . . . . . . . . . . Business
19. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . Management;
Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . Risk Factors;
Description of Securities;
Underwriting; Management
-- Executive Compensation
21. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . Management
-- Executive Compensation
22. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . Financial Statements
23. Changes in and Disagreements With Accountants
On Accounting and Financial Disclosure . . . . . . . . . . . . . Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 9, 1996
PROSPECTUS
[SOUND SOURCE
INTERACTIVE, INC. LOGO]
2,400,000 SHARES OF COMMON STOCK AND
1,200,000 REDEEMABLE WARRANTS
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Sound Source Interactive, Inc. (the "Company") hereby offers 2,400,000
shares (the "Shares") of common stock, par value $.001 per share (the "Common
Stock"), and 1,200,000 redeemable warrants (the "Redeemable Warrants") (the
Shares and the Redeemable Warrants offered hereby by the Company are sometimes
collectively referred to herein as the "Securities"). The Shares and the
Redeemable Warrants will be separately tradeable immediately upon issuance and
may be purchased separately. It is currently anticipated that the initial public
offering price will be $4.00 per share of Common Stock and $.25 per Redeemable
Warrant. Each Redeemable Warrant entitles the holder thereof to purchase one
share of Common Stock at a purchase price equal to 110 percent of the initial
public offering price per share, subject to adjustment, at any time during the
54-month period commencing one year after the date of this Prospectus, and is
redeemable by the Company at a redemption price of $.25 per Redeemable Warrant,
commencing one year after the date of this Prospectus, provided that the average
closing bid price of the Common Stock equals or exceeds 140 percent of the
initial public offering price per share for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. See "Description Securities -- Redeemable
Warrants."
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THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" COMMENCING
ON PAGES 10 AND 26, RESPECTIVELY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Download Table]
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS (1) COMPANY (2)
Per Share....................... $4.00 $.400 $3.600
Per Redeemable Warrant.......... .25 .025 .125
Total (3)....................... 9,900,000.00 990,000.000 8,910,000.000
(1) Does not include additional compensation to the Representatives in the form
of a nonaccountable expense allowance equal to three percent of the gross
offering proceeds. For indemnification arrangements with, and additional
compensation payable to, the Underwriters, see "Underwriting."
(2) Before deducting expenses of this offering payable by the Company, estimated
at approximately $600,000 in the aggregate, including the Representatives'
nonaccountable expense allowance.
(3) For the purpose of covering over-allotments, if any, the Company and certain
affiliated selling stockholders have granted to the Underwriters an option,
exercisable within 45 days from the date of this Prospectus, to purchase up
to 360,000 additional shares of Common Stock and/or up to 180,000 additional
Redeemable Warrants. If such over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Proceeds to Company will
be $11,385,000.00 and $1,138,500.00 and $10,246,500.00, respectively. See
"Underwriting."
The Securities are offered by the Underwriters, when, as and if delivered to
and accepted and subject to their right to withdraw, cancel or modify this
offering and to reject any orders in whole or in part. It is expected that
delivery of the Securities will be made on or about , 1996.
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THE BOSTON GROUP, L.P. JOSEPH STEVENS & COMPANY, L.P.
The date of this Prospectus is , 1996
[COVER ART]
Prior to this offering, there has been no public market for the Securities
and there can be no assurance that a market for the Securities will develop or,
if a market develops, that it will be sustained. The Common Stock and
Redeemable Warrants have been approved for quotation on the Nasdaq SmallCap
Market under the symbols SSII and SSIIW for the Common Stock and Redeemable
Warrants, respectively. The initial public offering prices for the Common Stock
and Redeemable Warrants and the exercise price of the Redeemable Warrants have
been determined by negotiation between the Company and The Boston Group, L.P.
and Joseph Stevens & Company, L.P., as representatives (the "Representatives")
of the several Underwriters, and are not necessarily related to the Company's
asset value, net worth or other established criteria of value. See "Risk
Factors" and "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR THE REDEEMABLE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements, with a report thereof by its
independent certified public accountant, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
[SOUND SOURCE LOGO]
From the silver screen to the computer, our Interactive MovieBooks-TM- combine
the fun of movies with the educational value of a book. Designed for young
children, these CD-ROMs make reading fun with movie clips, pictures, sound
effects, animation and other surprises.
Our "Talking Utilities" give your PC personality. Audio clips of your favorite
heroes and villains-plus authentic sound effects-can be assigned to computer
functions and application events.
From startup to shutdown, and a ton of places in between, AudioClips are the
only way to have fun while you work (and get away with it). Each package is a
collector's item, desktop diversion and functional utility all in one!
Our unique line of Entertainment Utilities features something for every fan of
pop culture: Babylon 5-TM-, Star Wars-Registered Trademark- Trilogy, Saturday
Night Live-Registered Trademark-, The Twilight Zone-TM- and Terminator 2-TM-:
Judgment Day. Combining original animation, stylized stills and authentic
AudioClips, our
CHILDREN'S EDUCATION/ENTERTAINMENT
[GRAPHICS]
AUDIOCLIPS
[GRAPHICS]
entertainment utilities put the FUN in functional.
In summer of 1996, the company will introduce its first Creativity Centers for
children based on popular franchises and major motion pictures.
The company targets the growing audience of home PC users who value high
quality, fully-featured, fun and easy to use software for themselves and their
children. Sound Source interactive products are available at thousands of retail
outlets, selling for $15.00 to $30.00.
ENTERTAINMENT UTILITIES AND SCREEN SAVERS
[GRAPHICS]
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Sound Source Interactive, Inc. (the "Company") is engaged primarily in
developing, publishing and marketing educational, interactive computer software
for children. MOVIEBOOKS-TM-, which combine text, photos, sound clips and
actual film footage of well recognized family films and cartoon series, are the
Company's major software products. MOVIEBOOKS-TM- are developed and published
by the Company on compact disk-read only memory ("CD-ROM") for multimedia
personal computers ("Multimedia PCs") as entertaining, interactive reading tools
for young children. The Company also produces a variety of entertainment
computer software utilities which incorporate screen savers, sound clips known
as AUDIOCLIPS-REGISTERED TRADEMARK- and other content based on entertainment
properties. The new entertainment utilities are marketed as limited edition
serialized collector editions. The Company is currently developing another line
of products which it refers to as creativity centers. This product line
combines learning activities such as painting, drawing, matching, puzzles and
mazes within a framework of three distinct skill levels.
The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM- and other popular titles. The
Company also holds licenses for new products currently being developed for
release in 1996 on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-,
DRAGON HEART-TM- and I LOVE LUCY-TM-. The Company is continuing the negotiation
of additional licenses for its MOVIEBOOKS-TM-, AUDIOCLIPS-REGISTERED TRADEMARK-,
entertainment utilities, creativity centers and screen savers. Management
believes the Company is capable of continuing to obtain new licenses for major
motion pictures and television shows and developing new, high quality software
products using content from these entertainment properties.
The powerful capabilities and declining price of Multimedia PCs have
enabled it to draw acceptance as an all purpose, functional educational and
entertainment product for home and school use. Industry sources state that the
installed base of Multimedia PCs exceeds 9,000,000 units. The technological
capabilities of the Multimedia PC itself have allowed the Company to produce
interactive software that is "user friendly" while maintaining what management
believes are high standards in design, sound quality, three-dimensional sound
effects and quality duplication of motion picture footage. Management believes
that the Company is well positioned to participate in this market not only
through expansion of its existing software products but through development
opportunities in other media formats, such as interactive television, virtual
reality and the Internet.
The Company believes that as of March 31, 1996, its products were in
distribution to approximately 6,000 retail outlets. Retailers currently selling
the Company's products include Target, Tower Records, Sears, Wal-Mart,
Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead,
-3-
Electronics Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam
Goody, Sam's Club, QVC, Musicland, Circuit City, Blockbuster Video and others.
The Company's strategy is to focus primarily on developing nonviolent,
family-oriented products with educational and entertainment value, which are
based on popular movies, television series and comic book characters and are
easy to use and install. The Company plans to develop a broad line of products,
to upgrade successful products and to develop product line extensions and
complementary products. Among other products the Company intends to develop
games based on licensed content. The Company intends to keep development costs
as low as possible by utilizing existing technologies and externally developed
programming, which will enable the Company to maintain prices which appeal to
the mass market.
The Company's objective is to be a leading publisher of high quality, value
priced, family oriented software. To achieve this objective, the Company
intends to (i) focus primarily on developing nonviolent products with
educational and entertainment value which are based on popular movies,
television series and comic book characters and are easy to use and install,
(ii) develop a broad line of products, upgrade successful products and develop
product line extensions and complementary products, (iii) leverage studio
relationships to develop cross-marketing promotional programs, (iv) promote
tradename recognition, (v) utilize existing technologies and externally
developed programming which the Company believes will enable it to maintain
prices which appeal to the mass market, (vi) leverage its licensed content to
develop products intended for the game market, (vii) pursue strategic alliances
and acquisitions.
The Company is located at 2985 East Hillcrest Drive, Suite A, Westlake
Village, California 91362. Its telephone number is (805) 494-9996. Its
facsimile number is (805) 379-3446.
-4-
THE OFFERING
Securities Offered
by the Company. . . . . . . . . . . 2,400,000 shares of Common Stock
and 1,200,000 Redeemable Warrants.
Each Redeemable Warrant entitles
the holder thereof to purchase one
share of Common Stock. The Common
Stock and Redeemable Warrants will
be purchased and traded separately
commencing on the date of this
Prospectus. See "Description of
Securities."
Terms of the
Redeemable Warrants . . . . . . . . Each Redeemable Warrant will
entitle the holder to purchase one
share of Common Stock at a price of
110 percent of the initial public
offering price per share, subject
to adjustment, during the 54-month
period commencing one year after
the date of this Prospectus. In
the event that the Redeemable
Warrants are called for redemption,
they will be exercisable for 30
days preceding the applicable
redemption date.
Redemption of the
Redeemable Warrants . . . . . . . . Commencing one year after the date
this Prospectus, the Redeemable
Warrants will be subject to
redemption at $.25 per Redeemable
Warrant if the average closing bid
price of the Common Stock equals or
exceeds 140 percent of the initial
public offering price per share for
any 20 trading days within a period
of 30 consecutive trading days
ending on the fifth trading day
prior to the date of the notice of
redemption. See "Description of
Securities -- Redeemable Warrants."
Shares of Common Stock
Outstanding:
Prior to the offering . . . . . . . 1,808,291 shares.
After the offering . . . . . . . . 4,208,291 shares, or 4,558,291
shares if the Underwriters' over-
allotment option is exercised. Of
the 360,000 shares subject to the
Underwriters' over-allotment
option, 340,000 are being offered
by the Company and 20,000 are being
offered by two affiliated
stockholders. Of the 20,000 shares
being offered by two affiliated
stockholders, 10,000 shares are
currently issued and outstanding
and 10,000 are subject to a
presently exercisable stock option.
See "Principal and Selling
Stockholders." Up to 10,110,183
additional shares may be issued in
the future under the Redeemable
Warrants offered hereby and options
and warrants that are outstanding
or agreed to be issued.
-5-
Use of Proceeds. . . . . . . . . . . . . The Company intends to use the net
proceeds of this offering to repay
notes issued to investors in the
Company's 1995 Private Placement
(as defined below) in the aggregate
principal amount of $4,987,500
(plus accrued interest estimated at
$242,500 as of March 31, 1996), to
obtain additional licenses, to pay
sales and marketing costs, to make
capital expenditures and for
working capital. See "Use of
Proceeds" and "Certain Transactions
-- 1995 Private Placement."
Nasdaq Symbols:
Common Stock. . . . . . . . . . . . SSII
Redeemable Warrants . . . . . . . . SSIIW
Risk Factors . . . . . . . . . . . . . . An investment in the Common Stock
and Redeemable Warrants involves a
high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
Consulting Arrangement . . . . . . . . . On April 30, 1996, the Company
entered into a consulting agreement
with ASSI, Inc., which also is a
creditor of the Company. Pursuant
to that agreement, ASSI, Inc. has
agreed to provide certain financial
and personnel consulting services
to the Company, in consideration
for which the Company has issued to
ASSI, Inc. warrants (the "ASSI
Warrants") to purchase 2,000,000
shares of Common Stock at an
exercise price of $4.40 per share,
which will become exercisable
September 1, 1996. See "Certain
Transactions -- Agreements With
ASSI, Inc."
-6-
Resale of Outstanding Securities;
Issuance of Common Stock
Underlying Redeemable Warrants . . . . . A separate Prospectus is being
filed with the Registration
Statement of which this Prospectus
is a part which relates to the
registration by the Company, at its
expense, for the account of certain
security holders (the "Selling
Security Holders") and for the
account of the Company, of (i)
107,500 shares of Common Stock and
5,689,665 warrants (unless
otherwise indicated, such warrants
and the Redeemable Warrants offered
hereby by the Company are
collectively referred to as
"Redeemable Warrants") previously
issued by the Company to the
Selling Security Holders, (ii)
7,069,665 shares of Common Stock
issuable by the Company upon the
exercise of the Redeemable
Warrants, and (iii) 2,000,000
shares of Common Stock issuable by
the Company upon the exercise of
the ASSI Warrants. The 107,500
shares of Common Stock, 5,689,665
Redeemable Warrants and 9,069,665
shares of Common Stock issuable
upon the exercise of the Redeemable
Warrants and ASSI Warrants being so
offered for sale by the Selling
Security Holders are sometimes
collectively referred to as the
"Selling Security Holders'
Securities." The Selling Security
Holders' Securities are not being
underwritten in this offering and
the Company will not receive any
proceeds from the sale of the
Selling Security Holders'
Securities. The Common Stock and
Redeemable Warrants being
registered for the account of the
Selling Security Holders may be
sold by the Selling Security
Holders or their transferees
commencing on the third business
day from the date of this
Prospectus. See "Risk Factors --
Sale of Certain Outstanding
Securities," "Certain Transactions"
and "Resale of Outstanding
Securities."
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SUMMARY FINANCIAL INFORMATION
The following table of summary financial information is derived from and
should be read in conjunction with the Company's financial statements and the
footnotes thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
Six Months Ended
Year Ended June 30, December 31,
------------------------ --------------------------
Statement of Operations Data 1994 1995 1994 1995
--------------------------------------------- --------- --------- --------- ----------
Retail software sales. . . . . . . . . . . . 1,313,890 1,255,230 1,006,849 1,077,547
OEM sales . . . . . . . . . . . . . . . . . 5,500 479,675 389,979 21,466
Development agreement
revenues . . . . . . . . . . . . . . . 112,520 343,250 127,250 0
Royalties . . . . . . . . . . . . . . . . . 253,961 76,771 76,253 21,678
Net sales from continuing
operations. . . . . . . . . . . . . . . 1,685,871 2,154,926 1,600,331 1,120,691
Gross profit . . . . . . . . . . . . . . . . 505,068 1,082,235 643,963 438,181
Noncash compensation expense
recorded in connection with
Common Stock and Common Stock
options issued for services . . . . . . 2,992,862 733,165 193,332 0
Other expenses . . . . . . . . . . . . . . . 1,374,052 1,940,124 886,272 2,448,553
Loss from continuing operations. . . . . . . (3,861,846) (1,591,054) (435,641) (2,010,372)
Loss from discontinued operations. . . . . . (115,887) (143,106) (13,376) 0
Net loss . . . . . . . . . . . . . . . . . (3,977,733) (1,734,160) (449,017) (2,010,372)
Loss per common share from
continuing operations . . . . . . . . . (2.38) (0.85) (0.23) (1.08)
Loss per common share from
discontinued operations . . . . . . . . (0.07) (0.08) (0.01) 0
Net loss per common share. . . . . . . . . . (2.45) (0.93) (0.24) (1.08)
Weighted average number of
common shares outstanding(1). . . . . . 1,626,107 1,862,908 1,869,998 1,868,145
[Download Table]
As of December 31, 1995
-----------------------------
Balance Sheet Data Actual As Adjusted(1)
------------------------------------------- ------------ --------------
Working Capital. . . . . . . . . . . . . . . (2,913,040) 4,666,092
Total assets . . . . . . . . . . . . . . . . 4,165,858 6,533,154
Current liabilities. . . . . . . . . . . . . 6,873,471 1,661,635
Long term debt . . . . . . . . . . . . . . . 25,601 25,601
Stockholder equity (deficit) . . . . . . . . (2,733,214) 4,845,918
---------------------------------
(1) Unless otherwise indicated, all share and per share information in this
Prospectus gives effect to a 9.25-for-1 stock split effected in May 1994
and a 1-for-5.976 reverse stock split effected in September 1995. Unless
otherwise indicated, such share and per share information does not give
effect to: (i) the exercise of the Underwriters' over-allotment option to
purchase up to 360,000 shares of Common Stock and 180,000 Redeemable
Warrants; (ii) the issuance of 1,200,000 shares of Common Stock underlying
the Redeemable Warrants being offered by the Company; (iii) the issuance of
5,689,665 shares of Common Stock underlying the Redeemable Warrants and
2,000,000 shares of Common Stock underlying the ASSI Warrants being offered
by the Selling Security Holders; (iv) the issuance of 180,000 shares of
Common Stock underlying the Redeemable Warrants included in the
Underwriters' over-allotment option; (v) the
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exercise of a warrant granted to the Representative (the "Representative's
Warrant") to purchase up to 240,000 shares of Common Stock and/or 120,000
Redeemable Warrants; (vi) the issuance upon exercise of the
Representative's Warrant of 240,000 shares of Common Stock, 120,000
Redeemable Warrants or 120,000 shares of Common Stock issuable upon
exercise of such Redeemable Warrants; (vii) the issuance of 384,070 shares
of Common Stock underlying options granted pursuant to the Company's 1992
Stock Option Plan; (viii) 500,000 shares of Common Stock reserved for
issuance pursuant to the Company's 1995 Stock Option Plan, as to which the
Company has granted no options and has agreed to grant 13,610 options; or
(ix) the issuance of 292,838 shares of Common Stock underlying options held
by the Company's President.
(2) As adjusted to reflect the issuance of 2,400,000 shares of Common Stock at
an assumed initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an assumed initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the Underwriter's discount and $600,000 for expenses,
including the Representatives' three percent nonaccountable expense
allowance) and repayment of all of the Company's funded indebtedness
(estimated at $5,105,676 at December 31, 1995) with a portion of such
proceeds. The as adjusted amounts do not reflect the issuance of up to
340,000 shares of Common Stock and 180,000 Redeemable Warrants by the
Company to cover over-allotments, if any, the exercise of the
Representative's Warrant to purchase up to 240,000 shares of Common Stock
and/or 120,000 Redeemable Warrants, or the exercise of any other
outstanding (or agreed to be issued) options or warrants to purchase up to
an additional 10,120,183 shares of Common Stock.
-9-
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THE PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE MAKING AN INVESTMENT.
PRODUCT DISTRIBUTION
In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim"), a distributor of entertainment software and related
products. The Company had no sales to or through Acclaim during its fiscal year
ended June 30, 1995. During the six-month period ended December 31, 1995, of
the Company's total revenues from retail software sales of $1,120,691, a total
of $819,619 (73 percent) were generated by Acclaim. Under the terms of this
agreement, Acclaim was the exclusive distributor of the Company's products on a
worldwide basis, subject to certain limited exceptions.
The Company was not satisfied with the distribution of its products through
Acclaim, and determined to terminate the Acclaim distribution agreement in March
1996. The Company and Acclaim have terminated the distribution agreement as of
April 30, 1996. On or before June 30, 1996, Acclaim will render a final
accounting to the Company together with payment of the balance of any amounts
due to the Company under the distribution agreement. Acclaim has notified its
accounts that it will not accept returns of any of the Company's software
products after June 30, 1996. The Company, however, will remain liable for all
such returns regardless of when received by Acclaim.
The Company believes it has the ability to distribute its products through
nonexclusive software distributors and by means of direct sales to major
computer and software retailers. The Company further believes that it could
generate sales sufficient to allow it to operate profitability without a major
exclusive distribution relationship similar to its past relationship with
Acclaim. Nevertheless, the Company believes that it is possible to generate
higher sales to mass marketers through an exclusive affiliate distributor, and
that the attendant risk of collection of accounts can be mitigated. Therefore,
the Company is currently in the process of negotiating distribution agreements
with potential new exclusive distributors. There can be no assurance, however,
that the Company will be successful in entering into any such distribution
agreements, or that the terms of any such distribution agreement will be
favorable to the Company. If the Company fails to enter into satisfactory
distribution agreements, there also can be no assurance as to its ability to
market its products directly. Moreover, even if the Company does enter into one
or more such distribution agreements, there can be no assurance that any new
distributor will successfully market the Company's products. The Company may
experience a loss of sales momentum as a result of the termination of the
Acclaim distribution agreement, even if the Company enters into agreements with
new distributors. See "Business -- Product Distribution."
PRODUCT RETURNS; COLLECTION OF ACCOUNTS RECEIVABLE; CREDIT RISK
Under the Acclaim distribution agreement, Acclaim was required to make
payments to the Company for all products shipped to retailers within 120 days of
their shipment, net of commissions earned by Acclaim. Thereafter, all risks
associated with collection of accounts receivable with respect to all products
sold by the Company through Acclaim were solely the responsibility of Acclaim.
In the event of any product returns by retailers, the Company was responsible
for return of payments made for the products to the retailers, whereas the risk
of product returns remained with the Company. On product sales made directly by
the Company, which included all sales by means of direct mail,
-10-
"infomercials," television home shopping and "bundling" agreements with original
equipment manufacturers, all risks of both collections and product returns were
retained by the Company.
After the termination of the Acclaim distribution agreement, and until such
time as the Company enters into a new exclusive distribution agreement (which
cannot be assured), the Company will bear all the risks of collection of
accounts receivable and acceptance of product returns on all of its sales.
The Company expects to remain responsible for product returns from retail
outlets for all products sold by it following the termination of the Acclaim
Distribution Agreement. The Company has maintained and will continue to
maintain a reserve for product returns equal to a percentage of all sales booked
based upon historical and current sell through information. It is difficult for
the Company to ascertain current demand for its existing products and
anticipated demand for newly introduced products. Accordingly, the Company will
be exposed to the risk of product returns from retailers and distributors.
There can be no assurance that actual returns and uncollectible receivables will
not exceed the Company's reserves. Any significant increase in product returns
or uncollected accounts receivable beyond reserves could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business -- Sales and Marketing."
PAST OPERATING LOSSES; GOING CONCERN QUALIFICATION
The Company sustained net losses of $3,977,733 and $1,734,160 for the
fiscal years ended June 30, 1994 and 1995, respectively, and a net loss of
$2,010,372 for the six months ended December 31, 1995. The Company's losses
include noncash charges attributable to Common Stock and options for the
purchase of Common Stock issued for services rendered of $2,992,862 and $733,165
for the fiscal years ended June 30, 1994 and 1995, respectively. See generally
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will continue to sustain losses unless it can further
increase product sales.
In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. See "Independent Auditors' Report."
LIMITED HISTORY OF BUSINESS OPERATIONS
The Company has limited operating history. The Company conducted
substantially no business prior to its acquisition of the Subsidiary (as
hereinafter defined) in 1994. The Subsidiary itself commenced operations
originally as a nonincorporated entity in 1988. The Subsidiary's revenues
originally were derived from the sale of sound patches for music synthesizers.
Since 1993, revenues and income have been predominately derived from
entertainment utilities software for Macintosh and IBM-compatible computers
incorporating content licensed from major motion picture studios.
NEW BUSINESS RISKS FOR THE LICENSED SOFTWARE PRODUCTS
The business of creating and marketing licensed software derived from
motion pictures is a new and evolving industry, which will be subject to a
number of risks, including trends in personal computer sales, changes in
available technology and changes in the competition for licenses to develop
software derived from motion pictures. Changes in these factors could have a
material adverse effect on the Company's revenues and potential profitability.
In 1994, the Company entered the multimedia interactive educational software
market. As a result, the Company believes that period-to-period
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comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of its future performance.
COMPETITION
The market for the Company's consumer software products is intensely and
increasingly competitive. Existing consumer software companies may broaden
their product lines to compete with the Company's products, and potential new
competitors, including computer hardware or software manufacturers, diversified
media companies and book publishing companies, may enter or increase 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 or may
compete in the future have greater financial, technical, marketing, sales and
customer support resources, as well as greater name recognition and better
access to consumers, than the Company. The competition for retail shelf space
is also likely to increase due to the continued proliferation of consumer
software products and companies. In addition, to the extent that competitors
achieve performance, price or other selling advantages, the Company could be
materially adversely affected. 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 fall, which may
materially adversely affect the Company's business, operating results and
financial condition.
The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), Lucasfilm Ltd., Warner Bros.
Consumer Products, CBS Entertainment, MCA/Universal Merchandising, Inc., Carolco
Pictures Inc., DC Comics, MGM/UA Merchandising, Inc. and others. Several of
these major motion picture studios now have captive software divisions. As
these types of software products become better known in the marketplace, these
profit centers may begin to vie for their studio's products. Management
believes that Disney, Lucasfilm and Paramount/Viacom are currently the most
active studios in publishing their own product to create software packages.
Fox, Universal Pictures, Sony Pictures and Warner Bros. each have announced the
formation of their own interactive computer software divisions to publish
software products using their own licensed content, which could have a material
adverse effect on the Company's ability to renew existing licenses or obtain new
licenses for additional movie titles. The establishment of these divisions may
limit the Company's ability to obtain licenses from the studios involved, which
in turn could reduce the Company's potential product offerings. To date, the
Company has had ample product licensing opportunities, and management believes
that even if some sources are lost due to the establishment of interactive
software divisions by some motion picture studios, there will continue to be
multiple sources of licensing for the Company's new products. There can be no
assurance, however, that the Company will have sufficient product licensing
opportunities in the future. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL; SUBSTANTIAL MANAGEMENT COMPENSATION
The Company's success depends to a significant extent on the performance
and continued service of its senior management and certain key employees. In
particular, the loss of the services of Vincent J. Bitetti, Chairman of the
Board and Chief Executive Officer, could have a material adverse effect on the
Company. Mr. Bitetti has agreed to work full-time for the Company and has
signed an employment agreement for the period ending September 15, 1998.
Competition for highly skilled employees with technical, management, marketing,
sales, creative product development and other specialized training is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. In addition, there can be no assurance that
employees will not leave the Company or compete against the Company. The
Company's failure to attract additional qualified employees or to retain the
services of key personnel could have a material adverse effect on
-12-
the Company's business, operating results and financial condition. The Company
is the beneficiary of a $1,000,000 life insurance policy on Vincent J. Bitetti,
Chairman of the Board and Chief Executive Officer, a $2,000,000 life insurance
policy on Eric H. Winston, President and Chief Operating Officer, and a $500,000
life insurance policy on Ulrich Gottschling, Chief Financial Officer, but does
not currently maintain life insurance on any of its other employees. See
"Management -- Directors and Executive Officers" and "-- Employment Agreements."
Following this offering, the Company intends to obtain an additional $4,000,000
of life insurance coverage on Vincent J. Bitetti.
The Company's Chairman of the Board and Chief Executive Officer currently
receives annual base compensation of $200,000, and its President and Chief
Operating Officer currently receives annual base compensation of $175,000. Such
base compensation, however, will be reduced by 20 percent on the date of this
Prospectus until such time as the Company generates net sales of $1,500,000 or
more for any three consecutive month period. In addition, each is entitled
to receive cash bonuses based upon the Company's performance. For fiscal
1995, each received a salary of $150,000 and a bonus of $75,000. The
Company's President and Chief Operating Officer also has received options to
purchase a total of 392,838 shares of Common Stock at nominal cost since
April 1994 (including options to purchase 292,838 shares granted by the
Company and options to purchase 100,000 shares granted by the Chairman of the
Board and Chief Executive Officer). See "Management -- Executive
Compensation." Such compensation may be considered excessive in view of the
Company's size and history of operating losses.
After the closing of this offering, the Company intends to hire a new Chief
Executive Officer upon terms to be negotiated. When the new Chief Executive
Officer is hired, Mr. Bitetti will resign as Chief Executive Officer and will
continue to serve as Chairman of the Board and retain his current salary,
bonuses and benefits, provided that his salary will be adjusted to an amount not
less than that of the new Chief Executive Officer, up to a maximum of $300,000.
NO OUTSIDE DIRECTORS
The Company currently has no independent directors. Consequently, the
Company's management is in a position to control the operations of the Company
and is not subject to independent review. Following this offering, the Company
intends to increase the size of its Board of Directors from three to five, to
include one director nominated by ASSI, Inc. and two other independent
directors. The Company has agreed to grant to each of The Boston Group, L.P.,
Joseph Stevens & Company, L.P. and ASSI, Inc., the right to nominate from time
to time one director of the Company or to have an individual designated thereby
attend all meetings of the Board of Directors of the Company as a nonvoting
advisor. Upon such expansion, it is anticipated that the Board will include
three independent directors. See "Management -- Directors and Executive
Officers," "Underwriting" and "Certain Transactions -- Agreements with ASSI,
Inc."
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation provides that a director of the
Company, to the maximum extent now or hereafter permitted by Section 102(b)(7)
of the Delaware General Corporation Law (the "Delaware GCL"), will have no
personal liability to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. The Company's Bylaws generally require
the Company to indemnify and advance expenses to its directors, officers,
employees and other agents to the fullest extent permitted by Delaware law. The
Company also has entered into indemnification agreements with each of its
directors whereby the Company will indemnify each such person against certain
claims arising out of certain past, present or future acts, omissions or
breaches of duty
-13-
committed by an indemnitee while serving as a Company director. See "Management
-- Limitation of Liability and Indemnification of Directors."
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS
The consumer software industry is undergoing rapid changes, including
evolving industry standards, frequent new product introductions and changes in
consumer requirements and preferences. The introduction of new technologies,
including operating systems and media formats, could render the Company's
existing products obsolete or unmarketable. In 1993, for example, there was a
significant shift in consumer demand from DOS-based software to Microsoft-
Registered Trademark--Windows-Registered Trademark--based software. More
recently, consumer demand has been shifting from disk-based software to software
on CD-ROM. In addition, the recent introduction of the new Windows '95-
Registered Trademark- operating system may affect consumer preferences and the
demand for new consumer software in ways which cannot be foreseen. In the
future, there could be radical changes in software delivery systems, replacing
CD-ROM with on-line or other methods of distribution.
There can be no assurance that the current demand for the Company's
Windows-Registered Trademark- and CD-ROM products will continue or that the mix
of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences. The success of the Company
will be dependent upon its ability to develop, introduce and market products
which respond to such changes in a timely fashion. The Company intends to
maintain its products in accordance with industry standards. The development
cycle for products utilizing new operating systems or formats may be
significantly longer than the Company's current development cycle for products
on existing operating systems and formats and may require the Company to invest
resources in products that may not become profitable. Although the Company's
software is Windows '95-Registered Trademark- compatible, there can be no
assurance that the Company will be successful in developing and marketing
products for certain advanced and emerging operating systems and formats that
may arise in the future. Failure to develop and introduce new products and
product enhancements in a timely fashion could result in significant product
returns and inventory obsolescence and could impair the Company's business,
operating results and financial condition. See "Business -- Products" and "--
Development."
UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES
Consumer preferences for software products are difficult to predict, and
few consumer software products achieve sustained market acceptance. The Company
believes that the highest sales of each of its products will occur during the
six- to nine-month periods following their introduction, and that thereafter
sales will diminish and pricing will be reduced. Therefore, the Company's
success is dependent upon the market acceptance of its existing products and the
continued development and introduction of new products which achieve market
acceptance. There can be no assurance that the Company's existing products will
continue to realize market acceptance, or that new products introduced by the
Company will achieve any significant degree of market acceptance or sustain any
such acceptance for any significant period of time. Failure of the Company's
new and existing products to achieve and sustain market acceptance will have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Products" and "-- Development."
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 and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
-14-
products, ability to add new distribution channels, 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. In response to
competitive pressures for new product introductions, the Company may take
certain pricing or marketing actions that could materially and adversely affect
the Company's business, operating results and financial condition. 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 may be required to pay in advance or to guarantee royalties, which may
be substantial, to obtain licenses of intellectual properties from third parties
before such properties have been introduced or achieved market acceptance.
Defective products may result in higher customer support costs and product
returns.
Additionally, the consumer software business traditionally has been
seasonal. Typically, net sales are 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. There can be no
assurance that the Company will achieve consistent profitability on a quarterly
or annual basis. Nevertheless, management believes that in the future its
results may be less subject to seasonal fluctuations because its products will
be marketed in conjunction with the releases of major motion pictures and home
videos, which occur throughout the year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
DEPENDENCE ON RETAILERS
The Company's retail customers include computer stores, office supply
stores, warehouse clubs, consumer electronics 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 could
discontinue carrying the Company's products in favor of a competitor's product
or for any other reason. Retailers compete in a volatile industry that is
subject to rapid change, consolidation, financial difficulty and increasing
competition from new distribution channels. Due to increased competition for
limited shelf space, retailers are increasingly in a better position to
negotiate favorable terms of sales, including price discounts and product return
policies. Retailers often require software publishers to pay fees in exchange
for preferred shelf space. Retailers may give higher priority to products other
than the Company's, thus reducing their efforts to sell the Company's products.
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, and as a
result, the Company's operating results could be materially adversely affected.
In addition, other types of retail outlets and methods of product distribution
may become important in the future, such as on-line services. It is critical to
the success of the Company that as these changes occur, the Company gains access
to those channels of distribution. See "Business -- Sales and Marketing."
DEPENDENCE ON OUTSIDE SUPPLIERS
The Company contracts with third party suppliers to provide programming and
manufacturing of its products, which the Company believes allows it to control
effectively its costs of production. The Company relies upon the ability of
such suppliers to provide products which are free of defects. To the extent
that any supplier produced defective product which was not discovered until the
product was shipped, it could result in liability of the Company for returned
merchandise and a loss of its reputation for high quality products. Although
the Company would attempt to recoup any expenses
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caused to it for defective products, there can be no assurance that it would be
fully compensated for any losses that resulted.
RISK OF INABILITY TO MANAGE RAPID GROWTH
The Company is currently experiencing a period of rapid growth that has
placed, and could continue to place, a significant strain on the Company's
financial, management and other resources. The Company's ability to manage its
growth effectively will require it to continue to improve its operational,
financial and management information systems, and to attract, train, motivate,
manage and retain key employees. The Company may make additional investments in
capital equipment to expand into new product lines. No assurances can be given
that these new systems will be implemented successfully, and the failure to do
so could have a material adverse effect on the Company's business, operating
results and financial condition. If the Company's management becomes unable to
manage growth effectively, the Company's business, operating results and
financial condition could be materially adversely affected. See "Business --
Operations" and "Management -- Directors and Executive Officers."
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its strategy to enhance revenue growth and market presence, the
Company continually evaluates acquisitions of entertainment software companies
and selected titles within existing or new product categories. In considering
an acquisition, the Company may compete with other potential acquirors, many of
which may have greater financial and operational resources. Further, the
evaluation, negotiation and integration of such acquisitions may divert
significant time and resources of the Company, particularly management. There
can be no assurance that suitable acquisition candidates will be identified,
that any acquisitions can be consummated, or that any acquired businesses or
products can be successfully integrated into the Company's operations. In
addition, there can be no assurance that future acquisitions will not have a
material adverse effect upon the Company's business, operating results and
financial condition, particularly in the fiscal quarters immediately following
the consummation of such transactions due to unexpected expenses which may be
associated with integrating such acquisitions. See "Business -- Strategy --
Acquisitions."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be materially adversely affected. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products.
The Company's licenses and other intellectual property may not be
transferred to third parties without the consent of the licensors. Under the
terms of certain such licenses, transfer of ownership of stated percentages of
the Common Stock could constitute a prohibited transfer of the licenses. The
licensors under such licenses have agreed that neither the sale by the Company
of the Common Stock pursuant to this offering nor the issuance by the Company of
the Common Stock underlying the Redeemable Warrants and the Representative's
Warrant will cause a termination of such licenses. Certain other licenses
provide that a change in "management" will be deemed an unauthorized
-16-
assignment of the license. It is not clear under what circumstances the Company
might be deemed to have a change in management which could result in the
termination of licenses containing this provision.
Any future change in ownership or control of the Company could result in
the termination of the licenses referred to above. The potential terminability
of such licenses could have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may materially adversely
affect the market price of the Common Stock.
Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark and other intellectual property rights
involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
LIMITED TIME PERIOD OF LICENSES
The Company's products are based upon licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. See "Business -- General" and "-- Licensed
Property." All of such license and development agreements to which the Company
currently is a party are for fixed terms which will expire over the next one to
five years. Although no licensor is required to extend any license, the Company
anticipates that the licensor under each agreement will extend its terms,
provided that the Company is in compliance with all requirements of each
license, including most significantly that the Company has satisfied the
applicable minimum royalty guarantees. In the event that any licensor fails to
renew its license agreement, then the subject license will terminate and the
Company will no longer be entitled to sell the licensed product. The loss of
one or more of the licenses could have a material adverse effect on the
Company's revenues and operating results. There can be no assurance that the
Company will satisfy its performance obligations under any license or
development agreement or that even if such requirements are satisfied, all
material licenses will be renewed. See "Business -- Proprietary Rights and
Licenses."
DEPENDENCE ON NET PROCEEDS OF THIS OFFERING; POSSIBLE NEED FOR ADDITIONAL
FINANCING
The Company is dependent on the net proceeds of this offering or other
financing to repay the aggregate principal amount of $4,987,500 in Private Notes
issued to investors in the Company's 1995 Private Placement, plus accrued
interest estimated at $242,500 as of March 31, 1996. As of the date of this
Prospectus, the Company has been dependent on the net proceeds of approximately
$4,023,000 from its 1995 Private Placement, the net proceeds of approximately
$278,000 from its 1995 Bridge Financing (which was repaid out of the net
proceeds of the Company's 1995 Private Placement), $263,300 of proceeds from the
Private Warrants and the net proceeds of approximately $1,371,000 from its 1994
Private Placement, to fund its working capital requirements. The Company
believes that the proceeds of this offering, together with its cash on hand, and
anticipated net cash
-17-
flow from operations, will be sufficient to fund the Company's contemplated cash
requirements for at least the next 12 months. However, there can be no
assurance that additional unanticipated expenses will not arise which would
require additional financing. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts and the estimated expenses of
this offering of $600,000 (including the Representatives' three percent
nonaccountable expense allowance), are estimated to be approximately $8,313,000
(assuming the Underwriters' over-allotment option is not exercised), assuming a
public offering price of $4.00 per share and $.25 per Redeemable Warrant. The
Company estimates that of such net proceeds, $2,183,000 will be allocated to
working capital. If the Underwriters exercise their over-allotment in full, the
Company will realize additional net proceeds of approximately $1,183,200, all of
which will be allocated to working capital. The Company will have broad
discretion in the use of funds allocated to working capital. See "Use of
Proceeds."
RISK OF LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS
As of June 30, 1995, the Company had net operating loss carryforwards of
approximately $2,513,000 for federal income tax purposes, which may be utilized
from 1996 to 2011 (subject to certain limitations). It is possible that the
consummation of this offering, including the issuance of the Securities offered
hereby and the Representative's Warrant, will result in an "ownership change" as
defined in Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations promulgated thereunder, or that the
issuance of warrants to investors in the Company's 1995 Bridge Financing and
1995 Private Placement and the reverse stock split effected by the Company in
September 1995 may have resulted in an ownership change under the Code and said
Treasury Regulations. As a result, the Company's use of its net operating loss
carryforwards to offset taxable income in any post-change period may be subject
to certain specified annual limitations. If there is any ownership change,
there can be no assurance as to the specific amount of net operating loss
carryforwards available in any post-change year since the calculation is based
upon a fact-dependent formula.
CONTROL OF THE COMPANY BY OFFICERS AND DIRECTORS
Upon the consummation of this offering, the current officers and directors
of the Company including the current controlling stockholder, will, in the
aggregate, beneficially own approximately 42.0 percent of the Common Stock (16.2
percent assuming exercise in full of the Redeemable Warrants and all other
outstanding warrants and options, but excluding issuance of any Common Stock and
Redeemable Warrants pursuant to the over-allotment option). As a result, it is
anticipated that these individuals will be in a position to influence
materially, if not control, the outcome of all matters requiring stockholder
approval, including the election of directors. See "Management," "Principal
Stockholders," "Description of Securities -- Common Stock" and "Underwriting."
Such influence and control is likely to continue for the foreseeable future.
The Company is, and upon consummation of this offering will be, a QUASI-
California corporation subject to certain provisions of the California General
Corporation Law (the "California GCL"). See "Description of Securities --
Application of California GCL." Among other consequences of the Company's
status as a QUASI-California corporation, at the request of any stockholder, the
election of the Company's directors will be determined by cumulative voting
procedures. Consequently, following this offering the Company's stockholders
other than its current officers and directors will have sufficient votes, if
cumulative voting is exercised, to elect two of its three directors (or three of
its five
-18-
directors, upon expansion of the Board following this offering as planned)
assuming no exercise of the Redeemable Warrants and two of its three (or four of
its five, as applicable) directors assuming exercise of the Redeemable Warrants
in full.
The Company has agreed to allow each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc. to nominate one director following this
offering. In addition, Vincent J. Bitetti, the Chairman of the Board and Chief
Executive Officer, and Eric H. Winston, the President and Chief Operating
Officer, have entered into voting agreements with each of The Boston Group,
L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. Pursuant to these
agreements, Messrs. Bitetti and Winston have agreed to vote their Common Stock
for the three director nominees of The Boston Group, L.P., Joseph Stevens &
Company, L.P. and ASSI, Inc. In addition, ASSI, Inc. has agreed to vote its
shares of Common Stock for two directors nominated by Mr. Bitetti for as long as
he holds 20 percent or more of the issued and outstanding Common Stock, and for
one director nominated by Mr. Bitetti for as long as he holds at least ten
perent but less than 20 percent of the issued and outstanding Common Stock. The
voting agreements with ASSI, Inc. will terminate when Messrs. Bitetti and
Winston together cease to own at least ten percent of the issued and outstanding
Common Stock. See "Management -- Directors and Executive Officers."
IMMEDIATE SUBSTANTIAL DILUTION
This offering involves an immediate and substantial dilution to investors
in this offering of $2.91 per share of Common Stock (73 percent) between the pro
forma net tangible book value per share after this offering and the initial
public offering price of the shares of Common Stock. See "Dilution."
RECENTLY FORMED REPRESENTATIVES
Both of the Representatives are recently formed, and neither has extensive
experience as an underwriter of securities. The Boston Group, L.P., which was
formed in March 1995, has acted as the managing underwriter for three public
offerings and has not acted as a member of an underwriting syndicate. Joseph
Stevens & Company, L.P., which was formed in May 1994, has acted as the managing
underwriter for four public offerings and as a member of an underwriting
syndicate on approximately seven occasions.
The Representatives are relatively small firms. No assurance can be given
that either will be able to participate as a market maker in the Securities, or
that any other broker-dealer will do so. See "Underwriting."
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET
It is anticipated that a significant amount of the shares of Common Stock
and substantially all of the Redeemable Warrants being offered hereby will be
sold to customers of the Representatives. Although the Representatives have
advised the Company that they intend to make a market in the Securities
following this offering, they will have no legal obligation to do so. The
Representatives, if they become market makers, could be a dominating influence
in the market, if one develops. The prices and the liquidity of the Common
Stock and the Redeemable Warrants may be significantly affected by the degree,
if any, of the Representatives' participation in the market. No assurance can
be given that any market making activities of the Representatives, if commenced,
will be continued. See "Underwriting."
-19-
CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE WARRANTS
The Redeemable Warrants are not exercisable unless, at the time of the
exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Redeemable Warrants and such shares have
been registered, qualified or deemed to be exempt under the securities or "blue
sky" laws of the jurisdiction of residence of the exercising holder of the
Redeemable Warrants. In addition, in the event that any holder of the
Redeemable Warrants attempts to exercise any Redeemable Warrants at any time
after nine months from the date of this Prospectus, the Company may be required
to file a post-effective amendment and deliver a current prospectus before the
Redeemable Warrants may be exercised. Although the Company has undertaken to
use its best efforts to have all the shares of Common Stock issuable upon
exercise of the Redeemable Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, there is no assurance that it will be
able to do so. The value of the Redeemable Warrants may be greatly reduced if a
current prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.
The Redeemable Warrants will be separately tradeable immediately upon
issuance and may be purchased separately from the Common Stock. Although the
Securities will not knowingly be sold to purchasers in jurisdictions in which
the Securities are not registered or otherwise qualified for sale, investors may
purchase the Redeemable Warrants in the secondary market or may move to
jurisdictions in which the shares underlying the Redeemable Warrants are not
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Redeemable Warrants unless and until
the shares could be qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Redeemable Warrants would have no choice but to attempt to
sell the Redeemable Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised. See "Description of Securities -- Redeemable
Warrants."
ADVERSE EFFECT TO HOLDERS OF POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS
The Redeemable Warrants are subject to redemption by the Company, at any
time, commencing one year after the date of this Prospectus, at a price of $.25
per Redeemable Warrant if the average closing bid price for the Common Stock
equals or exceeds 140 percent of the initial public offering price per share for
any 20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. If the
Redeemable Warrants are redeemed prior to their exercise, the holders thereof
would lose their right to exercise Redeemable Warrants except during such period
of notice of redemption and the benefit of the difference between the market
price of the underlying Common Stock as of such date and the exercise price of
such Redeemable Warrants, as well as any possible future price appreciation in
the Common Stock. Upon the receipt of a notice of redemption of the Redeemable
Warrants, the holders thereof would be required to: (i) exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so; (ii) sell the Redeemable Warrants at the market price, if any,
when they might otherwise wish to hold the Redeemable Warrants; or (iii) accept
the redemption price, which is likely to be substantially less than the market
value of the Redeemable Warrants at the time of redemption. See "Description of
Securities -- Redeemable Warrants" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
A total of 4,208,291 shares of Common Stock will be issued and
outstanding upon the consummation of this offering, assuming no exercise of the
Underwriters' over-allotment option
-20-
and assuming that the Representative's Warrants and all other options and
warrants then to be outstanding are not exercised. Of such shares, the
2,400,000 shares offered by the Company and the 107,500 shares offered by the
Selling Security Holders will be freely tradeable without further registration
under the Securities Act, except for any such shares of Common Stock purchased
by an "affiliate" of the Company. Of the remaining 1,700,791 outstanding
shares, 183,723 shares are freely tradeable and the remainder are "restricted
shares" as defined in Rule 144 under the Securities Act and may not be sold
without registration under the Securities Act unless pursuant to an applicable
exemption therefrom. See generally "Shares Eligible for Future Sale."
SALE OF CERTAIN SECURITIES
A separate Prospectus is being filed with the Registration Statement of
which this Prospectus is a part which relates to the registration for the
account of the Selling Security Holders of 107,500 shares of Common Stock and
5,689,665 Redeemable Warrants and to the registration for the account of the
Company of 9,069,665 shares of Common Stock issuable upon exercise of the
Redeemable Warrants and ASSI Warrants. The Selling Security Holders' Securities
may be sold by the Selling Security Holders or their transferees commencing on
the date of this Prospectus. Sales by the Selling Security Holders or their
transferees of the Selling Security Holders' Securities may depress the price of
the Common Stock or the Redeemable Warrants in any market therefor that may
develop. See "Certain Transactions" and "Resale of Outstanding Securities."
In addition, the Company has issued warrants for 2,000,000 shares of Common
Stock to ASSI, Inc., a consultant to and creditor of the Company. The Common
Stock underlying the ASSI Warrants is being registered pursuant to the
Registration Statement of which this Prospectus is a part. Sales of the Common
Stock underlying the ASSI Warrants may depress the market for the Common Stock.
See "Certain Transactions -- Agreements With ASSI, Inc."
NO PRIOR MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF TRADING PRICES FOR SECURITIES
Prior to this offering, there has been no public market for the Common
Stock or the Redeemable Warrants, and there can be no assurance that a public
market for the Securities will develop or, if developed, that it will be
sustained after the offering. The initial public offering prices of the Common
Stock and Redeemable Warrants and the terms of the Redeemable Warrants were
determined arbitrarily by, among other things, negotiations between the Company
and the Representative and bear no relationship to the Company's assets, net
worth, results of operations or other established criteria of value. See
"Underwriting." Pursuant to a separate Prospectus filed as a part of the
Registration Statement of which this Prospectus is a part, 107,500 shares of
Common Stock and 5,689,665 Redeemable Warrants previously issued by the Company
are being registered for the account of the Selling Security Holders. See
"Certain Transactions -- 1995 Bridge Financing" and "-- 1995 Private Placement"
and "Selling Security Holders." Such Common Stock and Redeemable Warrants are
expected to become freely tradeable on or about the third business day after the
date of this Prospectus. In addition, the 9,069,665 shares of Common Stock
issuable upon exercise of the 5,689,665 Redeemable Warrants being registered for
the account of the Selling Security Holders, the 2,000,000 ASSI Warrants and the
1,380,000 Redeemable Warrants being issued by the Company pursuant to this
offering (assuming exercise of the Underwriters' over-allotment option) all will
become freely tradeable on the date of their issuance pursuant to the exercise
of such Redeemable Warrants and ASSI Warrants. Sales of the Common Stock and
Redeemable Warrants being registered for the account of the Selling Security
Holders will likely have an adverse effect on the market price of the shares of
Common Stock and the Redeemable Warrants being issued by the Company pursuant to
this offering, and such adverse effect may be material. In addition, the Common
Stock underlying the Redeemable Warrants being issued by the Company pursuant to
this offering and being separately
-21-
registered for the account of the Selling Security Holders and the ASSI Warrants
also are expected to become freely tradeable on the issuance thereof pursuant to
conversion of the related Redeemable Warrants or ASSI Warrants, as applicable.
Sales of such Common Stock also will likely have an adverse effect on the market
price of the Common Stock and such adverse effect may be material.
The trading prices of the Securities could be subject to wide fluctuations
in respect to the Company's operating results announcements by the Company or
others of developments affecting the Company or its competitors or customers and
other events or factors. In addition, the stock market has experienced extreme
price and volume fluctuations in recent years, particularly in the securities of
small development companies. The fluctuations have had a substantial effect on
the market prices of many companies, often unrelated to the operating
performances of the specific companies, and similar events in the future may
materially adversely affect the market prices of the Securities. See
"Description of Securities" and "Selling Security Holders."
ADVERSE EFFECT ON COMMON STOCK FROM EXERCISE OF WARRANTS AND OPTIONS
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of Common Stock. A total of 4,208,291 shares of Common Stock
will be outstanding after the completion of this offering, assuming exercise of
the Underwriters' over-allotment option and assuming that the Representative's
Warrant and all other stock options and warrants then to be outstanding are not
exercised. A total of 8,889,665 shares of Common Stock are reserved for
issuance pursuant to the Redeemable Warrants being issued by the Company
pursuant to this offering and being registered for the account of the Selling
Security Holders (and assuming no exercise of the Underwriters' over-allotment
option) and the ASSI Warrants. An additional 1,536,908 shares of Common Stock
are reserved for issuance pursuant to the Representative's Warrant (360,000
shares, including Common Stock issuable pursuant to the Redeemable Warrants
issuable pursuant to the Representative's Warrant), options previously granted
by the Company to the President and Chief Operating Officer (292,838 shares) and
under the 1992 Stock Option Plan (384,000 shares) and options that may be
granted under the 1995 Stock Option Plan (500,000). Thus, an additional
5,365,136 shares of Common Stock remain available for issuance at the discretion
of the Board of Directors. The potential issuance of such authorized and
unissued Common Stock may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may materially adversely
affect the market price of, and the voting and other rights of the holders of
the Common Stock. Although the Company has no present intention to issue any
such shares of its authorized and unissued Common Stock there can be no
assurance the Company will not do so in the future. See "Description of
Securities -- Common Stock."
NO PREEMPTIVE RIGHTS; POSSIBLE DILUTIVE EVENT
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock, or securities
convertible into or exercisable to purchase shares of Common Stock, following
this offering, persons acquiring Common Stock in this offering would have no
right to purchase additional shares, and as a result, their percentage equity
interest in the Company would be diluted. See "Description of Securities --
Common Stock."
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NO DIVIDENDS
As of the date of this Prospectus, the Company has not paid any cash
dividends on its Common Stock and does not intend to declare any such dividends
in the foreseeable future. The Company's ability to pay dividends is subject to
limitations imposed by Delaware law and, as a QUASI-California corporation, to
the more restrictive provisions of California law. The sole source of funds
available to the Company for the payment of dividends is dividends or loans
advanced to it by the Subsidiary which is itself a California corporation and
therefore subject to the dividend payment provisions of the California GCL.
Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if (i) the assets of the corporation exceed 1-1/4 times its
liabilities; and (ii) the current assets of the corporation equal or exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1-1/4 times its current
liabilities. Under the foregoing requirements, the Company will not be able to
pay dividends for the foreseeable future. See "Dividend Policy" and
"Description of Securities."
QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISK OF LOW PRICED SECURITIES
Certain qualification requirements are established for the initial and
continued listing of securities on Nasdaq. The Common Stock and the Redeemable
Warrants will be eligible for initial listing on the Nasdaq SmallCap Market
under these rules upon consummation of this offering. Under the rules for
initial listing, a company must, among other things, have at least $4,000,000 in
total assets, at least $2,000,000 in total capital and surplus, and a minimum
bid price of $3.00 per share. For continued listing, a company must, among
other things, maintain at least $2,000,000 in total assets, at least $1,000,000
in total capital and surplus, and a minimum bid price of $1.00 per share. The
Company has qualified for initial listing on the Nasdaq SmallCap Market and
expects to maintain its listing on Nasdaq; however, if the Company experiences
losses from operations or material adverse trading conditions, it may be unable
to maintain the standards for continued listing and the Securities could be
subject to delisting from Nasdaq. It is anticipated that if the Securities are
delisted from Nasdaq, trading, if any, in the Securities would be conducted in
the over-the-counter market on the NASD OTC Electronic Bulletin Board
established for securities that do not meet the Nasdaq listing requirements or
quoted in what are commonly referred to as the "pink sheets." In such event, an
investor may find it more difficult to dispose of, or to obtain accurate price
quotations and volume information concerning, the Securities.
In addition, if the Securities are delisted from Nasdaq, they might be
subject to the low priced security or so-called "penny stock" rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally defined as investors with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with a spouse). For any
transaction involving a penny stock, unless exempt, the rules require, among
other things, the delivery, prior to the transaction, of a disclosure schedule
required by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over
-23-
the market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
Although the Company believes that the Securities will not be defined as a
penny stock due to their anticipated continued listing on Nasdaq, in the event
the Securities subsequently become characterized as a penny stock, the market
liquidity for the Securities could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Securities and, thus, the ability of purchasers in this offering to
sell their Securities in the secondary market.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts of $990,000 and $600,000 for
expenses, including the Representatives' three percent nonaccountable expense
allowance, are estimated to be approximately $8,310,000 ($9,496,200 if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $4.00 per share and $.25 per Redeemable Warrant. The
Company anticipates that the estimated net proceeds of this offering
initially will be allocated substantially as follows:
APPROXIMATE
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
------------------------------------------- ------------- -------------
Repayment of Notes(1). . . . . . . . . . $5,230,000 62.9%
Marketing Expenses(2). . . . . . . . . . 400,000 4.8
Licenses and Royalties(3). . . . . . . . 450,000 5.4
Capital Expenditures(4) . . . . . . . . 50,000 .6
Working capital(5) . . . . . . . . . . . 2,180,000 26.3
--------- ----
Total. . . . . . . . . . . . . . . . . . $8,310,000 100.0%
------------------------
(1) Represents repayment of all of the Company's outstanding Private Notes in
the aggregate principal amount of $4,987,500, plus accrued interest of
approximately $242,500 as of March 31, 1996. The Private Notes were issued
in connection with the Company's 1995 Private Placement (as defined below),
bear interest at the rate of ten percent per annum and are due on the
earlier of (i) September 1, 1996 or (ii) the completion of any initial
public offering by the Company. See "Certain Transactions -- 1995 Private
Placement."
(2) Represents amounts expected to be expended in connection with product
marketing activities, including print and co-operative advertising,
promotions and contests, coupon inserts and in-store displays.
(3) Represents amounts expected to be paid to licensors in connection with the
obtaining of new licenses, and to licensors under the terms of existing
licenses.
(4) Represents amounts expected to be expended for purchases of equipment for
use in the Company's business.
(5) Working capital will be used, among other things, to fund operating
expenses, including rent and salaries.
If the Underwriters exercise their over-allotment option in full, the
Company will realize additional net proceeds of approximately $1,183,200 which
will be added to the Company's working capital. In addition, all net proceeds
received by the Company upon the exercise, if any, of the Redeemable Warrants
and the Representative's Warrant will be added to working capital.
The Company anticipates that the net proceeds of this offering, together
with its cash on hand and anticipated net cash flow from operations, will be
sufficient to fund the Company's contemplated cash requirements for at least the
next 12 months. See "Risk Factors -- Dependence on Net Proceeds of this
Offering; Possible Need for Additional Financing." While the initial allocation
of the net proceeds of this offering, as set forth above, represents the
Company's best estimates of its future financing needs, the amounts actually
expended for each purpose may vary significantly from the specific allocation of
the net proceeds set forth above, depending on numerous factors. The Company,
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therefore, reserves the right to reallocate the net proceeds of this offering
among the various categories set forth above as it, in its sole discretion,
deems necessary or advisable.
In the event that the Company requires additional financing prior to the
completion of this offering, the Company reserves the right to borrow up to
$500,000. It is anticipated that any such loan will be made at an interest rate
not to exceed ten percent per annum. Any such loan would be repaid out of the
proceeds of this offering. The Company, however, may allow the lender to
convert the outstanding balance of the loan into warrants having terms
substantially the same as those of the Redeemable Warrants.
Part of the Company's strategy is to expand through acquisitions. After
this offering, the Company intends to seek to make such acquisitions, but it is
not currently a party to any discussion, agreement, arrangement or understanding
in connection with any such acquisition. See "Business -- Business Strategy --
Acquisitions and Affiliate Label Arrangements."
Pending application, the net proceeds of this offering will be invested
principally in U.S. government securities, short-term certificates of deposit,
money market funds or other similar short-term interest-bearing investments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since its inception. It is the current policy of the Company that it will
retain its earnings, if any, for expansion of its operations and other corporate
purposes, and that it will not pay any dividends in respect of the Common Stock
in the foreseeable future. The payment of dividends, if any, is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, if any, its capital requirements and financial condition and such
other factors as the Board of Directors may consider.
The Company's ability to pay dividends is subject to the applicable
provisions of the General Corporation Law of Delaware, which is the Company's
jurisdiction of incorporation. As a QUASI-California corporation, the Company
also is subject to the relatively more restrictive provisions of the California
GCL. The sole source of funds available to the Company for the payment of
dividends is dividends and loans advanced to it by the Subsidiary, which is
itself a California corporation and therefore subject to the dividend payment
provisions of the California GCL.
Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if the assets of the corporation exceed 1-1/4 times its liabilities;
and (ii) the current assets of the corporation equal or exceed its current
liabilities, but if the average pre-tax earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1-1/4 times its current liabilities. Under the
foregoing requirements, the Company will not be able to pay dividends until it
achieves positive retained earnings, which management does not anticipate will
occur for the foreseeable future. See "Risk Factors - No Dividends."
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DILUTION
At December 31, 1995, the Company had 1,808,291 shares of Common Stock
outstanding and at such date the net tangible book value of the Company was
$(2,733,214) or approximately ($1.51) per share of Common Stock. "Net tangible
book value per share" represents the total tangible assets of the Company, less
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt of the net proceeds (estimated to be
approximately $8,049,000 after deducting the Underwriters' discount of
$990,000 and $600,000 for expenses, including the Representatives' three
percent nonaccountable expense allowance), from the sale of the 2,400,000
shares of Common Stock offered by the Company at an assumed public offering
price of $4.00 per share (without giving any effect to the net proceeds from
the sale of the Redeemable Warrants), the pro forma net tangible book value
of the Company at December 31, 1995 would have been $4,584,918, or
approximately $1.09 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.60 per share of Common Stock to
existing stockholders and an immediate dilution to new investors of
approximately $2.91 per share of Common Stock. Dilution per share represents
the difference between the offering price per share of Common Stock and the
net tangible book value per share after giving effect to this offering.
The following table illustrates the per share dilution to be incurred by
the purchasers of Common Stock of this offering from the assumed initial public
offering price of $4.00 per share:
[Enlarge/Download Table]
DESCRIPTION AMOUNT AMOUNT
------------------------------------------------------------------------ ---------- ----------
Assumed initial public offering price per share of Common Stock(1) . . $4.00
Net tangible book value per share of Common stock before
offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.51)
Increase in net tangible book value per share of Common Stock
attributable to the sale of the Common Stock offered by the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.60
----
Pro forma net tangible book value per share of Common Stock
after offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.09
----
Dilution per share of Common Stock to public investors(2)(3) . . . . . 2.91
----
----
--------------------------
(1) Before deducting underwriting discounts and other expenses of this
offering.
(2) If the net proceeds of $261,000 from the sale of the Redeemable Warrants
offered by the Company (after deducting the Underwriters' discount and the
Representative's nonaccountable expense allowance, but attributing no
other costs of this offering to the Redeemable Warrants) had been
attributed to the net tangible book value of the shares of Common Stock
after this offering, it would increase the pro forma net tangible book
value after this offering by $.06 per share of Common Stock and decrease
the dilution to new public investors by approximately $.06 per share of
Common Stock.
(3) In the event that the Underwriters exercise their over-allotment option to
purchase 340,000 shares of Common Stock from the Company, the pro forma
net tangible book value of the Company after this offering (after
deducting the underwriters' discount and the Representative's
nonaccountable expense allowance but no other costs of this offering)
would be approximately $6,029,118 (including the net proceeds of $261,000
from the sale of the Redeemable Warrants) or $1.33 per share of Common
Stock, which would result in immediate dilution in net tangible book value
to the public investors of approximately $2.67 per share of Common Stock.
In the event of the further exercise of all 484,037
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presently exercisable Common Stock purchase options at the average
exercise price of $.75 per share, and the sale and exercise in full of the
Representative's Warrant including the sale and exercise in full of the
Redeemable Warrants and the ASSI Warrants, and after giving effect to all
of the aforementioned transactions, the pro forma net tangible book value
of the Company would be approximately $49,666,063 or $3.43 per share,
which would result in immediate dilution in net tangible book value to the
public investors of approximately $.57 per share of Common Stock.
The following table illustrates the per share dilution to be incurred by
the purchasers of Common Stock in this offering upon exercise of the Redeemable
Warrants and ASSI Warrants from the assumed exercise price of $4.00 per share:
[Enlarge/Download Table]
DESCRIPTION AMOUNT AMOUNT
----------------------------------------------------------------------- ---------- --------
Assumed initial public offering price per share of Common Stock(1) . . $4.00
Pro forma net tangible book value per share of Common stock
before exercise of Redeemable Warrants and ASSI Warrants. . . . . $1.33
Increase in net tangible book value per share of Common Stock
attributable to the sale of the Common Stock upon exercise of all
Redeemable Warrants and ASSI Warrants . . . . . . . . . . . . . 2.10
----
Pro forma net tangible book value per share of Common Stock
after exercise of all Redeemable Warrants and ASSI Warrants . . . . . 3.43
----
Dilution per share of Common Stock to investors exercising Redeemable
Warrants and ASSI Warrants . . . . . . . . . . . . . . . . . . . . . . .57
----
----
----------------------------------
(1) Before deducting warrant exercise fee payable to the Representative upon
exercise of the Redeemable Warrants and ASSI Warrants. See "Underwriting."
The following table sets forth, as of December 31, 1995, the number and
percentage of shares of Common Stock purchased by, and the amount and percentage
of consideration paid by, the existing stockholders, by public investors in this
offering and the average price per share of Common Stock.
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
----------------------------- -----------------------------------------------
AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ---------- ----------- ---------- -------------
Current stockholders(1) 1,808,291 43.0% $6,128,007 39.0% $3.39
Public investors(2). . . . . . 2,400,000 57.0 9,600,000 61.0% 4.00
--------- ----- --------- -----
Total. . . . . . . . . . . 4,208,291 100.0% $15,728,007 100.0%
(1) Includes: (i) $263,300 paid by the investors in the Company's 1995 Private
Placement and 1995 Bridge Financing for warrants to purchase 5,268,747
shares of Common Stock issued by the Company in such private placements;
and (ii) the nominal consideration of $50 paid by Financial West Group,
Inc. for the
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warrants to purchase up to 420,918 shares of Common Stock issued to it in
connection with such private placements as part of the total consideration
paid by existing stockholders. See "Certain Transactions."
(2) Does not include the $600,000 to be paid by public investors for the
1,200,000 Redeemable Warrants being offered by the Company. To the extent
that any of the Redeemable Warrants are exercised, there will be no further
dilution to the public investors.
The foregoing computations assume the exercise of no stock options after
December 31, 1995. As of December 31, 1995, 292,838 shares of Common Stock were
subject to presently exercisable options granted to the Company's President and
Chief Operating Officer at an exercise price of $.06 per share. As of
December 31, 1995, additional options to purchase a total of 184,070 shares of
Common Stock were issued pursuant to the 1992 Stock Option Plan; options to
purchase a total of 200,000 additional shares of Common Stock were subsequently
issued pursuant to the 1992 Stock Option Plan. All of such options are non-
qualified stock options having an exercise price of $.06 per share. Of the
384,070 options that have been granted pursuant to the 1992 Stock Option Plan,
191,199 are presently exercisable, 45,840 will become exercisable in fiscal 1997
and the balance will become exercisable in fiscal 1998. No further options may
be granted pursuant to the Company's 1992 Stock Option Plan. An additional
500,000 shares of Common Stock are available for issuance under the Company's
1995 Stock Option Plan, of which the Company has agreed to issue 13,610 options
to its nonexecutive employees. See "Management -- Executive Compensation," "--
1995 Stock Option Plan" and "-- 1992 Stock Option Plan." The Representative's
Warrant entitles the Representative to purchase 240,000 shares of Common Stock
and/or 120,000 Redeemable Warrants at 120 percent of the offering price of the
Common Stock or Redeemable Warrants, as applicable, in this offering, and will
become exercisable one year after the date of this Prospectus. See
"Underwriting."
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CAPITALIZATION
The following table sets forth, as of December 31, 1995, the short-term
debt and capitalization of the Company on an actual basis and as adjusted to
reflect the issuance and sale of the 2,400,000 shares of Common Stock and the
1,200,000 Redeemable Warrants offered by the Company and the initial application
of the estimated net proceeds therefrom. The table should be read in
conjunction with the financial statements and the notes to the financial
statements which are contained elsewhere in this Prospectus.
[Enlarge/Download Table]
DECEMBER 31, 1995
-------------------------------------
ACTUAL AS ADJUSTED(1)
-------------- ---------------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,987,500 $ 0
Stockholders' equity (deficit)
Common Stock, $.001 par value; 20,000,000
shares authorized; 1,808,291 shares issued
and outstanding (actual); 4,208,291 shares
issued and outstanding (as adjusted) . . . . . . . . 1,808 4,208
Warrants . . . . . . . . . . . . . . . . . . . . . . . 263,350 524,350
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 5,124,576 13,171,176
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (8,122,948) (8,853,816)
Total stockholders' equity (deficiency). . . . . . . . . . . . . (2,733,214) 4,845,918
Total capitalization . . . . . . . . . . . . . . . . . 2,254,286 4,845,918
(1) As adjusted to reflect the issuance of 2,400,000 shares of Common Stock at
an assumed initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an assumed initial public offering price of $.25 per
Redeemable Warrant, net of anticipated expenses of the offering (estimated
at $990,000 for the Underwriters' discount and $600,000 for expenses,
including the Representatives' three percent nonaccountable expense
allowance) and repayment of all of the Company's funded indebtedness
(estimated at $5,105,676 at December 31, 1995) with a portion of such
proceeds. The as adjusted amounts do not reflect the issuance of up to
340,000 shares of Common Stock and 180,000 Redeemable Warrants by the
Company to cover over-allotments, if any, or the exercise of the
Representative's Warrant to purchase up to 240,000 shares of Common Stock
and/or 120,000 Redeemable Warrants, or the exercise of any other
outstanding (or agreed to be issued) options or warrants to purchase up to
an additional 10,120,183 shares of Common Stock.
-30-
SELECTED FINANCIAL DATA
The following table of summary financial information is derived from and
should be read in conjunction with the Company's financial statements and the
footnotes thereto included elsewhere in this Prospectus. The financial data for
the fiscal years ended June 30, 1994 and 1995 has been derived from audited
financial statements prepared by Corbin & Wertz, certified public accountants,
who are the Company's independent auditors. The Company's losses for fiscal
1994 and 1995 include noncash charges of $2,992,862 and $733,165, respectively,
associated with the granting of certain compensatory stock options. The
financial data for the six-month periods ended December 31, 1994 and 1995 are
derived from unaudited financial statements of the Company. The unaudited
financial statements include all adjustments consisting of normal recurring
accruals which the Company considers necessary for a fair presentation of the
financial position and the results of operations. Operating results for the
six-month period are not necessarily indicative of the results that may be
expected for the entire year ending June 30, 1996. See "Risk Factors --
Fluctuations in Operating Results; Seasonality" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
[Enlarge/Download Table]
Six Months Ended
Year Ended June 30, December 31,
------------------------ -------------------------
Statement of Operations Data 1994 1995 1994 1995
---------------------------------------- --------- ---------- --------- ----------
Retail software sales. . . . . . . . . . 1,313,890 1,255,230 1,006,849 1,077,547
OEM sales. . . . . . . . . . . . . . . . 5,500 479,675 389,979 21,466
Development agreement
revenues. . . . . . . . . . . . . . 112,520 343,250 127,250 0
Royalties. . . . . . . . . . . . . . . . 253,961 76,771 76,253 21,678
Net sales from continuing
operations. . . . . . . . . . . . . 1,685,871 2,154,926 1,600,331 1,120,691
Gross profit . . . . . . . . . . . . . . 505,068 1,082,235 643,963 438,181
Noncash compensation expense
recorded in connection with
Common Stock and Common Stock
options issued for services . . . 2,992,862 733,165 193,332 0
Other expenses . . . . . . . . . . . . . 1,374,052 1,940,124 886,272 2,448,553
Loss from continuing operations. . . . . (3,861,846) (1,591,054) (435,641) (2,010,372)
Loss from discontinued operations. . . . (115,887) (143,106) (13,376) 0
Net loss . . . . . . . . . . . . . . . . (3,977,733) (1,734,160) (449,017) (2,010,372)
Loss per common share from
continuing operations . . . . . . . (2.38) (0.85) (0.23) (1.08)
Loss per common share from
discontinued operations . . . . . (0.07) (0.08) (0.01) 0
Net loss per common share. . . . . . . . (2.45) (0.93) (0.24) (1.08)
Weighted average number of
common shares outstanding(1). . . . 1,626,107 1,862,908 1,869,998 1,868,145
[Download Table]
As of December 31, 1995
----------------------------
Balance Sheet Data Actual As Adjusted(1)
---------------------------------------- ------------ --------------
Working Capital. . . . . . . . . . . . . (2,913,040) 4,666,092
Total assets . . . . . . . . . . . . . . 4,165,858 6,533,154
Current liabilities. . . . . . . . . . . 6,873,471 1,661,635
Long term debt . . . . . . . . . . . . . 25,601 25,601
Stockholder equity (deficit) . . . . . . (2,733,214) 4,845,918
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----------------
(1) Unless otherwise indicated, all share and per share information in this
Prospectus gives effect to a 9.25-for-1 stock split effected in May 1994
and a 1-for-5.976 reverse stock split effected in September 1995. Unless
otherwise indicated, such share and per share information does not give
effect to: (i) the exercise of the Underwriters' over-allotment option to
purchase up to 360,000 shares of Common Stock and 180,000 Redeemable
Warrants; (ii) the issuance of 1,200,000 shares of Common Stock underlying
the Redeemable Warrants being offered by the Company; (iii) the issuance of
5,689,665 shares of Common Stock underlying the Redeemable Warrants and
2,000,000 shares of Common Stock underlying the ASSI Warrants being offered
by the Selling Security Holders; (iv) the issuance of 180,000 shares of
Common Stock underlying the Redeemable Warrants included in the
Underwriters' over-allotment option; (v) the exercise of a warrant granted
to the Representative (the "Representative's Warrant") to purchase up to
240,000 shares of Common Stock and/or 120,000 Redeemable Warrants; (vi) the
issuance upon exercise of the Representative's Warrant of 240,000 shares of
Common Stock, 120,000 Redeemable Warrants or 120,000 shares of Common Stock
issuable upon exercise of such Redeemable Warrants; (vii) the issuance of
384,070 shares of Common Stock underlying options granted pursuant to the
Company's 1992 Stock Option Plan; (viii) 500,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1995 Stock Option Plan, as
to which the Company has granted no options and has agreed to grant 13,610
options; or (ix) the issuance of 292,838 shares of Common Stock underlying
options held by the Company's President.
(2) As adjusted to reflect the issuance of 2,400,000 shares of Common Stock at
an assumed initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an assumed initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the Underwriters' discount and $600,000 for expenses,
including the Representatives' three percent nonaccountable expense
allowance) and repayment of all of the Company's funded indebtedness
(estimated at $5,105,676 at December 31, 1995) with a portion of such
proceeds. The as adjusted amounts do not reflect the issuance of up to
340,000 shares of Common Stock and 180,000 Redeemable Warrants by the
Company to cover over-allotments, if any, or the exercise of the
Representative's Warrant to purchase up to 240,000 shares of Common Stock
and/or 120,000 Redeemable Warrants, or the exercise of any other
outstanding (or agreed to be issued) options or warrants to purchase up to
an additional 10,120,183 shares of CommonStock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenues from sales of its
retail consumer software and original equipment manufacturer ("OEM") versions of
its retail consumer software. The Company designs, develops, markets and
supports a broad line of consumer software products. The Company focuses
primarily on nonviolent, family-oriented products with educational and
entertainment value, which are easy to use and install, using popular movies,
television series and comic book characters. See generally "Business."
In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software and related products. The Company had no sales to or through Acclaim
during its fiscal year ended June 30, 1995. During the six-month period ended
December 31, 1995, of the Company's net sales of $1,120,691, a total of $819,619
(73 percent) were generated by Acclaim. Under the terms of this agreement,
Acclaim was the exclusive distributor of the Company's products on a worldwide
basis, subject to certain limited exceptions. The Company was not satisfied
with the distribution of its products through Acclaim, and determined to
terminate the Acclaim distribution agreement in March 1996.
The Company and Acclaim have terminated the distribution agreement as of
April 30, 1996. On or before June 30, 1996, Acclaim will render a final
accounting to the Company together with payment of the balance of any amounts
due to the Company under the distribution agreement. Acclaim has notified its
accounts that it will not accept returns of any of the Company's software
products after June 30, 1996. The Company, however, will remain liable for all
such returns regardless of when received by Acclaim.
Net sales consist of gross sales net of allowances for returns, credit
losses and other adjustments. The Company adjusts its allowance for returns as
it deems appropriate. The Company could be forced to accept substantial product
returns or other concessions to maintain its relationships with retailers and
distributors and its access to distributor channels. The Company is also
exposed to the risk of returns of defective, shelf-worn and damaged products
from retailers and distributors.
Costs of sales consist primarily of product cost, freight charges,
royalties to outside programmers and content providers, and an inventory
provision for damaged and obsolete products. Product costs consist of the costs
to purchase the underlying materials and print both boxes and manuals, media
costs (disks and CD-ROMs) and fulfillment (assembly and shipping).
From the Company's inception through October 24, 1995, the Company sold
synthesizer sound libraries. In July 1995, the Company's Board of Directors
approved a formal plan to license the proprietary assets related to such
revenues in exchange for royalties. The Results of Operations discussion and
analysis which follows includes only the continuing operations of the Company,
which is primarily comprised of software sales. The Company sustained losses
from these discontinued synthesizer operations of $143,106 in fiscal 1995 and
$115,887 in fiscal 1994.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1994 COMPARED TO SIX MONTHS ENDED DECEMBER
31, 1995
NET SALES. Net sales from continuing operations decreased by 30 percent
from $1,600,331 for the six months ended December 31, 1994 to $1,120,691 for the
six months ended December 31, 1995. In 1995, the Company determined to
concentrate its focus on development of its educational interactive CD-ROM
software and to reduce its development work for third parties. Consequently,
total retail sales of the Company's software products increased from $1,006,849
during the six months ended December 31, 1994 to $1,197,718 during the six
months ended December 31, 1995, but the Company had no development revenues in
the period, compared with $127,250 for the prior period. Revenues from OEM
sales declined from $389,979 to $21,466, reflecting a one-time agreement with
Acer in 1994 that did not produce significant revenues in 1995. In addition,
the Company's royalty fees declined from $76,253 to $21,678 during the
corresponding periods. The higher royalty revenues for the six months ended
December 31, 1994 resulted primarily from introductions of products
incorporating content sublicensed by the Company that were not repeated in the
six months ended December 31, 1995. This decline in royalty revenues also
reflected the Company's current strategy of focusing on developing all product
licenses itself rather than sublicensing them to third parties.
During the six months ended December 31, 1995, of the Company's net sales
of $1,120,691, a total of $819,619 (73 percent) were generated by Acclaim. None
of the Company's net sales of $1,006,840 during the six months ended December
31, 1994 were generated by Acclaim. As noted above, because of its
disappointment with the level of sales generated by Acclaim, the Company has
terminated its distribution agreement with Acclaim effective April 30, 1996.
COST OF SALES. Cost of sales decreased by 29 percent from $956,368 for the
six months ended December 31, 1994 to $682,510 for the six months ended December
31, 1995, representing 60 percent and 61 percent of net sales, respectively.
This decrease is primarily attributable to diminished inventory and reduced
production costs resulting from the Company's switch from floppy disk to CD-ROM
media for the majority of its products.
MARKETING AND SALES. Marketing and sales expenses increased by 96 percent
from $291,805 for the six months ended December 31, 1994 to $572,778 for the six
months ended December 31, 1995, and increased as a percentage of net sales from
18 percent to 51 percent, respectively. These increases were primarily due to
increased marketing activities to promote the Company's products and brand name
among retail purchasers, and increased personnel costs. The Company intends to
continue to launch new and innovative marketing promotions and to hire
additional personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 75 percent from $688,974 for the six months ended December 31, 1994 to
$1,208,838 for the six months ended December 31, 1995, and increased as a
percentage of net sales from 43 percent to 108 percent, respectively. The
increase is primarily attributable to costs incurred by the Company during the
six months ended December 31, 1995 related to the 1995 Bridge Financing and a
$422,310 bad debt reserve relating to the Company's receivable from Acclaim,
offset by decreased executive salaries and noncash compensation incurred in
connection with the issuance of Common Stock and Common Stock options. A total
of $193,332 of the general and administrative expenses for the six months ended
December 31, 1994 relates to a noncash charge to earnings in connection with the
vesting of stock options granted to employees, determined as the difference
between the fair market value on the date of grant and the exercise price. No
such charge was incurred during the six months ended December 31, 1995.
-34-
DEVELOPMENT. Development expenses increased by 247 percent from $76,725
six months ended December 31, 1994 to $266,153 for the six months ended December
31, 1995, and increased as a percentage of net sales from 5 percent to 24
percent, respectively. These increases were primarily attributable to costs
relating to product upgrade and new product development activities. The Company
believes that development expenses will increase in dollar amount and as a
percentage of net sales in the future as the Company expands its development
activities.
TAX PROVISION. The current period income tax provision is comprised of
minimum state franchise taxes of $1,200. There is no provision for Federal
income taxes as the Company has a loss in the six month periods ended December
31, 1994 and 1995, respectively.
OTHER. Other income (expense) increased from $20,900 for the six months
ended December 31, 1994 to $399,584 for the six months ended December 31, 1995,
and increased as a percentage of net sales from one percent to 36 percent,
respectively. This increase is primarily comprised of amortization of deferred
loan costs of $262,732, and interest expense of $118,176, during the six months
ended December 31, 1995, all of which costs related to the Company's 1995
Private Placement.
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
NET SALES. Net sales from continuing operations increased by 28 percent
from $1,685,871 for fiscal 1994 to $2,154,296 for fiscal 1995. Retail software
sales decreased by 5 percent from $1,313,890 for 1994 to $1,255,230 for 1995 due
principally to discounting and pricing declines for the Company's software
products. Development revenues increased by 205 percent from $112,520 for 1994
to $343,250 for 1995, primarily as a result of an agreement to develop
MOVIEBOOKS-TM- under a contract with a motion picture studio. OEM sales
increased by 13.3 percent from $5,500 for 1994 to $479,675 for 1995. This
increase in OEM sales resulted principally from sales pursuant to a software
bundling agreement with a PC manufacturer. Royalty fees decreased by 69 percent
from $253,961 for 1994 to $76,771 for 1995. The decline in royalty revenues
reflected the Company's strategy of focusing on developing all product licenses
itself rather than sublicensing them to third parties.
The Company established a reserve for 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. Costs of sales decreased by 9.1 percent from $1,180,803 for
fiscal 1994 to $1,072,691 for fiscal 1995, and decreased as a percentage of net
sales from 70.0 percent to 50 percent, respectively. This percentage decrease
was principally attributable to the substantially lower costs associated with
the sale of the single "golden master" for certain of the Company's products
sold to a PC manufacturer to install under an OEM bundling agreement in the
first six months of fiscal 1995, partially offset by a change in the product mix
to higher priced items and a decrease in OEM costs.
MARKETING AND SALES. Marketing and sales expenses increased by 45.2
percent from $356,381 for fiscal 1994 to $516,886 for fiscal 1995, and increased
as a percentage of net sales from 21.1 percent to 24 percent, respectively.
These increases were primarily due to increased marketing activities to promote
the Company's product and brand name, and an increase in personnel. The Company
intends to continue to launch new and innovative marketing promotions and to
hire additional personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by 53 percent from $3,821,728 for fiscal 1994 to $1,783,023 for fiscal 1995, and
decreased as a percentage of net sales
-35-
from 227 percent to 83 percent, respectively. The decrease was primarily due to
a decrease in noncash compensation in connection with Common Stock issued for
services provided, partially offset by increased staffing and associated
overhead expenses necessary to manage and support the Company's growth. A total
of $2,992,862 of the 1994 general and administrative expenses and $733,165 of
the 1995 general and administrative expenses relates to noncash charges to
earnings in connection with the vesting of stock options granted to employees,
determined as the difference between the fair market value on the date of grant
and the exercise price.
DEVELOPMENT. Development expenses increased by 223.1 percent from $116,559
for fiscal 1994 to $378,471 for fiscal 1995, and increased as a percentage of
net sales from 7 percent to 18 percent, respectively. These increases were
primarily attributable to costs relating to product upgrade and new product
development activities. The Company developed its first four MOVIEBOOKS-TM- in
fiscal 1995, and to date has developed four MOVIEBOOKS-TM- in fiscal 1996. The
Company believes that development expenses will increase in dollar amount and as
a percentage of net sales in the future as the Company expands its development
activities.
TAX PROVISION. The income tax provision for 1994 and 1995 is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision
for Federal income taxes as the Company has a current year loss and has a
$2,513,000 net operating loss carryforward. Depending upon future changes in
ownership of the Company, the use of this carryforward may be limited in the
future.
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 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. Nevertheless, management believes that in
the future its results may be less subject to seasonal fluctuations because its
products will be marketed in connection with the releases of major motion
pictures and home videos, which occur throughout the year. See "Risk Factors --
Fluctuations in Operating Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operations and capital
expenditures primarily with cash provided by operating activities, securities
issuances and financing arrangements. As of December 31, 1995, the Company had
negative working capital of $2,490,730 and cash equivalents of $1,492,507. To
date, the Company has not invested in derivative securities or any other
financial
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instruments that involve a high degree of complexity or risk, and management
does not intend to invest in these types of securities or financial instruments
in the future.
The Company invested approximately $46,000 during fiscal year 1995 and
currently anticipates investing approximately $100,000 during fiscal 1996 for
capital equipment to expand into new product lines and to address potential
capacity constraints created by the Company's growing unit sales volumes. From
time to time, the Company evaluates acquisitions of products, businesses and
technologies that are complementary to the Company's business. Presently,
however, the Company does not have any understandings, commitments or agreements
with respect to any such acquisitions.
The Company is dependent on the net proceeds of this offering or other
financing to repay the aggregate principal amount of $4,987,500 in Private Notes
issued to investors in the Company's 1995 Private Placement, plus accrued
interest. The Company believes that the net proceeds from the offering,
together with its cash on hand, and anticipated net cash flow from operations,
will be sufficient to fund the Company's contemplated cash requirements for at
least the next 12 months. The Company currently plans to develop four to five
MOVIEBOOKS-TM- and at least one activity center per year, which management
estimates will cost approximately $150,000 per title, plus a licensing fee of
approximately $25,000 to $150,000 per title. If the Company can generate sales
of at least 40,000 units per title, management believes the Company will be able
to finance its business operations from net sales revenue. If the Company is
unable to generate the necessary volume of sales on its existing products
through March 31, 1997, the Company will be required to seek additional
financing to continue the development of new products for the next fiscal year.
There can be no assurance that the Company will achieve the necessary sales to
fund its future operations or that, if additional financing is necessary, such
financing will be available. See "Risk Factors -- Dependence on Net Proceeds of
this Offering; Possible Need for Additional Financing."
Management expects that in the future, cash in excess of current
requirements will be invested in investment-grade, interest-bearing securities.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a method of accounting
for stock compensation plans based on fair value of grants made under such plans
on the date of grant using certain option-pricing models. SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance with
APB opinion 25 "Accounting for Stock Issued to Employees," which provides for an
intrinsic valuation model that recognizes only the difference between the fair
market value of a company's stock and the price paid to acquire the stock under
the stock compensation plan. However, SFAS No. 123 encourages the adoption of
the fair value accounting method. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. The Company plans to use the intrinsic
valuation model and provide footnote disclosure with respect to the fair value
of options for fiscal years beginning after January 1, 1996.
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BUSINESS
GENERAL
The Company is engaged primarily in developing, publishing and
marketing educational, interactive computer software products for children.
MOVIEBOOKS-TM-, which combine text, photos, soundclips and actual film footage
of well recognized family films and cartoon series, are the Company's major
software products. MOVIEBOOKS-TM- are developed and published by the Company
on CD-ROM for Multimedia PCs as entertaining, interactive reading tools for
young children. The Company also produces a variety of entertainment
computer software utilities such as screen savers and sound clips known as
AUDIOCLIPS-Registered Trademark-. The Company is currently developing another
line of products which it refers to as creativity centers. This product line
combines learning activities such as painting, drawing, matching, puzzles and
mazes within a framework of three distinct skill levels.
The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements include for existing products
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM-, and other popular titles.
The Company also holds licenses for new products being developed for release in
1996 on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-,DRAGON HEART-TM-,
and I LOVE LUCY-TM-. The Company is continuing the negotiation of additional
licenses for all of its product line offerings. Management believes the Company
is capable of continuing to obtain new licenses for major motion pictures and
television shows and developing new, high quality software products using
content from these entertainment properties.
The Company believes that as of March 31, 1996, its products were in
distribution to approximately 6,000 retail outlets. Retailers currently selling
the Company's products include Target, Tower Records, Sears, Wal-Mart,
Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead, Electronics
Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam Goody, Sam's
Club, QVC, Musicland, Circuit City and others.
INDUSTRY BACKGROUND
In recent years, the installed base of Multimedia PCs in households has
grown substantially as prices have declined significantly and as improvements in
computing power and capability have been achieved. There are a number of
factors driving the increased demand and use of Multimedia PCs in U.S. and
foreign households beyond the general impact of falling prices and increased
performance. Enabling technologies and standards, such as graphical user
interfaces and the Microsoft-Registered Trademark- Windows-Registered Trademark-
operating system, and the recent release of the Windows '95-Registered
Trademark- operating system, have made Multimedia PCs easier to use for a broad
range of applications, resulting in the transformation of Multimedia PCs into
general-purpose tools. In addition, today's Multimedia PCs feature high-speed
microprocessors, large amounts of memory, high-resolution monitors and enhanced
sound and speaker and graphics capabilities. These advanced capabilities, along
with the introduction of CD-ROM multimedia technology, have allowed software
developers to produce more engaging software with advanced three-dimensional
graphics, realistic sound and full motion video. The Company believes that CD-
ROM multimedia technology will continue to impact the growth of the consumer
software market as software developers take advantage of the multimedia
capabilities of this more advanced hardware technology.
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The resulting increased penetration of Multimedia PCs into domestic
households has created a large and growing mass market for consumer software as
consumers wish to maximize the utility of their Multimedia PCs. The
distribution of consumer software has also expanded beyond traditional software
retailers and computer stores to include general mass merchandisers.
In response to these developments, increasing numbers of consumer software
products are being developed to address a broad range of consumer interests and
everyday tasks. The Company believes that consumers are more frequently
purchasing software on impulse in the same way that they often buy books, music
compact discs ("CDs") and motion picture videos. With the increasing
consumerization of the software market, the Company believes that the prices for
consumer software products may fall. If this occurs, the distribution channels
for consumer software could continue to expand to include book and music stores,
video outlets and, possibly, supermarkets.
As consumer software becomes more of a mass market product, the Company
believes it will become increasingly important for consumer software companies
to have direct relationships with retailers and to effectively market their
products to consumers. Competition for retail shelf space is also likely to
increase due to the proliferation of consumer software products and companies.
As a result, the Company believes that in order to be successful, consumer
software companies must have a consumer-driven focus, a broad offering of
category-leading products, close relationships with retailers, a recognized
brand name and a cost-efficient business model.
BUSINESS STRATEGY
The Company's objective is to be a leading publisher of high quality, value
priced family oriented consumer software. The Company seeks to develop a broad
line of products in categories in which a substantial market share can be
attained. The Company also seeks to expand product franchises by upgrading
successful products and developing product line extensions and complementary
products. The Company believes that it may achieve its objectives utilizing the
following strategies:
- MAINTAIN CONSUMER-DRIVEN FOCUS. The Company develops what it believes
are creative and innovative products with mass market appeal,
targeting families who are familiar with the Company's licensed movie
titles, television series and comic book characters. The Company
believes that these consumers base their software purchasing decisions
largely on quality, value, ease of use, recognition and personal
affinity for recognizable motion picture and television productions
upon which the Company's products are based. As a result, the Company
is committed to providing products that are high quality, value priced
and which require minimal computer experience to operate. The
Company's consumer-oriented marketing strategy combines attractive and
informative shrink-wrap packaging with high-impact promotional
campaigns to encourage impulse purchases. To enhance customer
satisfaction, the Company also provides technical support for all of
its products. In addition, the Company revises products in response
to consumer feedback and upgrades products to utilize new technologies
as those technologies gain broader acceptance in the consumer market.
The Company receives consumer feedback primarily from comments on
product registration cards submitted to it by customers.
- DEVELOP DIVERSIFIED TITLES WITH STRONG FRANCHISE VALUE. The Company
seeks to develop a broad line of products in sustainable categories in
which a substantial market share can be achieved. The Company
currently has 21 software products available for sale in stores in the
education and entertainment categories. Hollywood content such as
motion pictures and television shows will continue to be the
foundation on which the products are based. The Company seeks
to build franchise value through its merchandising programs and seeks
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to create franchises by upgrading products and developing product line
extensions and complementary products. Several of the Company's
licenses permit it to produce multiple software titles using the same
proprietary subject matter. The Company also seeks to create
"evergreen" titles with extended lifecycles by upgrading successful
products to incorporate new features and to adapt to new technologies.
- LEVERAGE STUDIO RELATIONSHIPS. The Company is developing a variety of
cross-marketing promotional programs with its movie studio licensors
and other licensees of movie titles licensed by the Company for its
software products. For example, the Company has worked with the MCA
Home Video Division to include discount coupons for the Company's
BABE-TM- MOVIEBOOK-TM- in video cassettes of BABE-TM-. The Company is
further working with MCA Home Video Division to include trailers for
MCA movie titles in the Company's software products. In addition, the
Company is working with the manufacturers of toy action figures to
include rebate coupons for the Company's products with the related
action figures. The Company has also developed a screen saver for
Universal Studios Florida in return for trip packages to be used for
promotional contests. The Company's goal is to run one special
promotion, such as a contest, every two to three months. Based on
currently pending negotiations with its movie studio licensors,
management believes the Company will have the opportunity to develop a
variety of new cross-promotional programs that may significantly
enhance the Company's marketing efforts.
- PROMOTE TRADENAME RECOGNITION. The Company promotes its licensed
properties in conjunction with its brand name "Sound Source
Interactive" in order to encourage customer loyalty and repeat
purchases. The Company believes that its brand name products are
recognized by consumers as high quality, fully featured software that
consistently exceed consumer expectations. Drawing upon established
consumer marketing techniques, the Company uses its brand name and
consistent packaging style which emphasize high-impact design and
recognizable motion picture and television titles. The Company
includes a mail-in order form with each product it sells, which
includes a list of the Company's other available products to encourage
repeat purchases. The Company believes that by promoting a
recognizable brand name and consistent packaging, satisfied consumers
are more likely to purchase additional Company-produced products when
faced with multiple options in a software category. The Company also
has an established public relations effort which seeks to broaden
consumer awareness and acceptance of its tradename. As the consumer
software industry becomes more of a mass market, the Company believes
that tradename recognition will become an increasingly important means
of product differentiation among retailers and consumers.
- MANAGE DEVELOPMENT PROCESS TO MAINTAIN QUALITY AND VALUE PRICING. The
Company manages its development process in an attempt to provide
consistent product quality, shorter and more predictable delivery
schedules, and lower overall development costs. The Company works
closely with each licensor to carefully select appropriate product
development opportunities. The Company's internal development efforts
are focused primarily on product design and features, consistent user
interfaces and product quality and consistency. The Company
supplements its internal product development resources by utilizing
existing technologies and externally developed programming. This
process allows the Company to maintain internal control over the
creative and market-driven aspects of its product development efforts,
while using outside resources to lessen its development risks and
control costs. This allows the Company to offer value pricing of its
products. As consumer software becomes more of a mass market driven
by consumer demand and lower price points, the Company believes that
its ability to develop, produce, market and support value-priced
products provides it with a competitive advantage.
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- DEVELOP GAME PRODUCTS. The Company intends to develop products
intended for the game market in the future. The Company believes that
its access to motion picture and related content will enable it to
produce games that can be successfully marketed. The Company intends
to market its game products in concert with studio releases and
events.
- ACQUISITIONS. The Company intends to pursue acquisitions of
entertainment software companies and selected titles within existing
or new product categories. The Company believes that acquisitions may
provide diversification of revenues and enhanced revenues growth. The
Company is not currently a party to any discussion, agreement,
arrangement or understanding in connection with any such acquisition.
PRODUCTS
INTERACTIVE CD-ROM
The Company has created MOVIEBOOKS-TM- for children, which are electronic
storybooks with full motion video based on the licensed property. MOVIEBOOKS-
TM- are marketed as reading aids for young children. Research studies involving
literacy have shown that children learn to read by repetitive reading -- usually
with the aid of a parent or teacher. This learning process begins at about 18
months of age and continues through the first and second grades for many
children. The targeted ages for MOVIEBOOKS-TM- are three through ten. The
Company has released five of its MOVIEBOOKS-TM- on CD-ROM. This product
provides options for automatic reading by the computer, user reading, a
dictionary invoked by "clicking" on a dictionary book icon, actual full motion
video taken from the motion picture that coincides with the text pages, high-
quality sound, art and animation as well as a quiz consisting of multiple choice
questions on a related topic to the story, reinforcement through a "jigsaw"
puzzle which can be printed, and a "bookmark" so the adventure can be stopped,
put away and restarted at the same point at a later date. More elaborate
activities in the MOVIEBOOK-TM- have been included in BABE-TM-, THE LITTLE
RASCALS-TM-, FREE WILLY 2-TM-, EXOSQUAD-TM- and THE ADVENTURES OF BATMAN AND
ROBIN-TM-, will be further incorporated in the next generation of products.
The Company first introduced its MOVIEBOOK-TM- product line into the
marketplace in August 1994 with the release of Warner Bros.' THE SECRET GARDEN-
TM-. The Company released Warner Bros.' BLACK BEAUTY-TM- in November 1994,
Broadway Video's LASSIE-TM-," a Paramount Pictures release, in December 1994 and
Universal Pictures' LITTLE RASCALS-TM- in June 1995. The Company released
Warner Bros.' FREE WILLY 2-TM- in July 1995. During November 1995, three new
MOVIEBOOKS-TM- were completed and released: BABE-TM- (Universal Pictures),
EXOSQUAD-TM- (Universal Pictures) and THE ADVENTURES OF BATMAN & ROBIN-TM- (DC
Comics). These three products, however, did not receive widespread distribution
until the first calendar quarter of 1996. All products are currently Windows
'95-Registered Trademark- compatible. Currently, the products are sold at a
suggested retail price of up to $30 each, a price point intended to generate
impulse purchases among consumers at the retail level.
The Company intends to introduce four to five new MOVIEBOOKS-TM- annually
in the future. Each is expected to experience its highest sales prices and
volumes within the 12 months following its introduction. Although the products
may continue to be sold after 12 months, they typically will be sold on a
discounted basis.
The following is a listing of the Company's MOVIEBOOK-TM- products which
are currently existing or planned for release, all of which are on CD-ROM:
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[Enlarge/Download Table]
MOVIEBOOK-TM-TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
---------------------------- ---------------- -------------- ------------------
The Secret Garden-TM- Warner Bros. August 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
Black Beauty-TM- Warner Bros. November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
Lassie-TM- Broadway Video December 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
The Little Rascals-TM- Universal Pictures June 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
Free Willy 2-TM- Warner Bros. July 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
Babe-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
ExoSquad-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
The Adventures of DC Comics November 1995 Windows-Registered Trademark- and
Batman and Robin-TM- Windows '95-Registered Trademark-
Land Before Time-TM- UniversalPictures July 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
All Dogs Go to Heaven II-TM- MGM October 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
Batman and Robin II-TM- DC Comics March 1997 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
The Company is currently developing another line of interactive CD-ROM
based products which it refers to as creativity centers. This product line
combines learning activities such as painting, drawing, matching, puzzles and
images within a framework of three distinct skill levels. The Company intends
to introduce its first creativity center product in June 1996, and to introduce
one or two new creativity centers annually thereafter.
The following creativity center products which are planned for release in
1996.
[Enlarge/Download Table]
CREATIVITY CENTER TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
------------------------ -------- ------------- ---------------------
DRAGONHEART-TM- Universal June 1996 Macintosh-Registered Trademark-,
Pictures Windows-Registered Trademark- and
Windows '95-Registered Trademark-
LAND BEFORE TIME-TM- Universal October 1996 Macintosh-Registered Trademark-,
Pictures Windows-Registered Trademark- and
Windows '95-Registered Trademark-
ENTERTAINMENT UTILITIES
The Company was one of the first to license motion picture studio
properties to create entertainment utility software. The first product was Star
Trek AUDIOCLIPS-Registered Trademark- and the second was a sub-license for a
STAR TREK-TM- Screen Saver. The Company followed its STAR TREK-TM- products
with STAR WARS-TM-, THE WIZARD OF OZ-TM-, TERMINATOR 2: JUDGMENT DAY-TM- and
others. The Company's screen saver line-up now includes TERMINATOR 2: JUDGMENT
DAY-TM-, THE TWILIGHT ZONE-TM- and SATURDAY NIGHT LIVE-TM-. Additionally, the
sub-license for Star Trek AUDIOCLIPS-Registered Trademark- now extends to STAR
TREK: THE NEXT GENERATION-TM-, STAR TREK: THE MOTION PICTURES-TM- and a Stardate
Desktop Calendar.
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Entertainment utility products may include AUDIOCLIPS-Registered Trademark-,
screen savers based on animation, video and still images, and wallpaper,
VISUALCLIPS-Registered Trademark- and jigsaw puzzles.
- LIMITED EDITION ENTERTAINMENT UTILITIES. The Company's new
entertainment computer software utilities incorporate screen savers,
AUDIOCLIPS-Registered Trademark- and other content based on
entertainment properties. The new entertainment utilities are
marketed as limited issue, serialized collector editions. For
Christmas 1995, the Company released a Limited Edition BABYLON 5-TM-
(Warner Bros.) Entertainment Utility which contains screen savers and
AUDIOCLIPS-Registered Trademark-. Limited edition products are
serialized and retail at approximately $30 each. The Company expects
the limited edition products to replace stand alone screen savers and
AUDIOCLIPS-Registered Trademark- by Christmas of 1996. The Company
currently sells the following limited edition entertainment utilities:
[Enlarge/Download Table]
TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
-------------------------- ------------------- -------------------- ----------------------------------
STAR WARS TRILOGY-TM- Lucasfilm, Ltd. July 1985 Macintosh-Registered Trademark-,
Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BABYLON 5-TM- Warner Bros. November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
TERMINATOR 2; Carolco Pictures July 1996 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
STAR TREK DEEP SPACE Paramount/ August 1996 Windows-Registered Trademark- and
NINE-TM- Viacom Windows '95-Registered Trademark-
STAR TREK VOYAGER-TM- Paramount/ November 1996 Windows-Registered Trademark- and
Viacom Windows '95-Registered Trademark-
I LOVE LUCY-TM- CBS November 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
- AUDIOCLIPS-Registered Trademark-. The Company's AUDIOCLIPS-Registered
Trademark- Desktop Diversion Utilities are audio computer software
utilities which utilize segments of dialogue, music or sound effects
from original soundtracks of major motion pictures and hit television
shows to provide complementary audio "cues" for certain computer
system functions. The AUDIOCLIPS-Registered Trademark- utilities are
packaged with default assignments via the playing "engine" to enable
consumers to personalize their computing environment. Thus, although
AUDIOCLIPS-Registered Trademark- are pre-programmed for use by the
computer novice, the technology enables the user to assign other
sounds to the computer function of their choice. AUDIOCLIPS-
Registered Trademark- products were first introduced into the
marketplace in December 1991. Currently, the products are sold at a
suggested retail price of approximately $15 each, a price point
intended to generate impulse purchases among consumers at the retail
level. The Company currently sells the following AUDIOCLIPS-
Registered Trademark- products:
[Enlarge/Download Table]
AUDIOCLIPS Registered
Trademark- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
--------------------------- ------------------- ---------------- ---------------------------------
TERMINATOR 2: Carolco Pictures January 1993 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
TOTAL RECALL-TM- Carolco Pictures February 1993 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. October 1992 Macintosh-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. August 1993 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
THE EMPIRE STRIKES BACK-TM- Lucasfilm, Ltd. August 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
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[Enlarge/Download Table]
AUDIOCLIPS Registered
Trademark- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
--------------------------- ------------------- ---------------- ---------------------------------
RETURN OF THE JEDI-TM- Lucasfilm, Ltd. October 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
STAR TREK-TM- Paramount March 1995 Windows-Registered Trademark- and
(original TV show) /Viacom Windows '95-Registered Trademark-
STAR TREK: Paramount March 1995 Windows-Registered Trademark- and
THE NEXT GENERATION-TM- /Viacom Windows '95-Registered Trademark-
STAR TREK: Paramount October 1994 Windows-Registered Trademark- and
THE MOTION PICTURES-TM- /Viacom Windows '95-Registered Trademark-
STAR WARS TRILOGY-TM- (limited Lucasfilm, Ltd. July 1995 Macintosh-Registered Trademark-,
edition of AUDIOCLIPS- Windows-Registered Trademark- and
Registered Trademark- Windows '95-Registered Trademark-
and VISUALCLIPS-
Registered Trademark-)
- SCREEN SAVERS. Originally developed as a utility to protect computer
monitors from image "burn-in," screen saver utilities have evolved
into desktop entertainment software. Market observers estimate the
screen saver market currently to exceed $80 million per annum. The
Company first introduced its screen saver product line into the
marketplace in August 1993 with the release of its TERMINATOR 2:
JUDGMENT DAY-TM- screen saver. In November 1994, the Company released
its THE TWILIGHT ZONE-TM- screen saver and SATURDAY NIGHT LIVE-TM-
screen saver.
Currently, the stand alone screen saver products are sold at a suggested
retail price of approximately $20 each, a price point intended to generate
impulse purchases among consumers at the retail level. The Company currently
sells the following screen saver products:
[Enlarge/Download Table]
SCREEN SAVERS TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
------------------- ------------------ ---------------- ----------------------------------
TERMINATOR 2: Carolco Pictures August 1993 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
THE TWILIGHT ZONE-TM- CBS Television November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
SATURDAY NIGHT LIVE-TM- Broadway Video November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
MUSIC INDUSTRY PRODUCTS
The Company's original products were sound libraries for professional
musicians sold to musical instrument manufacturers, music stores and directly to
end users. Although sales of the hardware that utilize the products continue
today, software sales remain flat due to the limited consumer population. The
Company recently discontinued its music industry products operations in order to
focus entirely on the computer software market. The Company will continue to
utilize its sound laboratory facilities and its sound library as it exists today
for incorporation into multimedia products as necessary. Using its own sound
library, the Company is capable of providing all of its own music and sound
effects for its software products, and creating new sounds as required for each
project. The Company believes that the discontinuance of its music industry
business will not materially affect its future earnings.
DEVELOPMENT AGREEMENTS
The Company has entered into development agreements with MTV Music
Television, NBC Television and Fox Interactive, pursuant to which the Company is
entitled to receive fees for its
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development services and/or royalties on the products sold by the contracting
parties. The Company has developed or is in current development with the
following entities for the following titles:
[Enlarge/Download Table]
CLIENT CONTENT CATEGORY STATUS
-------------------------- --------------------- ------------------ --------------------
MTV Music Television DEAD AT 21-TM- Screen Saver Completed
NBC Television HISTORIC PEACOCK-TM- Screen Saver Completed
Fox Interactive EEK! THE CAT-TM- MOVIEBOOK-TM- In Final Approval
Fox Interactive THE TICK-TM- MOVIEBOOK-TM- In Final Approval
Fox Interactive BOBBY'S WORLD-TM- MOVIEBOOK-TM- In Development
Fox Interactive LIFE WITH LOUIE-TM- MOVIEBOOK-TM- In Development
The Company currently does not intend to enter into additional development
agreements in the foreseeable future, because it intends to emphasize the
development of its own products.
PRODUCT DISTRIBUTION
In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software. The Company had no sales to or through Acclaim during its fiscal year
ended June 30, 1995. During the six-month period ended December 31, 1995, of
the Company's total revenues from retail software sales of $1,120,691, a total
of $819,619 (73 percent) were generated by Acclaim. Under the terms of this
agreement, Acclaim was the exclusive distributor of the Company's products on a
worldwide basis to retail accounts, resellers and distributors except with
respect to distribution in North America by direct mail, "infomercials,"
television home shopping channels or through "bundling" agreements with OEMs.
As a result of the foregoing, the Company was substantially dependent upon
Acclaim for the distribution and sale of its products through March 31, 1996.
See "Business -- Relationship With Acclaim."
The Company was not satisfied with the distribution of its products through
Acclaim and determined to terminate the Acclaim distribution agreement in March
1996. The Company and Acclaim have terminated the distribution agreement as of
April 30, 1996. On or before June 30, 1996, Acclaim will render a final
accounting to the Company together with payment of the balance of any amounts
due to the Company under the distribution agreement. Acclaim has notified its
accounts that it will not accept returns of any of the Company's software
products after June 30, 1996. The Company, however, will remain liable for all
such returns regardless of when received by Acclaim.
The Company believes that it has the ability to distribute its products
through nonexclusive software distributors and by means of direct sales to major
computer and software retailers. The Company further believes that it could
generate sales sufficient to allow it to operate profitability without a major
exclusive distribution relationship similar to its past relationship with
Acclaim. Nevertheless, the Company believes that it is possible to generate
higher sales to mass marketers through an exclusive affiliate distributor, and
that the attendant risk of collection of accounts can be mitigated. Therefore,
the Company is currently in the process of negotiating distribution agreements
with potential new exclusive distributors. There can be no assurance, however,
that the Company will be successful in entering into any such distribution
agreements, or that the terms of any such distribution agreement will be
favorable to the Company. Moreover, even if the Company does enter into one or
more such distribution agreements, there can be no assurance that the
distributors in question will successfully market the Company's products. The
Company may experience a loss of sales momentum as a result of the termination
of the Acclaim distribution agreement, even if the Company enters into
agreements with new distributors.
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The Company believes that its products currently are in distribution to
approximately 6,000 retail outlets. Retailers currently selling the Company's
products include Target, Tower Records, Sears, Wal-Mart, Price/Costco, CompUSA,
Best Buy, BJ's, Computer City, Egghead, Electronics Boutique, Babbages, Software
Etc., Kmart, Barnes & Noble, Sam Goody, Sam's Club, QVC, Musicland, Circuit
City, Blockbuster Video and others.
In fiscal 1994, the Company had four customers who collectively represented
29 percent of the Company's sales, including two distributors, Cameo Interactive
and Good Times Interactive, each of which accounted for ten percent or more of
the Company's sales. As a result of the Company's broader distribution to
retail customers during fiscal 1995, only one customer, Comp USA, accounted for
18 percent of the Company's gross sales, and no other customer accounted for ten
percent or more of the Company's gross sales. The Company believes that mass
market retailers will increasingly be significant outlets for consumer software.
SALES AND MARKETING
The Company intends to tailor marketing efforts, promotions and
merchandising displays to fit the needs of specific retailers. This strategy
enables the Company to identify and react to trends in the retail consumer
market and to help build incremental sales. The Company believes that its
attention to detail at the retail level and careful execution will be key
factors in successful marketing programs. As the number of consumer software
titles continues to grow and as the competition for retail shelf space
increases, the Company believes that this marketing strategy, combined with the
strength of its licensed titles, will give it a competitive advantage.
Offering a wide variety of products, the Company can provide retailers with
an assortment of titles in categories of interest to consumers. The Company
also supports its retailers by setting up special displays, end caps and kiosks,
executing targeted promotions and analyzing sales trends to help build
incremental sales. The Company is currently developing a variety of cross-
marketing promotional programs with its movie studio licensors and other
licensees of movie titles licensed by the Company for its software products.
These promotional programs will include discount coupons for products in video
cassettes, rebate coupons with action figures, movie trailers in the Company's
software products, and promotional contests with various motion picture studios.
Drawing upon established consumer marketing techniques, the Company's
marketing department creates and executes high-impact merchandising programs
with the goal of maximizing each product's retail exposure. The Company
believes that its consumer-driven marketing, the relatively high perceived value
and low price points of its products, and easily identifiable packaging which
emphasizes high-impact design and concise, nontechnical product information lead
to higher visibility and impulse purchases of its products in retail stores.
The Company provides technical support by telephone at no additional
charge. The Company has installed a telephone system and a call handling center
to facilitate its response to customer inquiries. Customer feedback is shared
among other support representatives and made available to product managers for
development of product enhancements and upgrades.
DEVELOPMENT
The Company seeks to develop a broad line of products in sustainable market
categories in which a leading market share can be obtained. The Company depends
on a flow of creative ideas to develop high-quality, value-priced products. The
Company believes that its efficient development model has certain key advantages
including consistent product quality, reliable delivery schedules, cost
containment and low investment risk.
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The Company's product managers oversee the development of various products
from conception through completion, and control the products' content, design,
scope and development schedule. New product ideas are evaluated with each
studio partner based upon upcoming theatrical releases, detailed market research
on the subject matter, the type and demographics of the target consumer, and the
existence and characteristics of competitive products. The Company seeks to
design new products which incorporate all of the important functions and
features of the leading competitive products. Once a product is approved for
development, a detailed design specification is created that includes the
product's features and a user interface that is consistent with other Company
products. Whenever possible, the software is designed to incorporate technology
used in existing Company products in an effort to shorten the development cycle
and improve quality and consistency. The overall product, including
documentation, is designed to meet a manufacturing specification that will meet
the Company's margin requirements at consumer price points.
The product managers then execute the development project with a team that
includes programmers, sound engineers, artists, animators, designers, writers
and testers. The Company's internal development efforts are focused primarily
on product design and features, consistent user interfaces, and product quality
consistency. The Company supplements its internal product development resources
by utilizing existing technologies and externally developed programming when
such utilization can result in a more efficient method of creating a higher
quality product. Using this method, the Company maintains internal control over
the creative and market-driven aspects of product development while using
external resources to shorten development time and lower development risks.
Development costs associated with externally licensed technology are generally
paid by royalties based on net sales, which lowers the Company's investment
risk. The Company's agreements with its external developers typically grant the
Company an exclusive worldwide license to use the developers' software. The
agreements typically have three-year terms, with renewal provisions upon mutual
agreement of the parties.
The Company currently is the licensee under technology licenses with Apple
Computer, Iterated Systems, Qsound Labs, Rock Ridge, Echo and Rhode Island Soft
Systems. The Company utilizes technology provided by these licensors to develop
and operate various of its products. With the exception of the Apple Computer
license, there are alternative products for each of the technologies now
licensed by the Company. Therefore, the Company believes that it could readily
obtain licenses to comparable products from other sources at comparable costs.
Products under development are extensively tested by the quality assurance
department, and must be approved by the licensor before being released for
production. The department tests for bugs, functionality, ease-of-use and
compatibility with the many popular Multimedia PC configurations that are
available to consumers.
Product managers are also responsible for reviewing customer feedback,
competitive products, product performance and market positioning in order to
introduce upgrades that keep abreast of consumer tastes and trends. The Company
has increased its development of new CD-ROM products to address the shift to CD-
ROM-based products.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order
processing and accounting functions related to its operations, with all
production and warehousing performed by independent contractors in accordance
with the Company's specifications. The Company intends to invest in management
information systems and other capital equipment which it believes are necessary
to achieve operational efficiencies and support increasing sales volumes.
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Software orders can be automatically tracked through to delivery to enhance
customer satisfaction and prompt delivery. Shipments are generally made within
48 hours of receiving an order. The Company has relatively little backlog at
any given date, and its backlog is not indicative of potential sales for any
future period.
The Company prepares master software disks, user manuals and packaging
designs. Disk and CD-ROM duplication, printing of documentation and packaging,
as well as the assembly of purchased components and the shipment of finished
products, are performed by third parties in accordance with the Company's
specifications. The Company has multiple sources for all components, with
assembly and shipping currently performed by three independent fulfillment
houses. To date, the Company has not experienced any material difficulties or
delays in the production and assembly of its products. To the extent that the
Company's fulfillment houses do not continue to perform assembly and shipping
functions in a cost-efficient and timely manner, and transition to substitute
fulfillment houses is not completed in a timely fashion, the Company's business,
operating results and financial condition could be adversely affected.
COMPETITION
The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. Existing consumer
software companies may broaden their product lines to compete with the Company's
licensed products, and potential new competitors, including computer hardware
and software manufacturers, diversified media companies and book publishing
companies, may enter or increase their focus on the consumer software market,
resulting in greater competition for the Company.
Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. Principal competitive
factors in marketing consumer software include product features, quality,
reliability, tradename and licensed title recognition, ease-of-use,
merchandising, access to distribution channels and retail shelf space,
marketing, price, and the availability and quality of support services. The
Company believes that it competes effectively in these areas, particularly in
the areas of quality, brand recognition, ease-of-use, merchandising, access to
distribution channels and retail shelf space and price. To the extent that
competitors achieve performance, price or other selling advantages, the Company
could be adversely affected. There can be no assurance that the Company will
have the resources required to respond 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 fall, which could adversely affect
the Company's business, operating results and financial condition.
The Company considers Microsoft Corp., Broderbund, Inc., Knowledge
Adventure, Disney, Maxis, 7th Level, Inc. and A.D.A.M. Software, Inc. its chief
competitors in the interactive entertainment CD-ROM market. The Company
considers Microsoft, Inc. and Berkeley Systems its chief competitors in the
entertainment utility software market. Microsoft has introduced screen savers
and generic sounds, as well as licensed sounds from the MGM/Turner film library.
The Company considers Berkeley Systems its chief competitor in the screen saver
market. The Company developed the concept and provided the introductions that
led to the development of the STAR TREK-TM- series of screen savers by Berkeley
Systems. The Company has received over $300,000 in earnings from this sub-
license, which continues until 1997. The Company notes that there are a number
of other smaller entertainment utility publishers competing in this market.
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The Company has entered into license agreements with Warner Bros.,
Paramount/Viacom, Lucasfilm, Turner Broadcasting, Universal Pictures, Carolco
and MGM, among others. Several of the major motion picture studios now have
captive interactive software divisions. As these types of software become
better known in the marketplace, these profit centers may begin to vie for their
studio's product. Management believes that Disney, Lucasfilm and
Paramount/Viacom are currently the most active studios in publishing their own
product to create software packages. Fox, Universal Pictures, Sony Pictures and
Warner Bros. each have announced the formation of divisions to publish software
products using their own license content. See "Risk Factors -- Competition."
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these products further
overlaps, software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Any such claims, with or without merit, can be time
consuming and expensive to defend and resolve.
Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors -- Limited Protection of Intellectual Property and
Proprietary Rights."
The Company's licenses and other intellectual property may not be
transferred to third parties without the consent of the licensors. Under the
terms of certain such licenses, transfer of ownership of stated percentages of
the Common Stock would constitute a prohibited transfer of the licenses. The
licensors under such licenses have agreed that neither the sale by the Company
of the Common Stock pursuant to this offering nor the issuance by the Company of
the Common Stock underlying the Redeemable Warrants and the Representative's
Warrant will cause a termination of such licenses. Certain other such licenses
are terminable upon a change in the management of the Company. The Company does
not believe that any such change in management will occur in the foreseeable
future.
Any future change in ownership or control of the Company could result in
the termination of the licenses referred to above. The potential terminability
of such licenses could have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of the Common Stock.
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The Company's products are based upon licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. See "Business -- General" and "-- Products." All
of such license and development agreements to which the Company currently is a
party are for fixed terms which will expire over the next one to five years.
The Company anticipates that the licensor under each agreement will extend its
terms, although no licensor is required to extend any license, provided that the
Company is in compliance with all requirements of each license, including most
significantly that the Company have satisfied the applicable minimum royalty
guarantees. In the event that any licensor failed to renew its license
agreement, then the subject license would terminate and the Company would no
longer be entitled to sell the licensed product. The loss of one or more of the
licenses could have a material adverse effect on the Company's revenues and
profits. There can be no assurance that the Company will satisfy its
performance obligations under any license or development agreement, or that,
even if such requirements are satisfied, all material licenses will be renewed.
EMPLOYEES
As of March 31, 1996, the Company had 30 full-time employees, including
five employees in sales and marketing, 20 employees in development and customer
support and five employees in administration and finance. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with its employees are good.
FACILITIES
The Company leases approximately 8,000 square feet of office and
warehousing space in Westlake Village, Ventura County, California. The lease
for the Company's current office space expires on March 31, 1997. The Company
currently expects that this facility will be sufficient for its needs at least
through the term of the lease. The Company may lease additional adjacent space
as its needs require, which it believes will be available on acceptable terms.
LEGAL MATTERS
At present there is no pending litigation or proceeding involving the
Company or any director or officer of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and their
positions with the Company are as follows:
NAME AGE POSITION
---- --- ---------
Vincent J. Bitetti 41 Chairman of the Board, Chief
Executive Officer and Director
Eric H. Winston 48 President, Chief Operating Officer
and Director
Ulrich E. Gottschling 37 Chief Financial Officer, Treasurer,
Secretary and Director
VINCENT J. BITETTI founded Sound Source Interactive, Inc., a California
corporation (the "Subsidiary"), in 1989 and served as the President of the
Subsidiary from its formation. Since the Company acquired the Subsidiary in
1994, Mr. Bitetti has served as the Chairman of the Board and Chief Executive
Officer and as a director of the Company and the Subsidiary. Prior to founding
the Subsidiary, from 1986 to 1988 Mr. Bitetti was President of Fantastic Planet
Consultants, a sound and musical instrument design consulting company. Mr.
Bitetti is a published music composer and lyricist. From 1986 to 1993, Mr.
Bitetti was a consultant to manufacturers of keyboard synthesizers in the music
industry. Mr. Bitetti developed the concepts for the Company's MOVIEBOOK-TM-,
AUDIOCLIPS-Registered Trademark-, VISUALCLIPS-Registered Trademark-, limited
edition and creativity center products.
ERIC H. (RICK) WINSTON has served as President and director of the Company
and the Subsidiary since April 1994, and Chief Operating Officer of the Company
and the Subsidiary since October 1995. Prior to joining the Company, Mr.
Winston was President of E.H. Winston & Associates, a business consulting firm
which he established in 1991. Mr. Winston was President and Chief Executive
Officer of Computer Data Information Systems, Inc. from 1985 to 1989, when it
was acquired by NYNEX. As part of that acquisition, Mr. Winston was retained as
Vice President and General Manager of The DATAGROUP, a NYNEX subsidiary, and
remained with The DATAGROUP until 1991 when he departed to start E.H. Winston &
Associates.
ULRICH E. GOTTSCHLING was appointed as Chief Financial Officer, Treasurer
and director of the Company on October 9, 1995, and as Secretary of the Company
on November 17, 1995. Prior to joining the Company, Mr. Gottschling was
employed from June 1991 through September 1995 as a certified public accountant
with Corbin & Wertz, the Company's independent auditors. From 1987 through May
1991, he was employed as a certified public accountant by Deloitte & Touche.
From 1980 through 1986, Mr. Gottschling held various management positions with
Westin Hotels and Marriott Corporation.
The Company is currently conducting a search for a new Chief Executive
Officer. It is anticipated that such person will be appointed following the
closing of this offering. Upon the commencement of his or her employment by the
Company, Mr. Bitetti will resign his current position as Chief Executive
Officer.
It is also anticipated that the Board of Directors will be reconstituted
following this offering to comprise a total of five members. Mr. Gottschling
will resign as a director, and three independent directors are expected to be
appointed. Thereafter, all of the Company's directors will be elected
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annually and will serve until the next annual meeting of stockholders or until
the election and qualification of their successors. The Board of Directors
elects the Company's officers and such officers serve at the discretion of the
Board of Directors. There are no family relationships between the directors and
executive officers of the Company. See generally "Risk Factors -- Dependence on
Key Personnel."
The Company has agreed to grant to each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc., the right to nominate from time to time
one director of the Company or to have an individual designated thereby attend
all meetings of the Board of Directors of the Company as a nonvoting advisor.
See "Underwriting" and "Certain Transactions -- Agreements With ASSI, Inc."
Vincent J. Bitetti and Eric H. Winston have entered into voting agreements
with each of The Boston Group, L.P., Joseph Stevens & Company, L.P. and ASSI,
Inc. Pursuant to these agreements, Messrs. Bitetti and Winston have agreed to
vote their Common Stock for the three director nominees of The Boston Group,
L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. In addition, ASSI, Inc. has
agreed to vote its shares of Common Stock for two directors nominated by Mr.
Bitetti for as long as he holds 20 percent or more of the issued and outstanding
Common Stock, and for one director nominated by Mr. Bitetti for as long as he
holds at least ten perent but less than 20 percent of the issued and outstanding
Common Stock. The voting agreements with ASSI, Inc. will terminate when Messrs.
Bitetti and Winston together cease to own at least ten percent of the issued and
outstanding Common Stock.
BOARD OF DIRECTORS AND COMMITTEES
The business of the Company's Board of Directors currently is conducted
through full meetings of the Board. Upon the expansion of the Board following
the completion of this offering, it is expected that the Board also will conduct
business through meetings of its committees. Set forth below is a description
of the committees of the Board.
The Audit Committee will review and report to the Board on various auditing
and accounting matters, including an annual audit report from the Company's
independent public accountants. The Chief Financial Officer, if a director,
will not be a member of the Audit Committee.
The Compensation Committee will establish compensation levels for the
Company's executive officers and will administer and determine appropriate
awards under the Company's 1995 Stock Option Plan. See "Management -- 1995
Stock Option Plan." Two of the independent directors to be appointed by the
Board of Directors will serve on the Compensation Committee.
The Executive Committee will have the authority to act on behalf of the
full Board of Directors in between meetings of the Board, except that the
Executive Committee will not have the authority to amend the Certificate of
Incorporation or the Bylaws of the Company, adopt an agreement of merger or
consolidation, recommend to the stockholders a dissolution of the Company or a
revocation of dissolution or remove or indemnify a director. To the extent
authorized by the Board of Directors, the Executive Committee will also be
authorized to declare dividends of the Company and to issue shares of authorized
and unissued Common Stock of the Company. The Executive Committee will also act
as the Nominating Committee to nominate officers and directors of the Company
for election. The Executive Committee will consist of the Chairman of the
Board, the Chief Executive Officer and an independent director.
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COMPENSATION OF BOARD OF DIRECTORS
Directors previously have received no cash compensation for serving on the
Board of Directors. Beginning in December 1995, the Company adopted a policy
that will provide for payment of fees to its nonofficer directors for serving on
its Board of Directors and for their attendance at Board and committee meetings.
The Company will pay each nonofficer director an annual fee of $15,000. In
addition, each nonofficer director will receive options to purchase 10,000
shares of Common Stock annually.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth information
concerning compensation of the Company's Chief Executive Officer and each of the
Company's other executive officers who received compensation from the Company
and/or the Subsidiary in excess of $100,000 for the fiscal year ended June 30,
1995 (the "Named Executives"). No other executive officer's compensation
exceeded $100,000 during fiscal 1995.
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Summary Annual Long-Term
COMPENSATION COMPENSATION
---------------------------- ---------------------------------
NAME AND STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) (SHARES) COMPENSATION(2)
------------------ ---- ---------- ------------ -------------- ----------------
Vincent J. Bitetti, 1995 $150,000 $75,000 0 $ 6,200
Chairman of the Board and
Chief Executive Officer
Eric H. Winston, 1995 150,000 75,000 0 9,600
President and Chief
Operating Officer
(1) The bonuses accrued for fiscal year 1995 were fully paid in December 1995.
(2) The amounts in this column for 1995 consist of the following: (a) personal
use of Company car (50 percent of payment for car expenses): Mr. Bitetti -
$4,800; Mr. Winston - $4,800; (b) life insurance premiums: Mr. Bitetti -
$1,400; and (c) medical insurance premiums: Mr. Winston - $4,800.
OPTION GRANTS. The following table provides information concerning options
granted by the Company to each of the Named Executives during its fiscal year
ended June 30, 1995 and to Ulrich E. Gottschling during its current fiscal year.
[Enlarge/Download Table]
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SHARES SUBJECT TOTAL OPTIONS
TO COMMON GRANTED TO
STOCK OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE(2) DATE
---------------------- -------- ----------- ------------ ----
Vincent J. Bitetti 0 0.0% $ -- --
Eric H. Winston 0 0.0 -- --
Ulrich Gottschling(3) 100,000 70.5 5.00 10/8/05
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----------------------
(1) This column shows the hypothetical gains or option spreads of the options
granted based on assumed annual compound stock appreciation rates of zero
percent, five percent and ten percent over the full ten-year term of the
options. The five percent and ten percent assumed rates of appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of future Common Stock
prices.
(2) The number of options granted and the exercise price per share were
established by negotiation between the Company and Mr. Gottschling at the
time of his hiring by the Company. The exercise price is equal to the
price per share at which Common Stock was sold in the October 1995 Private
Placement.
(3) Mr. Gottschling became an executive officer and employee of the Company on
October 9, 1995. The information concerning Mr. Gottschling is as of
December 31, 1995, and includes an option granted to Mr. Gottschling on
October 9, 1995. This option was cancelled on March 31, 1996. See
"Management -- Employment Agreements."
OPTION EXERCISES AND HOLDINGS. The following table sets forth information
concerning each exercise of a stock option during the fiscal year ended June 30,
1995 by each of the Named Executives and the number and value of unexercised
options granted by the Company held by each of the Named Executives on June 30,
1995.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-ENDED OPTION VALUES
--------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF SHARES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 6/30/95(1) 6/30/95(1)
NUMBER OF ------------------- ---------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
----------------- ---------------- -------------- ------------------- ---------------
Vincent J. Bitetti 0 $ 0 0/0 $ 0/0
Eric H. Winston(2) 0 0 292,838/0 1,153,782/0
(1) Based on the fair market value of the Common Stock in this offering ($4.00
per share), less the option exercise price.
(2) Does not include a presently exercisable option held by Mr. Winston to
purchase 100,000 shares of Common Stock from Mr. Bitetti at $2.00 per
share.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Vincent J.
Bitetti, Chairman of the Board and Chief Executive Officer, for a term ending on
September 15, 1998. Pursuant to that employment agreement, Mr. Bitetti is to
receive annual base compensation of $200,000, which will be reduced to $160,000
upon the date of this Prospectus. Mr. Bitetti's annual base compensation
will be increased by $40,000 at such time as the Company realizes net sales
(gross sales less returns and allowances) of $1,500,000 or more for any three
consecutive calendar months. Mr. Bitetti's salary also is subject to
escalation annually in accordance with the Consumer Price Index (the "CPI").
In addition, Mr. Bitetti's employment agreement entitles him to receive
bonuses based on three criteria: attainment of specified gross revenues,
attainment of specified gross profits, and attainment of specified pre-tax
profitability. If the Company acquires any new business in the future, the
related revenues and profits will not be taken into account in determining
entitlements to these bonuses.
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The gross revenue bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross revenues are attained for the fiscal year ending
June 30, 1996.
Gross Revenue Cumulative Cash Bonus
------------- ---------------------
$ 7,500,000 $ 25,000
10,000,000 75,000
15,000,000 125,000
The gross revenue attainment levels required to receive each bonus level
for each subsequent fiscal year will be increased by 60 percent annually.
The gross profit bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross profit amounts (defined as annual sales revenue
less all costs of sale as determined by the Company's independent public
accountants) are attained for the fiscal year ending June 30, 1996:
Gross Profit Cumulative Cash Bonus
------------ ----------------------
$2,000,000 $ 50,000
2,250,000 75,000
2,500,000 100,000
The gross profit levels required to receive each bonus level for each subsequent
fiscal year will be increased by 60 percent annually.
The pre-tax profitability bonus would entitle Mr. Bitetti to the following
amounts if the following pre-tax profit amounts (defined as annual earnings
before interest, taxes, depreciation and amortization) are attained for each
fiscal year during the term of Mr. Bitetti's employment agreement:
Profitability Cumulative Cash Bonus
------------- ---------------------
10% $ 50,000
15% 100,000
Pursuant to his employment agreement, Mr. Bitetti is entitled to certain
other fringe benefits including use of a Company automobile or automobile
allowance, $5,000,000 in life insurance coverage (provided that in no event will
the Company be required to pay a premium for such insurance in excess of $7,500
per year) and the right to participate in the Company's customary benefit plans.
Mr. Bitetti's employment agreement further provides that following the voluntary
or involuntary termination of his employment by the Company, Mr. Bitetti is
entitled to two demand registration rights with respect to the Common Stock held
by or issuable to him. These registration rights will only become effective
upon the voluntary or involuntary termination of Mr. Bitetti's employment with
the Company. Mr. Bitetti's employment agreement further provides that his
salary may not be less than that of the Company's new Chief Executive Officer,
up to a maximum of $300,000.
The Company has entered into an employment agreement with Eric H. Winston,
President and Chief Operating Officer, for a term ending on September 15, 1998.
Pursuant to that employment agreement, Mr. Winston is to receive annual base
compensation of $175,000, which will be reduced to $140,000 upon the date of
this Prospectus. Mr. Winston's annual base compensation will be increased by
$35,000 at such time as the Company realizes net sales of $1,500,000 or more
for any three consecutive calendar months. Mr. Winston's salary also is
subject to escalation annually in accordance with the CPI. Mr. Winston's
employment agreement entitles him to receive three annual bonuses payable in
accordance with the same provisions described above with respect to Mr.
Bitetti's employment agreement. Mr. Winston is also entitled to the same
fringe benefits as Mr. Bitetti.
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Pursuant to his employment agreement the Company has granted Mr. Winston
options to purchase 292,838 shares of Common Stock at an exercise price of $.06
per share. See "Management -- Executive Compensation." Mr. Winston's
employment agreement further provides that following the voluntary or
involuntary termination of his employment by the Company, Mr. Winston is
entitled to two demand registration rights with respect to the Common Stock held
by or issuable to him. The registration rights will only become effective upon
the voluntary or involuntary termination of Mr. Winston's employment with the
Company. Mr. Bitetti has separately granted Mr. Winston a presently exercisable
option to acquire 100,000 shares of Common Stock at a purchase price of $2.00
per share.
Pursuant to his employment agreement, Mr. Winston has granted Mr. Bitetti a
right of first refusal as to all Common Stock that Mr. Winston may from time to
time acquire. Such first offer right provides that before Mr. Winston offers to
sell any such Common Stock to any third party, he must first offer to sell such
shares to Mr. Bitetti on no less favorable terms that proposed to be offered to
the third party. If Mr. Bitetti rejects such offer, then Mr. Winston is free to
sell to the third party on terms no less favorable than offered to Mr. Bitetti.
The Company also separately agreed to pay each of Messrs Bitetti and
Winston a bonus equal to the sum of three percent of the Company's net sales.
The entitlement to receive such bonuses ended November 30, 1995. A bonus of
$16,578 was paid to each of Messrs. Bitetti and Winston for the two-month period
ended November 30, 1995.
The Company entered into an employment agreement with Ulrich E.
Gottschling, Chief Financial Officer, Treasurer, Secretary and director, for a
term ending October 9, 1997. The employment agreement entitles Mr. Gottschling
to receive annual cash compensation of $110,000. Pursuant to his employment
agreement, on October 9, 1995 Mr. Gottschling also was granted options to
purchase 100,000 shares of Common Stock at an exercise price of $5.00 per share.
See "Management -- Executive Compensation" and "-- 1992 Stock Option Plan." On
April 30, 1996, Mr. Gottschling agreed to the termination of his existing
100,000 share option in consideration for the Company's agreement to grant to
him a new 200,000 share option pursuant to the 1992 Stock Option Plan. The
Company granted this option to Mr. Gottschling on April 30, 1996. The option is
exercisable upon the date of its grant as to 100,000 shares at a purchase price
of $3.40 per share, and will become exercisable as to 100,000 shares on
September 30, 1997 at a purchase price of $4.00 per share. Mr. Gottschling's
employment agreement further provides that following the voluntary or
involuntary termination of his employment by the Company, Mr. Gottschling is
entitled to a single demand registration right with respect to the Common Stock
held by or issuable to him pursuant to his option agreement.
1995 STOCK OPTION PLAN
GENERAL
On October 9, 1995, the Board of Directors of the Company adopted the
Company's 1995 Stock Option Plan, which plan was approved by the stockholders of
the Company the same day. The following summary of the Company's 1995 Stock
Option Plan is qualified in its entirety by the 1995 Stock Option Plan, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The 1995 Sound Source Interactive, Inc. Stock Option Plan (the "1995 Stock
Option Plan") is designed to promote and advance the interests of the Company
and its stockholders by (i) enabling the Company to attract, retain, and reward
managerial and other key employees and nonemployee directors, and (ii)
strengthening the mutuality of interests between participants in the 1995 Stock
Option Plan and the stockholders of the Company in its long term growth,
profitability and financial success by offering stock options.
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The 1995 Stock Option Plan empowers the Company to award or grant from time
to time until September 30, 2005, to officers, directors and key employees of
the Company and its subsidiaries, Incentive and Non-Qualified Stock Options
("Options") authorized by the Compensation Committee of the Board of Directors
(the "Committee") which will administer the 1995 Stock Option Plan.
The Company has not yet granted any options under the 1995 Stock Option
Plan. The Board of Directors however, has resolved to grant 13,610 to
nonexecutive Company employees on the closing date of this offering at an
exercise price of $4.00 per share.
ADMINISTRATION
The 1995 Stock Option Plan will be administered by the Committee. The 1995
Stock Option Plan provides that the Committee must consist of at least two
directors of the Company who are "disinterested directors" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee has the sole authority to construe and interpret the 1995
Stock Option Plan, to make rules and procedures relating to the implementation
of the 1995 Stock Option Plan, to select participants, to establish the terms
and conditions of Options and to grant Options, with broad authority to delegate
its responsibilities to others, except with respect to the selection for
participation of, and the granting of Options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Members of the Committee will not be
eligible to receive discretionary Options under the 1995 Stock Option Plan.
ELIGIBILITY CONDITIONS
All officers and key employees of the Company and its subsidiaries and
nonemployee directors will be eligible to receive Options under the 1995 Stock
Option Plan. Nonemployee directors are only eligible to receive Non-Qualified
Stock Options under the 1995 Stock Option Plan. Except for Non-Qualified Stock
Options granted to nonemployee directors, the selection of recipients of, and
the nature and size of, Options granted under the 1995 Stock Option Plan will be
wholly within the discretion of the Committee. Subject to specific formula
provisions relating to the grant of options to nonemployee directors and except
with respect to the exercisability of Incentive Stock Options and the total
shares available for option grants under the 1995 Stock Option Plan, there is no
limit on the number of shares of Common Stock or type of option in respect of
which Options may be granted to or exercised by any person.
SHARES SUBJECT TO 1995 STOCK OPTION PLAN
The maximum number of shares of Common Stock in respect of which Options
may be granted under the Plan (the "Plan Maximum") is 500,000. For the purpose
of computing the total number of shares of Common Stock available for Options
under the 1995 Stock Option Plan, the above limitations shall be reduced by the
number of shares of Common Stock subject to issuance upon exercise or settlement
of Options previously granted, determined at the date of the grant of such
Options. However, if any Options previously granted are forfeited, terminated,
settled in cash or exchanged for other Options or expire unexercised, the shares
of Common Stock previously subject to such Options shall again be available for
further grants under the 1995 Stock Option Plan. The shares of Common Stock
which may be issued to participants in the 1995 Stock Option Plan upon exercise
of an Option may be either authorized and unissued Common Stock or issued Common
Stock reacquired by the Company. No fractional shares may be issued under the
1995 Stock Option Plan.
The maximum number of shares of Common Stock issuable upon the exercise of
Options granted under the 1995 Stock Option Plan is subject to appropriate
equitable adjustment in the event of a reorganization, stock split, stock
dividend, combination of shares, merger, consolidation or other
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recapitalization of the Company. The effect of such adjustment would be to
provide customary anti-dilution protection.
TRANSFERABILITY
No Option granted under the 1995 Stock Option Plan, and no right or
interest therein, shall be assignable or transferable by a participant except by
will or the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION
The 1995 Stock Option Plan will terminate on September 30, 2005 except with
respect to Options then outstanding. The Board of Directors of the Company may
amend or terminate the 1995 Stock Option Plan at any time, except that, to the
extent restricted by Rule 16b-3 promulgated under the Exchange Act, as amended
and in effect from time to time (or any successor rule), the Board of Directors
may not, without approval of the Stockholders of the Company, make any amendment
that would increase the total number of shares covered by the 1995 Stock Option
Plan, change the class of persons eligible to receive Options granted under the
1995 Stock Option Plan, reduce the exercise price of Options granted under the
1995 Stock Option Plan or extend the latest date upon which Options may be
exercised.
INCENTIVE STOCK OPTIONS
Options designated as Incentive Stock Options, within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), in
respect of up to the Plan Maximum may be granted under the 1995 Stock Option
Plan. The number of shares of Common Stock in respect of which Incentive Stock
Options are first exercisable by any participant in the 1995 Stock Option Plan
during any calendar year shall not have a fair market value (determined at the
date of grant) in excess of $100,000 (or such other limit as may be imposed by
the Code). To the extent the fair market value of the shares for which options
are designated as Incentive Stock Options that are first exercisable by any
optionee during any calendar year exceed $100,000, the excess amount shall be
treated as Non-Qualified Stock Options. Incentive Stock Options shall be
exercisable for such period or periods, not in excess of ten years after the
date of grant, as shall be determined by the Committee.
NON-QUALIFIED STOCK OPTIONS
Non-Qualified Stock Options may be granted for such number of shares of
Common Stock and will be exercisable for such period or periods as the Committee
shall determine.
OPTIONS TO NONEMPLOYEE DIRECTORS
The 1995 Stock Option Plan also provides for the grant of Options to
nonemployee directors of the Company without any action on the part of the Board
or the Committee, only upon the terms and conditions set forth in the 1995 Stock
Option Plan. Each nonemployee director shall automatically receive Non-
Qualified Options to acquire 10,000 shares of Common Stock upon appointment, and
shall receive Non-Qualified Options to acquire an additional 10,000 shares of
Common Stock for each additional year that the nonemployee director continues to
serve on the Board of Directors. Each Option shall become exercisable as to 50
percent of the shares of Common Stock subject to the Option on the first
anniversary date of the grant and 50 percent on the second anniversary date of
the grant, and will expire on the earlier of ten years from the date the Option
was granted, upon expiration of the 1995 Stock Option Plan or three weeks after
the optionee ceases to be a director of the Company. The exercise price of such
Options shall be equal to 100 percent of the fair market value of the
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Common Stock subject to the Option on the date on which such Options are
granted. Each option shall be subject to the other provisions of the 1995 Stock
Option Plan.
OPTION EXERCISE PRICES
The exercise price of any Option granted under the 1995 Stock Option Plan
shall be at lest 100 percent of the fair market value of the Common Stock on the
date of grant, except that the exercise price of any Option granted to any
participant in the 1995 Stock Option Plan who owns in excess of ten percent of
the outstanding voting stock of the Company shall be 110 percent of the fair
market value of the Common Stock on the date of grant. Fair market value per
share of Common Stock is quoted by the Nasdaq SmallCap Market, or as the amount
determined in good faith by the Committee if the Common Stock is neither listed
for trading on an exchange or quoted by the Nasdaq SmallCap Market. Options
granted effective as of the closing date of this offering will have an exercise
price equal to the initial public offering price per share.
EXERCISE OF OPTIONS
No Option may be exercised, except as provided below, unless the holder
thereof remains in the continuous employ or service of the Company. Options
shall be exercisable upon the payment in full of the applicable option exercise
price in cash or, if approved by the Committee, by instruction to a broker
directing the broker to sell the Common Stock for which such Option is exercised
and remit to the Company the aggregate exercise price of the Option or upon such
terms as the Committee shall approve, in shares of the Common Stock then owned
by the optionee (at the fair market value thereof at exercise date).
1992 STOCK OPTION PLAN
On May 4, 1992, the Board of Directors adopted the Company's 1992 Stock
Option Plan. The Board of Directors has resolved that no further options are to
be granted pursuant to the 1992 Stock Option Plan. All existing options
previously issued under the 1992 Stock Option Plan will remain enforceable in
accordance with their respective terms.
Options to purchase a total of 384,070 shares of Common Stock currently are
issued pursuant to the 1992 Stock Option Plan. All of such options are non-
qualified stock options, all of which have an exercise price of $.06 per share.
Of the 384,070 options that have been granted pursuant to the 1992 Stock Option
Plan, 191,199 are presently exercisable, 45,840 will become exercisable in
fiscal 1997 and the balance will become exercisable in fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to November, 1995, the Company did not have a compensation committee
or other committee of the Board of Directors performing similar functions.
Decisions concerning compensation of executive officers previously were made by
Vincent J. Bitetti.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
DIRECTOR EXCULPATION
The Company's Certificate of Incorporation provides that a director of the
Company, to the maximum extent now or hereafter permitted by Section 102 (b)(7)
of the Delaware GCL will have no personal liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the Delaware GCL currently provides that directors of
corporations
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that have adopted such a provision will not be so liable, except (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) as provided under Section 174 of
the Delaware GCL for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions or (iv) for any transaction from which
the director derived an improper personal benefit. This provision would absolve
directors of personal liability for negligence in the performance of their
duties, including gross negligence. It would not permit a director to be
exculpated, however, for liability for actions involving conflicts of interest
or breaches of the traditional "duty of loyalty" to the Company and its
stockholders, and it would not affect the availability of injunctive or other
equitable relief as a remedy.
This provision does not eliminate or alter the duty of the Company's
directors; it merely limits personal liability for monetary damages to the
maximum extent now or permitted by the Delaware GCL. Moreover, it applies only
to claims against a director arising out of his role as a director; it does not
apply to claims arising out of his role as an officer (if he is also an officer)
or arising out of any other capacity in which he serves. While this provision
does not affect the availability of injunctive or other equitable relief as a
remedy for breach of duty by directors, it does limit the remedies available to
a stockholder who has an otherwise valid claim that a director acted in
violation of his duties, if the action is among those as to which liability is
limited. Because of this provision, stockholders will not have a claim for
monetary damages based on breach of the directors' duty, even if the directors'
conduct involved gross negligence (including a grossly negligent business
decision involving a takeover proposal for the Company), unless the conduct is
of a type for which the Delaware GCL does not permit limitation of liability.
If the stockholders do not have a claim for monetary damages, their only remedy
may be a suit to enjoin completion of the Board's action or to rescind completed
action. The stockholders may not be aware of a proposed transaction that might
otherwise give rise to a claim until the transaction is completed or until it is
too late to prevent its completion by injunction. In such a case, the Company
and its stockholders may have no effective remedy for an injury resulting from
the Board's action.
This provision may reduce the likelihood of stockholder derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duties,
even though such action, if successful, might otherwise have benefited the
Company and its stockholders. The Securities and Exchange Commission has taken
the position that similar provisions added to other corporations' certificates
of incorporation would not protect those corporations' directors from liability
for violations of the federal securities laws.
The Company included this exculpation provision in its Certificate of
Incorporation to provide its directors with the maximum protection from personal
liability made available by the Delaware GCL. It is believed that this
provision will help the Company to attract and retain as directors the persons
most qualified for those positions.
DIRECTOR INDEMNIFICATION
The Company's Bylaws generally require the Company to indemnify and advance
expenses to its directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. The Company also has entered into
indemnification agreements with each of its existing directors, and plans to
enter into indemnification agreements with directors appointed in the future,
whereby the Company will indemnify each such person against certain claims
arising out of certain past, present or future acts, omissions or breaches of
duty committed by an indemnitee while serving as a Company director. Such
indemnification does not apply to acts or omissions which are knowingly
fraudulent, deliberately dishonest or arise from willful misconduct.
Indemnification will only be provided to the extent that the indemnitee has not
already received payments in respect of a claim from the Company
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or from an insurance company. Under certain circumstances, such indemnification
(including reimbursement of expenses incurred) will be allowed for liability
arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock, prior to the offering and immediately following completion
of the offering, by (i) each selling stockholder, (ii) each person who is known
to the Company to own, of record or beneficially, more than five percent of the
Common Stock; (iii) each of the Company's directors; and (iv) all directors, and
executive officers as a group. The Company and the selling stockholders have
granted the Underwriters an option to purchase up to an aggregate of 360,000
additional shares of Common Stock, exercisable within 30 days of the date
hereof, solely to cover over-allotments, if any. The Common Stock being offered
by the selling shareholders will be sold only if such over-allotment option is
exercised. See "Underwriting." Unless otherwise indicated, each of the
stockholders shown in the table below has sole voting and investment power with
respect to the shares beneficially owned.
[Enlarge/Download Table]
BEFORE OFFERING(2)-(3) NUMBER OF AFTER OFFERING(2)-(3)
NUMBER SHARES BEING NUMBER
NAME(1) OF SHARES PERCENT OFFERED(4) OF SHARES PERCENT(4)
------- --------- ------- ------------ --------- ----------
Vincent J. Bitetti(5) 1,557,901 86.2% 10,000 1,547,901 36.7%
Eric H. Winston(6) 392,838 18.7 10,000 382,838 8.5
Ulrich E. Gottschling(7) 100,000 5.2 0 100,000 2.3
All directors and
executive officers as a
group (three persons)(8) 1,950,739 88.6 20,000 1,930,739 42.0
Mark Lane 122,323 6.8 0 122,323 2.9
GFL Ultra Fund Limited 183,723 10.2 0 183,723 4.4
-------------------
(1) The address of each of Messrs. Bitetti, Winston and Gottschling is c/o the
Company, 2985 E. Hillcrest Drive, Suite A, Westlake Village, California
91362. The address of Mark Lane is 2818 Birch Creek Place, Thousand Oaks,
California 91360. The address of GFL Ultra Fund Limited is Kaya Flamboyan
9, P.O. Box 812, Netherlands Antilles.
(2) Each person's beneficial ownership is determined by assuming that options
and warrants that are held by such person or entity (but not those held by
any other person or entity) and which are exercisable within 60 days have
been exercised.
(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to
all shares of stock beneficially owned by them.
(4) Reflects the issuance of 2,400,000 shares of Common Stock by the Company,
and 20,000 shares of Common Stock by the selling stockholders as part of
the Underwriter's over-allotment option, pursuant to this offering.
(5) Includes 73,394 and 122,323 shares of Common Stock owned of record by
Martin H. Meyer and Mark Lane, respectively, for which Vincent J. Bitetti
holds a right of first offer to purchase and an irrevocable
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voting proxy. See "Certain Transactions -- 1994 Acquisition." Also
includes 100,000 shares of Common Stock which Mr. Winston is entitled to
acquire from Mr. Bitetti pursuant to a presently exercisable option. See
"Certain Transactions -- Sales by Controlling Stockholder.
(6) Includes 292,838 shares of Common Stock issuable under stock options
granted by the Company to Mr. Winston which are presently exercisable. See
"Management -- Executive Compensation." Also includes 100,000 shares of
Common Stock which Mr. Winston is entitled to acquire from Mr. Bitetti
pursuant to a presently exercisable option. See "Certain Transactions --
Sales by Controlling Stockholder."
(7) Includes 100,000 shares of Common Stock issuable to Mr. Gottschling under a
presently exercisable option. Excludes 100,000 shares of Common Stock
issuable to Mr. Gottschling under an option that is not presently
exercisable. See "Management -- Employment Agreements."
(8) Includes 292,838 shares of Common Stock issuable to Mr. Winston and 100,000
shares of Common Stock issuable to Mr. Gottschling under presently
exercisable options. Excludes 100,000 shares of Common Stock issuable to
Mr. Gottschling under an option that is not presently exercisable.
RESALE OF OUTSTANDING SECURITIES
This Prospectus relates to the sale by the Company of 2,400,000 shares of
Common Stock and 1,200,000 Redeemable Warrants for aggregate gross consideration
of $9,900,000. A separate Prospectus is being filed with the Registration
Statement of which this Prospectus is a part which relates, in part, to the sale
by the Selling Security Holders of 107,500 shares of Common Stock and 5,689,665
Redeemable Warrants for aggregate gross consideration of $1,852,416 (assuming an
offering price of $4.00 per share of Common Stock and $.25 per Redeemable
Warrant). None of the Common Stock or Redeemable Warrants being offered by the
Selling Security Holders are being underwritten by the Underwriters. The second
Prospectus also will be used by the Company for the issuance of Common Stock
pursuant to the exercise of Redeemable Warrants.
The Company will not receive any of the proceeds of the sale of the Common
Stock or Redeemable Warrants by the Selling Security Holders, although it will
receive the exercise price of such Redeemable Warrants when and if they are
exercised. None of the Selling Security Holders had any position, office or
material relationship with the Company or its affiliates during the last three
years except for Financial West Group, Inc., which served as dealer manager for
the Company's 1995 Bridge Offering and its 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement."
Prior to this offering, the Selling Security Holders collectively held
107,500 shares of Common Stock and Redeemable Warrants to purchase 5,689,665 of
Common Stock. Assuming the sale of all such Common Stock and Redeemable
Warrants pursuant to the separate Prospectus referred to above, the Selling
Security Holders will not own any securities of the Company after the completion
of such offering.
CERTAIN TRANSACTIONS
1994 ACQUISITION
On May 16, 1994, the Company consummated the 1994 Acquisition, whereby the
Company acquired all the issued and outstanding capital stock of the Subsidiary
in exchange for newly issued
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stock of the Company. The 1994 Acquisition was accomplished by the issuance of
1,278,515 shares of Common Stock and 1,000,000 shares of the Company's Series A
Preferred Stock to Vincent J. Bitetti, 73,394 shares of Common Stock to Martin
H. Meyer and 122,323 shares of Common Stock to Mark Lane, and the simultaneous
cancellation of 60,241 shares of Common Stock held by former directors and
officers of the Company, the cancellation of an option to purchase 3,347 shares
of Common Stock held by a former director and officer of the Company, which
option was to become exercisable only upon the satisfaction of certain
contingencies, and the cancellation of an option to purchase 3,347 shares of
Common Stock held by a former director of the Company, which option was to
become exercisable only upon the satisfaction of certain contingencies.
Effective upon the closing of the 1994 Acquisition, all of the Company's former
directors and officers resigned and were replaced by Vincent J. Bitetti, Joseph
Urquidi, Eric H. Winston and Martin H. Meyer. Mr. Urquidi resigned as an
officer and director as of June 29, 1994. Mr. Meyer resigned as a director as
of August 5, 1994. Subsequent to the 1994 Acquisition, Mr. Bitetti exchanged
his 1,000,000 shares of Series A Preferred Stock for 83,669 shares of Common
Stock issued by the Company.
Simultaneously with the 1994 Acquisition, Martin H. Meyer and Mark Lane
each granted to Vincent J. Bitetti a right of first offer to purchase their
Common Stock. Such first offer right provides that before Messrs. Meyer and
Lane offer all or any of their shares to any third party, they must first offer
to sell such shares to Mr. Bitetti at a price which Mr. Bitetti determines to be
their fair market value. If the selling party disagrees with Mr. Bitetti's
determination as to fair market value, then the issue will be resolved by an
arbitration procedure. If Mr. Bitetti does not elect to purchase the shares
proposed for sale, then they may be sold to third parties. Messrs. Meyer and
Lane also have granted Mr. Bitetti an irrevocable proxy to vote all their shares
of Common Stock on all matters coming before the holders of the Common Stock for
a vote. See "Risk Factors -- Control of the Company" and "Principal
Stockholders."
1994 PRIVATE PLACEMENT
During May through August 1994, the Company conducted a private offering of
its Common Stock (the "1994 Private Placement"). Pursuant to that offering, a
total of 113,036 shares of Common Stock were sold for total cash consideration
of approximately $1,492,000. An additional 1,841 shares were issued to the
brother of the Chief Executive Officer in payment of a $22,000 note payable. An
additional 81,997 shares of Common Stock were issued to the placement agent for
such offering in partial payment for its services as such. Subsequently, the
Company's founders, who also were affiliates of the placement agent, distributed
all 81,997 such shares plus an additional 26,772 shares held by them to the
investors in the 1994 Private Placement in settlement of litigation initiated by
one of such investors, and returned 15,120 shares of Common Stock to the
Company, which were cancelled.
1995 BRIDGE FINANCING
During June through August of 1995, the Company conducted a private
offering (the "1995 Bridge Financing") of Units consisting of notes and
warrants. Pursuant to that offering, a total of 32 Units were sold at a price
of $10,000 per Unit. Each Unit consisted of $9,975 principal amount of the
Company's 10% Secured Promissory Notes due August 15, 1995 (the "Bridge Notes")
and warrants to purchase 586 shares of Common Stock (the "Bridge Warrants").
The gross offering proceeds of the 1995 Bridge Financing were $320,000.
Pursuant to the 1995 Bridge Financing, $319,200 in aggregate principal amount of
the Bridge Notes were issued. The Bridge Notes were repaid in full out of the
proceeds of the 1995 Private Placement, and the related liens upon the assets of
the Company and the Subsidiary were extinguished. Such repayment was in the
amount of $332,320. Pursuant to the 1995 Bridge Financing, the Company also
issued 18,747 Bridge Warrants to investors, and
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issued 20,918 Bridge Warrants to Financial West Group, Inc. in partial
consideration for its services as dealer manager for the 1995 Bridge Offering.
Subsequent to the completion of the 1995 Bridge Offering, the Company and
the Subsidiary agreed with the holders of all of the Bridge Warrants as to
certain changes to the terms of the Bridge Warrants. As amended, the terms of
the Bridge Warrants, including the registration rights applicable thereto, are
identical to those of the Private Warrants as described below. See "Certain
Transactions -- 1995 Private Placement."
The terms of the Bridge Warrants provide that if the Company consummates an
initial public offering (an "IPO") which includes warrants to purchase shares of
Common Stock, then the Bridge Warrants shall automatically be converted into
warrants included in the IPO; such warrants into which the Bridge Warrants are
automatically converted shall be exercisable to purchase the same number of
shares as the Bridge Warrants, and shall contain the same terms (including
exercise price) as the warrants offered to the public. Accordingly, the Bridge
Warrants, which in the aggregate are exercisable to purchase 39,665 shares of
Common Stock, will, upon the consummation of this offering, be automatically
converted into Redeemable Warrants to purchase an aggregate of 39,665 shares of
Common Stock and such Redeemable Warrants, as well as the underlying shares of
Common Stock, have been included in the Registration Statement of which this
Prospectus is a part.
1995 PRIVATE PLACEMENT
In September and October 1995, the Company conducted a private offering
(the "1995 Private Placement"). Pursuant to that offering, a total of 52.5
Units were sold at a price of $100,000 per Unit. Each Unit consisted of $95,000
principal amount of the Company's 10% Secured Promissory Notes due 1996 (the
"Private Notes") and warrants to purchase 100,000 shares of Common Stock (the
"Private Warrants"). The gross offering proceeds of the 1995 Private Placement
were $5,250,000. Pursuant to the 1995 Private Placement, $4,987,500 in
aggregate principal amount of the Private Notes were issued. The Private Notes
are secured by a first priority lien on substantially all of the assets of the
Company (including a pledge of all capital stock of the Subsidiary) and are
guaranteed by the Subsidiary. The Private Notes are due and payable in the
principal amount plus accrued interest on the earlier of (i) September 1, 1996
or (ii) the completion of any IPO by either the Company or the Subsidiary.
Accordingly, the aggregate principal amount of $4,987,500 of the Private Notes,
and accrued interest estimated at $242,500 as of March 31, 1996, will be repaid
out of the net proceeds of this offering. See "Use of Proceeds." Pursuant to
the 1995 Private Placement, the Company issued 5,250,000 Private Warrants to
investors and issued 400,000 Private Warrants to Financial West Group, Inc. in
partial consideration for its services as dealer manager for the 1995 Private
Placement.
The Private Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) one year following the completion by the Company or
the Subsidiary of any IPO, and expire on December 31, 2001. The exercise price
of the Private Warrants is 110 percent of the price per share of the Common
Stock (or the Subsidiary's common stock as applicable) in the IPO, or if the IPO
has not occurred by December 31, 1996, $4.50 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an IPO by
the Subsidiary is completed, the Private Warrants will be automatically
converted to warrants exercisable for shares of Subsidiary Common Stock on a
one-for-one basis, at an exercise price of $4.50 per share, for the period
commencing December 31, 1996 and ending on December 31, 2001. In addition, the
holders of the Private Warrants and Common Stock issued or issuable upon the
conversion of the Private Warrants have certain registration rights.
Concurrently with the registration of the Securities in this offering, the
Company is registering the Private Warrants and the underlying Common Stock as
part of the Registration Statement of which this Prospectus is a part,
satisfying the applicable rights.
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The terms of the Private Warrants provide that, if the Company consummates
an IPO which includes warrants to purchase shares of Common Stock, then the
Private Warrants shall automatically be converted into warrants included in the
IPO; such warrants into which the Private Warrants are automatically converted
shall be exercisable to purchase the same number of shares as the Private
Warrants, and shall contain the same terms (including exercise price) as the
warrants offered to the public. Accordingly, the Private Warrants, which in the
aggregate were exercisable to purchase 5,650,000 shares of Common Stock, will,
upon the consummation of this offering, be automatically converted into
Redeemable Warrants exercisable to purchase an aggregate of 5,650,000 shares of
Common Stock and such Redeemable Warrants, as well as the underlying shares of
Common Stock, have been included in the Registration Statement of which this
Prospectus forms a part, and comprise a portion of the Selling Security Holders'
Securities. See "Selling Security Holders."
Contemporaneously with the 1995 Private Placement, Vincent J. Bitetti, the
Company's Chief Executive Officer, privately sold 107,500 shares of Common Stock
for total cash consideration of $537,500. Such shares of Common Stock have been
included in the Registration Statement of which this Prospectus is a part, and
comprise a portion of the Selling Security Holders' Securities. See "Selling
Security Holders."
On April 3, 1995, Vincent J. Bitetti, for nominal consideration granted
Eric H. Winston, the Company's President, an option to purchase 100,000 shares
of the Common Stock owned by Mr. Bitetti at an exercise price of $2.00 per
share, such price determined to be the fair market value by management.
AGREEMENTS WITH ASSI, INC.
In consideration of certain financial and personnel consulting services
provided to the Company in 1996, including advising the Company regarding
capital raising alternatives and executive recruiting, the Company has issued to
ASSI, Inc. warrants to purchase 2,000,000 shares of Common Stock at an exercise
price of $4.40 per share (the "ASSI Warrants," as previously defined). The
terms of the ASSI Warrants are substantially identical to those of the Private
Warrants, except that they become exercisable September 1, 1996, they are not
mandatorily redeemable by the Company and they are subject to separate
registration rights, including one demand registration right and unlimited
piggyback registration rights for as long as they are held by ASSI, Inc. or one
of its affiliates. Upon a transfer of the ASSI Warrants to any nonaffiliate of
ASSI, Inc., the terms of such transferred ASSI Warrants will become identical to
those of the Redeemable Warrants. The demand registration rights will expire on
September 1, 2001. Until and unless exercised, the holders of the ASSI Warrants
will have no voting, dividend or other rights as shareholders of the Company.
The Company also has agreed that the Private Warrants held by ASSI, Inc. will
become exercisable September 1, 1996.
The Company has also agreed to grant ASSI, Inc. the right to nominate from
time to time one director of the Company. Vincent J. Bitetti and Eric H.
Winston have entered into a voting agreement with ASSI, Inc. to vote their
shares of Common Stock for the election of such nominee. In addition, ASSI,
Inc. has agreed to vote its shares of Common Stock for two directors nominated
by Mr. Bitetti for as long as he holds 20 percent or more of the Common Stock,
and for one director nominated by Mr. Bitetti for as long as he hlds at least
ten percent but less than 20 percent of the issued and outstanding Common Stock.
The voting agreements with ASSI, Inc. will terminate when Messrs. Bitetti and
Winston together cease to own at least ten percent of the Common Stock. See
"Management -- Directors and Executive Officers."
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DESCRIPTION OF SECURITIES
GENERAL
The Securities consist of shares of Common Stock and Redeemable Warrants.
One Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock.
Under the Company's Restated Certificate of Incorporation, the authorized
capital stock of the Company consists of 20,000,000 shares of Common Stock. As
of March 31, 1996, the Company had 1,808,291 shares of Common Stock outstanding,
which were held by approximately 130 shareholders of record.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
on all matters to be voted on by the stockholders. Holders of shares of Common
Stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the Board of Directors in its discretion, from funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive rights to purchase Common Stock.
There are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock. All of the outstanding shares of Common Stock
issuable upon exercise of the Warrants will be, when issued and delivered, fully
paid and non-assessable.
As a QUASI-California corporation, the Company will be subject to certain
provisions of the California GCL, as more fully described under "Description of
Securities - Application of California GCL." Amongst other consequences of the
Company's status as a QUASI-California corporation, at the request of any
stockholder, the election of the Company's directors will be determined by
cumulative voting procedures. Consequently, following this offering the
Company's stockholders other than its current officers and directors will have
sufficient votes, if cumulative voting rights are exercised, to elect two of its
three directors (or three of its five directors, upon the anticipated expansion
of the Board following this offering) assuming no exercise of the Redeemable
Warrants and two of its three (or four of its five, as applicable) directors
assuming exercise of the Redeemable Warrants in full. See "Risk Factors --
Control of the Company by Officers and Directors" and "Management -- Directors
and Executive Officers."
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Redeemable
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and Corporate Stock Transfer Company as warrant agent (the "Warrant
Agreement"). A copy of the Warrant Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. See "Additional
Information."
Each Redeemable Warrant entitles the holder thereof to purchase, at any
time during the 54-month period commencing one year after the date of this
Prospectus, one share of Common Stock at a price of 110 percent of the initial
public offering price per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below.
The Redeemable Warrants are subject to redemption by the Company, at any
time, commencing one year after the date of this Prospectus, at a price of $.25
per Redeemable Warrant if the average closing bid price of the Common Stock
equals or exceeds 140 percent of the initial public
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offering price per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
notice of redemption. If the Redeemable Warrants were redeemed prior to their
exercise, the holders thereof would lose the benefit of the difference between
the market price of the underlying Common Stock as of such date and the exercise
price of such Warrants, as well as any possible future price appreciation in the
Common Stock.
The exercise price and the terms of the Redeemable Warrants bear no
relation to any objective criteria of value and should in no event be regarded
as an indication of any future market price of the Securities offered hereby.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification on or of the common Stock and issuances of
shares of Common Stock for a consideration less than the exercise price of the
Redeemable Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable holders of Redeemable Warrants to
acquire the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares that might
otherwise have been purchased upon the exercise of the Redeemable Warrant. No
adjustments will be made unless such adjustment would require an increase or
decrease of at least $.10 or more in such exercise price. No adjustment to the
exercise price of the shares subject to the Redeemable Warrants will be made for
dividends (other than stock dividends), if any, paid on the Common Stock.
The Redeemable Warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of the Warrant
Agent, with the exercise form on the reverse side of the certificate completed
and executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
Redeemable Warrants being exercised. The holders of Redeemable Warrants do not
have the rights or privileges of holders of Common Stock.
No Redeemable Warrant will be exercisable unless at the time of exercise
the Company has filed a current prospectus with the Securities and Exchange
Commission (the "Commission") covering the shares of Common Stock issuable upon
exercise of such Redeemable Warrant and such shares have been registered or
qualified or deemed to be exempt under the securities laws of the jurisdiction
of residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.
The Bridge Warrants issued by the Company in the 1995 Bridge Financing and
the Private Warrants issued by the Company in the 1995 Private Placement provide
that, if the Company consummates a public offering of its securities which
includes warrants to purchase shares of Common Stock, then the Bridge Warrants
and the Private Warrants shall automatically be converted into warrants included
in the public offering; accordingly, the 39,665 Bridge Warrants issued in the
1995 Bridge Financing and the 5,650,000 Private Warrants issued in the 1995
Private Placement have been converted as of the date of this Prospectus into a
like number of Redeemable Warrants.
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APPLICATION OF CALIFORNIA GCL
Although incorporated in Delaware, the business of the Company has been
conducted through its operating subsidiary which is domiciled and headquartered
in the State of California. Section 2115 of the California GCL ("Section 2115")
provides that certain provisions of the California GCL shall be applicable to a
corporation organized under the laws of another state to the exclusion of the
law of the state in which it is incorporated, if the corporation meets certain
tests regarding the business done in California and the number of its
California stockholders.
An entity such as the Company can be subject to Section 2115 even though it
does not itself transact business in California if, on a consolidated basis, the
average of the property factor, payroll factor and sales factor is more than 50
percent deemed to be in California during its latest full income year and more
than one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations
with outstanding securities listed on the New York or American Stock Exchange,
or with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the Company currently would be deemed
to meet these factors and does not currently qualify as a national market
security on NASDAQ, it is subject to Section 2115.
During the period that the Company is subject to Section 2115, the
provisions of the California GCL regarding the following matters are made
applicable to the exclusion of the law of the State of Delaware: (i) general
provisions and definitions; (ii) annual election of directors; (iii) removal of
directors without cause; (iv) removal of directors by court proceedings;
(v) filling of director vacancies where less than a majority in office were
elected by the stockholders; (vi) directors' standard of care; (vii) liability
of directors for unlawful distributions; (viii) indemnification of directors,
officers and others; (ix) limitations on corporate distributions of cash or
property; (x) liability of a stockholder who receives an unlawful distribution;
(xi) requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on mergers;
(xvi) reorganizations; (xvii) dissenters' rights in connection with
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants is Corporate Stock Transfer Company, 370 17th
Street, Suite 2350, Denver, Colorado 80202.
SHARES ELIGIBLE FOR FUTURE SALE
The offering made by this Prospectus is the initial registered public
offering of the Securities. There is no public trading market for any of the
Company's securities at the present time. There can be no assurance that a
public trading market will ever develop or, if a market develops, that it will
be sustained. See "Risk Factors -- No Prior Market; Arbitrary Determination of
Offering Price; Possible Volatility of Trading Prices for Securities." Although
it has no legal obligation to do so, the Representative and one or more other
Underwriters may from time to time become market-makers or otherwise effect
transactions in the Securities (and the Representative has indicated to the
Company that it intends to do so). The Representative, if it participates in
the market, may be a dominating influence in any market that might develop for
any of the Securities. The price and liquidity of the Securities may be
significantly affected by the degree, if any, of the Representative's
participation in
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the market. Such activities, if commenced, may be discontinued at any time or
from time to time. See "Risk Factors -- Representative's Potential Influence on
the Market."
Upon the consummation of this offering, 4,208,291 shares of Common Stock
will be outstanding, assuming that the Underwriters' over-allotment option is
not exercised and excluding (a) 384,070 shares of Common Stock underlying
options granted pursuant to the Company's 1992 Stock Option Plan; (b) 500,000
shares of Common Stock underlying options which may be granted pursuant to the
Company's 1995 Stock Option Plan; (c) 292,838 shares of Common Stock underlying
options granted to the Company's President; and (d) an aggregate of 9,249,665
shares of Common Stock issuable upon the exercise of (i) the Redeemable Warrants
being offered by the Company (1,200,000 shares), (ii) the Redeemable Warrants
that were issued in connection with the 1995 Bridge Financing (39,665 shares),
(iii) the Redeemable Warrants that were issued in connection with the 1995
Private Placement (5,650,000 shares), (iv) the ASSI Warrants (2,000,000 shares),
and (v) the Representative's Warrant (360,000 shares).
Of the 4,208,291 shares of Common Stock that will be issued and outstanding
upon the consummation of this offering (subject to the assumptions in the
preceding paragraph), the 2,400,000 shares offered by the Company and the
107,500 shares offered by the Selling Security Holders will be freely tradeable
without further registration under the Securities Act, except for any such
shares of Common Stock purchased by an "affiliate" of the Company. Of the
remaining 1,700,791 outstanding shares, 183,723 shares are freely tradeable and
the remainder are "restricted shares" as defined in Rule 144 under the
Securities Act and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has satisfied a two-year holding period may, under certain
circumstances, commencing 90 days after the date hereof, sell within any three-
month period, in ordinary brokerage transactions or in transactions directly
with a market maker, a number of shares of Common Stock equal to the aggregate
of one percent of the then outstanding Common Stock or the average weekly
trading volume during the four calendar weeks prior to such sale. Rule 144 also
permits the sale of shares of Common Stock without any quantity limitations by a
person who is not an "affiliate" of the Company and who has owned the shares for
at least three years. The foregoing summary of Rule 144 is not intended to be a
complete description thereof.
Vincent J. Bitetti, Eric H. Winston and Ulrich E. Gottschling have agreed
not to directly or indirectly offer, offer to sell, grant an option for the
purchase or sale of, transfer, assign, pledge hypothecate or otherwise encumber
(either pursuant to Rule 144 or otherwise) any of their securities for a period
of 18 months from the date of this Prospectus without the prior written consent
of the Company and the Representative. The Company intends to make a public
announcement in the event that a material amount of securities subject to a
lock-up arrangement described in this paragraph are released prior to the
expiration of the term of such arrangement if such announcement is required by
the federal securities laws.
The 1,200,000 Redeemable Warrants being offered by the Company (assuming
that the Underwriters' over-allotment option is not exercised) and the 5,689,665
Redeemable Warrants being registered for the account of the Selling Security
Holders entitle the holders of such Redeemable Warrants to purchase up to an
aggregate of 6,889,665 shares of Common Stock at any time during the 54-month
period commencing one year after the date of this Prospectus. The Redeemable
Warrants being registered for the account of the Selling Security Holders or, if
exercised, the shares of Common Stock issuable upon the exercise of such
Redeemable Warrants, may be sold by the Selling Security Holders or their
transferees commencing on the third business day after the date of this
Prospectus. Sales of either the Redeemable Warrants or the underlying shares of
Common Stock, or
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even the existence of the right to exercise such Redeemable Warrants, may
depress the price of the Common Stock or the Redeemable Warrants in any market
that may develop for such Securities. See "Selling Security Holders" and
"Description of Securities."
In connection with this offering, the Company will grant to the
Underwriters an over-allotment option, exercisable within 45 days of the date of
this Prospectus, to purchase up to an additional 360,000 shares of Common Stock
and/or up to an additional 180,000 Redeemable Warrants and issue to the
Representative the Representative's Warrant to purchase up to 240,000 shares of
Common Stock and/or 120,000 Redeemable Warrants. In the event that any holder
of warrants issued by the Company exercises its warrants, the percentage of
ownership of the Company by persons who invest hereunder will be diluted and any
sales of the securities acquired thereby might have an adverse effect on the
market price of the Common Stock and Redeemable Warrants. See "Underwriting."
The Company has granted options for the purchase of 384,070 shares of
Common Stock to certain key employees, officers, directors and consultants
pursuant to the Company's 1992 Stock Option Plan. The Company has determined
not to issue any further options under its 1992 Stock Option Plan, but all
outstanding options under such plan will remain valid. Of the 384,070 options
granted under the 1992 Stock Option Plan, 191,199 are presently exercisable,
45,840 will become exercisable in fiscal 1997 and the balance will become
exercisable in fiscal 1998. The Company also has reserved 500,000 shares of
Common Stock for issuance to key employees, officers, directors and consultants
pursuant to the Company's 1995 Stock Option Plan. All Common Stock issuable
upon exercise of such options will be "restricted stock" and will be subject to
resale pursuant to Rule 144 as described above. Following completion of this
offering, however, the Company intends to take action to register all such
options and the underlying Common Stock under the Securities Act. Upon the
effectiveness of such registration, the Common Stock issuable upon exercise of
the options will be freely tradeable. See "Management -- 1995 Stock Option
Plan" and "-- 1992 Stock Option Plan."
The holders of the Bridge Warrants issued in the 1995 Bridge Financing and
the Private Warrants issued in the 1995 Private Placement have certain
registration rights which will be satisfied by virtue of the registration of
such Bridge Warrants and Private Warrants (all of which will be converted to
Redeemable Warrants upon the consummation of this offering and will comprise a
portion of the Selling Security Holders' Securities) pursuant to the
Registration Statement of which this Prospectus is a part. See "Certain
Transactions -- 1995 Bridge Financing" and "-- 1995 Private Placement." Except
for the registration rights of Vincent J. Bitetti and Eric H. Winston and ASSI,
Inc. described below, following this offering no other existing security holder
of the Company will have registration rights with respect to any Company
security which it holds.
The Company has granted Eric H. Winston an option to purchase 292,838
shares of Common Stock which is presently exercisable. All Common Stock is
issuable upon exercise of such option will be "restricted stock" and will be
subject to resale pursuant to Rule 144 as described above. Following
termination of his employment with the Company, Mr. Winston is entitled to
certain registration rights with respect to the Common Stock issuable upon
exercise of this option. Upon the effectiveness of such registration, the
Common Stock issued upon exercise of this option will be freely tradeable.
Following termination of his employment with the Company, Vincent J. Bitetti
also is entitled to certain registration rights with respect to the Common Stock
owned by him. Upon the effectiveness of such registration, the Common Stock
owned by Mr. Bitetti will be freely tradeable. See "Management -- Employment
Agreements."
The Company has issued to ASSI, Inc. the ASSI Warrants to purchase
2,000,000 shares of Common Stock. See "Certain Transactions -- Agreements With
ASSI." All such ASSI Warrants and the Common Stock issuable upon exercise
thereof will be restricted securities and will be subject to resale pursuant to
Rule 144 as described above. ASSI, Inc. is entitled to certain registration
rights with
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respect to the ASSI Warrants and the Common Stock issuable upon exercise
thereof. Upon the effectiveness of such registration, the ASSI Warrants and
underlying Common Stock will be freely tradeable.
The Company is unable to predict the effect that any subsequent sales of
the Company's securities, under this Registration Statement, Rule 144 or
otherwise, may have on the then-prevailing market price of the Common Stock,
although such sales could have a depressive effect on such market price. See
"Risk Factors -- Shares Eligible for Future Sale."
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), the Underwriters named below (the
"Underwriters") have severally agreed to purchase from the Company the
respective number of shares of Common Stock and Redeemable Warrants set forth
opposite their name indicated below. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters will be obligated, as set forth in the Underwriting
Agreement, to purchase all of the 2,400,000 shares of Common Stock and 1,200,000
Redeemable Warrants being offered hereby, excluding shares of Common Stock and
Redeemable Warrants covered by the over-allotment options granted to the
Underwriters, if any are purchased.
NUMBER OF
UNDERWRITER NUMBER OF SHARES REDEEMABLE WARRANTS
----------------------------- ----------------- --------------------
The Boston Group, L.P.
Joseph Stevens & Company, L.P.
Both of the Representatives are recently formed, and neither has extensive
experience as an underwriter of securities. The Boston Group, L.P., which was
formed in March 1995, has acted as the managing underwriter for three public
offerings and has not acted as a member of an underwriting syndicate Joseph
Stevens & Company, L.P., which was formed in May 1994, has acted as the managing
underwriter for four public offerings and as a member of an underwriting
syndicate on approximately seven occasions. After interviewing various
underwriters, the Company selected the Representatives to act as co-managers for
this offering because it believes they have a thorough understanding of its
business.
Through the Representatives, the Underwriters have advised the Company that
the Underwriters propose to offer the Common Stock and Redeemable Warrants to
the public initially at the public offering price set forth on the cover page of
this Prospectus, and may offer the Common Stock and Redeemable Warrants to
selected dealers at such price less a concession of not more than $__ per share
and $___ per Redeemable Warrant. The Underwriters may allow, and such dealers
may reallow, a concession of not more than $__ per share and $___ per
Redeemable Warrant on sales to certain other dealers. The initial public
offering price and concessions and re-allowances to dealers may be changed by
the Underwriters.
The Company has agreed to pay to the Representatives a nonaccountable
expense allowance equal to three percent of the gross proceeds from the sales of
all shares of Common Stock and Redeemable Warrants offered hereby, including
shares sold to cover over-allotments, if any.
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The Underwriters have been granted the option, exercisable within 45 days
after the date of this Prospectus, to purchase up to an aggregate of an
additional 340,000 shares of Common Stock from the Company and up to 20,000
shares of Common Stock from Vincent J. Bitetti and Eric H. Winston (see
"Principal and Selling Stockholders") and to purchase up to 180,000 Redeemable
Warrants from the Company to cover over-allotments, at the same price being paid
by the Underwriters for the other shares of Common Stock and Redeemable Warrants
offered hereby. To the extent that the Underwriters exercise such option, each
of the Underwriters will have, subject to certain conditions, a firm commitment,
as set forth in the Underwriting Agreement, to purchase approximately the same
percentage of the additional shares of Common Stock and Redeemable Warrants as
the percentage of Common Stock and Redeemable Warrants to be purchased by it
shown in the above table bear to 2,400,000 and 1,200,000, respectively, and the
Company and the affiliated selling stockholders will be obligated, pursuant to
the option, to sell such shares of Common Stock and Redeemable Warrants to the
Underwriters.
The Company has agreed to grant to each of the Representatives, effective
upon the closing of the offering, the right to nominate from time to time one
director of the Company or to have an individual selected by each such
Representative attend all meetings of the Board of Directors of the Company as a
non-voting advisor. Vincent J. Bitetti and Eric H. Winston have agreed to vote
their shares of Common Stock for the election of such nominee. The Company has
agreed to indemnify and hold harmless such directors or advisors to the maximum
extent permitted by law in connection with such individual's service as a
director or advisor.
The Company has agreed to sell to the Representatives for an aggregate of
$50 the Representatives Warrant to purchase up to 240,000 shares of Common Stock
and/or 120,000 Redeemable Warrants at an exercise price of 120 percent of the
initial public offering price per share of Common Stock or Redeemable Warrants,
as applicable. The Representatives Warrant may not be transferred for one year,
except basically to officers or partners of the Representatives, any member of
the NASD participating in the offering hereunder, officers or partners of such
member or any successor of any of the foregoing, and is exercisable during the
four-year period commencing one year from the date of this Prospectus (the
"Representatives Warrant Exercise Term"). The Company has granted certain
rights to the holders of the Representative's Warrant to register the Common
Stock underlying the Representatives Warrant under the Securities Act. Such
rights require the Company to file a registration statement pertaining to the
Representatives Warrant and the underlying Common Stock and to maintain the
effectiveness of such registration statement for the period commencing one year
after the date of this Prospectus and continuing until the earlier of the sale
of all the registered securities or the fifth anniversary of the initial
effectiveness of the registration statement.
The Company has agreed, in connection with the exercise of Redeemable
Warrants pursuant to solicitation by the Representatives (commencing one year
from the date of this Prospectus), to pay to the Representatives a fee of five
percent of the Redeemable Warrant exercise price for each Redeemable Warrant
exercised, provided, however, that the Representatives will not be entitled to
receive such compensation in any Redeemable Warrant exercise transactions in
which (i) the market price of the Common Stock of the Company at the time of
exercise is lower than the exercise price of the Redeemable Warrants; (ii) the
Redeemable Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made, in addition to the disclosure provided in
this Prospectus, in documents provided to holders of the Redeemable Warrant at
the time of exercise; (iv) the exercise of the Redeemable Warrants is
unsolicited; (v) after the Company has called the Redeemable Warrants for
redemption; or (vi) the solicitation of exercise of the Redeemable Warrants was
in violation of Rule 10b-6 promulgated under the Exchange Act. In addition,
unless granted an exemption by the Commission from Rule 10b-6, the
Representative will be prohibited from engaging in any market-making activities
or solicited brokerage activities with regard to the Company's securities during
the period prescribed by Rule 10b-6 before the solicitation of the exercise of
any Redeemable
-73-
Warrant until the later of (i) the termination of such solicitation activity, or
(ii) the termination by waiver or otherwise of any right the Representatives may
have to receive a fee for the exercise of the Redeemable Warrants following such
solicitations. The Company has agreed not to solicit Warrant exercise other
than through the Representative.
The Company's officers and directors, including the controlling beneficial
stockholder, have agreed not to, directly or indirectly offer, offer to sell,
sell, grant an option to purchase or sell, transfer, assign, pledge, hypothecate
or otherwise encumber any shares of Common Stock owned by them for a period of
18 months from the date of this Prospectus without the prior written consent of
the Representatives.
The Underwriters have informed the Company that no sales to any accounts
over which they exercise discretionary authority will be made in this offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has not been an established public market for
the Common Stock or Redeemable Warrants of the Company. The initial public
offering price of the Company Securities and the exercise price and other terms
of the Representatives Warrant have been determined by negotiations between the
Company and the Representatives. The major factors considered in determining
the public offering price of the Common Stock and the Redeemable Warrants were
the prevailing market conditions, the market prices relative to earnings, cash
flow and assets for publicly traded Common Stocks of comparable companies, the
sales and earnings of the Company and comparable companies in recent periods,
the Company's earning potential, the experience of its management and the
position of the Company in the industry.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Washington, D.C. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Jeffer,
Mangels, Butler & Marmaro LLP, Los Angeles, California. Robert G. Kalik, of
counsel to McDermott, Will & Emery, holds a presently exercisable option to
purchase 33,467 shares of Common Stock.
EXPERTS
The financial statements included in this Prospectus have been audited by
Corbin & Wertz, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933,
-74-
as amended (the "Securities Act"), with respect to the securities offered
hereby. The Company is currently not a reporting company under the Securities
Exchange Act of 1934, as amended. This Prospectus, filed as part of the
Registration Statement, does not contain certain information set forth in or
annexed as exhibits to the Registration Statement, and reference is made to such
exhibits to the Registration Statement for the complete text thereof. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and to the exhibits
filed as part thereof, which may be inspected at the office of the Commission
without charge, or copies thereof may be obtained therefrom upon payment of a
fee prescribed by the Commission. Statements contained in this Prospectus and
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the complete text of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Such Registration
Statement may be inspected and copied at the public facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048 and at the Chicago Regional Office, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661-2511.
-75-
Sound Source Interactive
Index to Consolidated Financial Statements
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations. . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Deficit . . . . . . . . . F-6
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-13
-76-
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sound Source Interactive, Inc.
We have audited the accompanying consolidated balance sheet of Sound Source
Interactive, Inc. (a Delaware corporation) and subsidiary (collectively referred
to as the "Company") as of June 30, 1995 and the related consolidated statements
of operations, stockholders' deficit and cash flows for each of the years in the
two-year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sound Source
Interactive, Inc. and subsidiary as of June 30, 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, its excess of current liabilities (which, as of December 31, 1995,
include notes payable of $4,987,500 plus accrued interest which come due
September 1, 1996) over current assets and its stockholders' deficit raises
substantial doubt about its ability to continue as a going concern. The Company
is currently funding operations from the proceeds of the 1995 Private Placement
and is in the process of filing a Registration Statement for an initial public
offering of its common stock as more fully described in Note 14. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
September 8, 1995, except
for Notes 7, 14 and 15, as to
which the dates are as specified
therein
F-1
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
[Download Table]
December 31,
June 30, 1995
1995 (Unaudited)
ASSETS (Note 14) ---------- ------------
Current assets:
Cash $ 213,730 $ 1,492,507
Accounts receivable, net of allowances
of $104,250 and $447,310 (unaudited),
as of June 30, 1995 and December 31,
1995, respectively (Notes 5 and 11) 60,828 405,279
Inventories (Note 2) 150,320 457,232
Prepaid royalties 481,412 673,503
Deferred financing costs, net of
accumulated amortization of $262,732
(unaudited) as of December 31, 1995
(Note 14) --- 730,868
Deferred offering costs (Note 14) --- 106,160
Prepaid expenses and other --- 94,882
---------- ----------
Total current assets 906,290 3,960,431
Property and equipment, net of accumulated
depreciation of $84,724 and $104,161
(unaudited) as of June 30, 1995 and
December 31, 1995, respectively (Notes
3 and 7) 92,841 193,027
Other assets 3,060 12,400
---------- ----------
$ 1,002,191 $ 4,165,858
---------- ----------
---------- ----------
Continued
F-2
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
[Download Table]
December 31,
June 30, 1995
1995 (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY ----------- -----------
Current liabilities:
Notes payable (Note 14) $ --- 4,987,500
Accrued interest (Note 14) --- 118,176
Accounts payable and accrued expenses
(Notes 7 and 12) 535,046 745,430
Accrued compensation and related taxes 244,039 53,686
Commissions payable (Note 7) 159,593 35,555
Accrued royalties 542,513 37,124
Short-term advance (Note 5) 400,000 400,000
Deferred revenue (Note 6) 64,000 66,000
Notes payable to officers (Note 4) 13,500 ---
Current portion of capital lease
obligations (Note 7) 12,921 30,000
---------- ----------
Total current liabilities 1,971,612 6,873,471
---------- ----------
Capital lease obligations, net of
current portion (Note 7) 16,771 25,601
---------- ----------
Commitments and contingencies (Notes 5
and 7)
Stockholders' deficit (Notes 8, 9, 10
and 14):
Series A preferred common stock,
$.001 par value; 1,000,000 shares
authorized, no shares issued and
outstanding; liquidation value of
$.001 per share --- ---
Common stock, $.001 par value;
20,000,000 shares authorized;
1,859,182 and 1,808,291 shares
issued and outstanding at June 30,
1995 and December 31, 1995 (unaudited),
respectively 1,859 1,808
Warrants (Note 14) --- 263,350
Additional paid-in capital 5,124,525 5,124,576
Accumulated deficit (6,112,576) (8,122,948)
---------- ----------
Total stockholders' deficit (986,192) (2,733,214)
---------- ----------
$ 1,002,191 $ 4,165,858
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements
F-3
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
For The Six
Months Ended December 31,
For The Years Ended June 30, 1994 1995
1994 1995 (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Revenues (Notes 6 and 11):
Product sales $ 1,313,890 $ 1,255,230 $ 1,006,849 $ 1,077,547
Development fees 112,520 343,250 127,250 ---
Original equipment manufacturing 5,500 479,675 389,979 21,466
Royalties 253,961 76,771 76,253 21,678
---------- ---------- ---------- ----------
Net revenues 1,685,871 2,154,926 1,600,331 1,120,691
Cost of sales 1,180,803 1,072,691 956,368 682,510
---------- ---------- ---------- ----------
Gross profit 505,068 1,082,235 643,963 438,181
---------- ---------- ---------- ----------
Operating costs and expenses:
Marketing and sales (Note 7) 356,381 516,886 291,805 572,778
Compensation in connection with
common stock and common stock
options issued for services
rendered (Note 10) 2,992,862 733,165 193,332 ---
Other general and administrative 828,866 1,049,858 495,642 1,208,838
Research and development 116,559 378,471 76,725 266,153
---------- ---------- ---------- ----------
Total operating costs and
expenses 4,294,668 2,678,380 1,057,504 2,047,769
---------- ---------- ---------- ----------
Operating loss (3,789,600) (1,596,145) (413,541) (1,609,588)
Interest income 855 8,550 --- 22,172
Interest expense (38,513) (2,698) (4,439) (118,176)
Amortization of deferred loan costs
(Note 14) --- --- --- (262,732)
Other income (expense) (32,988) 839 (16,461) (40,848)
---------- ---------- ---------- ----------
Loss before provision for
income taxes (3,860,246) (1,589,454) (434,441) (2,009,172)
Provision for income taxes (Note 13) 1,600 1,600 1,200 1,200
---------- ---------- ---------- ----------
Loss from continuing operations (3,861,846) (1,591,054) (435,641) (2,010,372)
---------- ---------- ---------- ----------
Continued
F-4
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
For The Six
Months Ended December 31,
For The Years Ended June 30, 1994 1995
1994 1995 (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Discontinued operations (Note 12):
Loss from operations of discontinued
music division (115,887) (111,106) (13,376) ---
Estimated operating loss and loss on
disposal of discontinued music
division during phase-out period --- (32,000) --- ---
---------- ---------- ---------- ----------
Loss from discontinued operations (115,887) (143,106) (13,376) (2,010,372)
---------- ---------- ---------- ----------
Net loss $ (3,977,733) $ (1,734,160) $ (449,017) $ (2,010,372)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share (Note 14):
Loss from continuing operations $ (2.38) $ (0.85) $ (0.23) $ (1.08)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Loss from discontinued operations $ (0.07) $ (0.08) $ (0.01) $ ---
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share $ (2.45) $ (0.93) $ (0.24) $ (1.08)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding 1,626,107 1,862,908 1,869,998 1,868,145
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements
F-5
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For The Six Months Ended December 31, 1995 (Unaudited)
And For Each Of The Years In The Two-Year
Period Ended June 30, 1995
[Enlarge/Download Table]
Series A
Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Warrants Capital Deficit Total
--------------------- -------- -------- -------- ---------- ----------- ---------
Balance, July 1, 1993 1,000,000 $ 1,000 1,474,463 $ 1,474 $ --- $ 27,526 $ (400,683) $ (370,683)
Shares issued in
connection with
reverse acquisition 99,992 100 (100)
Issuance of stock
options for services
(Note 10) 2,347,862 2,347,862
Issuance of common
stock in exchange
for preferred stock
(Note 9) (1,000,000) (1,000) 83,669 84 644,916 644,000
Issuance of common
stock in connection
with private offering,
net of offering
costs of $58,312
(Note 8) 55,639 56 664,944 665,000
Shares issued for
services performed in
connection with
private offering
(Note 8) 39,770 40 475,275 475,315
Offering costs
(Note 8) (475,315) (475,315)
Continued
F-6
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED
For The Six Months Ended December 31, 1995 (Unaudited)
And For Each Of The Years In The Two-Year
Period Ended June 30, 1995
Series A
Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Warrants Capital Deficit Total
-------- -------- -------- -------- -------- ---------- ----------- ---------
Net loss (3,977,733) (3,977,733)
---------- ------- ---------- ------- ------- --------- ---------- ---------
Balance, June 30,
1994 --- --- 1,753,533 1,754 --- 3,685,108 (4,378,416) (691,554)
Issuance of common
stock in connection
with private offering,
net of offering costs
of $61,759 (Note 8) 59,238 59 706,048 706,107
Shares issued for
services performed
in connection with
private offering
(Note 8) 42,227 42 504,644 504,686
Offering costs (Note 8) (504,686) (504,686)
Issuance of stock
options for services
(Note 10) 733,165 733,165
Issuance of common
stock in connection
with exercise of
options (Note 10) 4,184 4 246 250
Net loss (1,734,160) (1,734,160)
---------- ------- ---------- ------- ------- --------- ---------- ----------
Balance, June 30,
1995 --- --- 1,859,182 1,859 --- 5,124,525 (6,112,576) (986,192)
Continued
F-7
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT - CONTINUED
For The Six Months Ended December 31, 1995 (Unaudited)
And For Each Of The Years In The Two-Year
Period Ended June 30, 1995
Series A
Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Warrants Capital Deficit Total
-------- -------- -------- -------- -------- ---------- ----------- ---------
Issuance of warrants
in connection with
private offerings
(Note 14) 263,350 263,350
Cancellation of shares
in connection with
settlement (Note 7) (15,120) (15) 15
Cancellation of shares
for which the Company
had not received
valid consideration
(Note 8) (35,771) (36) 36
Net loss (2,010,372) (2,010,372)
---------- ------- ---------- ------- ------- --------- ---------- ----------
Balance, December
31, 1995 $ --- $ --- $ 1,808,291 $ 1,808 $263,350 $5,124,576 $(8,122,948) $(2,733,214)
---------- ------- ---------- ------- ------- --------- ---------- ----------
---------- ------- ---------- ------- ------- --------- ---------- ----------
See accompanying notes to consolidated financial statements
F-8
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
For The Six
Months Ended December 31,
For The Years Ended June 30, 1994 1995
1994 1995 (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Cash flows from operating activities:
Net loss from continuing operations $ (3,861,846) $ (1,591,054) $ (435,641) $ (2,010,372)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization
(Note 14) 25,852 27,541 13,600 282,169
Allowance for sales returns (29,173) (8,732) 77,537 407,310
Allowance for doubtful accounts 69,306 (56,566) 55,218 (64,250)
Common stock and stock options
issued for services rendered 2,992,862 733,165 193,332 ---
Changes in operating assets and
liabilities:
Accounts receivable (68,570) 66,352 (262,652) (687,511)
Inventories 83,006 (99,576) (98,004) (306,912)
Prepaid royalties (146,903) 1,537 (56,833) (192,091)
Prepaid expenses and other 1,934 --- --- (94,882)
Other assets --- --- --- (9,340)
Accrued interest (Note 14) --- --- --- 118,176
Accounts payable and accrued
expenses 83,186 (125,686) (298,493) 210,384
Accrued compensation and related
taxes 139,838 92,394 60,170 (190,353)
Commissions payable 44,807 114,786 (9,252) (124,038)
Accrued royalties 189,780 (20,697) 43,177 (105,389)
Deferred revenue 72,795 (8,795) 139,705 2,000
---------- ---------- ---------- ----------
Net cash used by continuing operations (403,126) (875,331) (578,136) (2,765,099)
---------- ---------- ---------- ----------
Continued
F-9
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Six
Months Ended December 31,
For The Years Ended June 30, 1994 1995
1994 1995 (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Net loss from discontinued
operations (115,887) (143,106) (13,376) ---
Reserve for estimated loss on
disposal --- 32,000 --- ---
Depreciation 8,328 8,878 4,441 ---
Changes in operating assets and
liabilities of discontinued
operations:
Accounts receivable (5,007) (2,471) (2,021) ---
Inventories 12,248 1,351 9,842 ---
Accounts payable and accrued
expenses 10,601 3,098 1,884 ---
Accrued royalties --- 3,415 --- ---
Commissions payable --- 12,498 --- ---
---------- ---------- ---------- ----------
Net cash used by discontinued
operations (89,717) (84,337) 770 ---
---------- ---------- ---------- ----------
Cash flows from investing activities
of continuing operations -
Purchases of property and equipment (3,376) (38,876) (48,561) (81,152)
---------- ---------- ---------- ----------
Cash flows from investing activities
of discontinued operations -
Purchases of property and equipment (1,036) (6,665) (6,665) ---
---------- ---------- ---------- ----------
Continued
F-10
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Six
Months Ended December 31,
For The Years Ended June 30, 1994 1995
1994 1995 (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock (Note 8) 665,000 684,107 684,107 ---
Proceeds from issuance of warrants
(Note 14) --- --- --- 263,350
Proceeds from issuance of notes
payable (Note 14) 22,000 --- --- 4,987,500
Notes payable to officers --- 13,500 --- (13,500)
Payments on note payable (16,999) (19,587) (19,587) ---
Deferred financing costs (Note 14) --- --- --- (993,600)
Deferred offering costs (Note 14) --- --- --- (106,160)
Payments on capital lease obligation (18,257) (13,678) (8,059) (12,562)
Short-term advance --- 400,000 --- ---
---------- ---------- ---------- ----------
Net cash provided by financing
activities 651,744 1,064,342 656,461 4,125,028
---------- ---------- ---------- ----------
Net increase in cash 154,489 59,133 23,869 1,278,777
Cash, beginning of period 108 154,597 154,597 213,730
---------- ---------- ---------- ----------
Cash, end of period $ 154,597 $ 213,730 $ 178,466 $ 1,492,507
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow
information -
Cash paid during the period for:
Interest $ 14,785 $ 9,742 $ 14,301 $ 13,120
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income taxes $ 1,800 $ 1,600 $ 1,800 $ 1,600
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Continued
F-11
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Supplemental disclosure of noncash investing
and financing activities:
During the fiscal years ended June 30, 1994 and 1995, the Company purchased
property and equipment valued at $5,653 and $8,979, respectively, through
the issuance of capital leases (Note 7).
During the fiscal year ended June 30, 1995, the Company repaid a note to an
affiliate of a stockholder totalling $22,000 through issuance of common
stock shares in connection with a private placement (Note 4).
During the six months ended December 31, 1995, the Company purchased property
and equipment valued at $38,471 (unaudited) through issuance of capital
leases (Note 7).
See accompanying notes to consolidated financial statements
F-12
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sound Source Interactive, Inc., (a California corporation) was incorporated on
March 5, 1990, under the name Sound Source Unlimited, Inc. On May 16, 1994,
Sound Source Interactive, Inc. ("SSI") consummated a stock-for-stock exchange
with Basic Science Associates, Inc. ("BSA"), a Delaware corporation. As part of
the exchange, BSA issued 1,474,232 shares of its common stock and 1,000,000
shares of its Series A preferred stock (see Note 11) in exchange for all of the
outstanding shares of SSI. The exchange has been accounted for as a reverse
acquisition because stockholders of SSI maintained control of the surviving
entity, BSA. Accordingly, for financial reporting purposes, the shares issued
by BSA are considered outstanding since the date of incorporation of SSI, and
the 99,992 shares of common stock retained by the stockholders of BSA are
reflected as consideration issued to consummate the stock-for-stock exchange.
No value was ascribed to the shares of common stock retained by the stockholders
of BSA since as of the date of the exchange, BSA had nominal assets and
stockholders' equity and was an inactive company. Concurrent with the stock-
for-stock exchange, BSA changed its name to Sound Source Interactive, Inc. (a
Delaware corporation) (the "Company").
The Company, through its wholly-owned subsidiary (SSI), is in the business of
developing, publishing and distributing entertainment software, specializing in
interactive educational software, "screen savers" software and sound clips.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates, among other things, the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the accompanying consolidated financial statements, at December 31, 1995, the
Company's current liabilities exceeded its current assets by $2,913,040
(unaudited) and the Company had a stockholders' deficit of $2,733,214
(unaudited). In addition, the Company has incurred net losses of $3,977,733,
$1,734,160, $449,017 (unaudited) and $2,010,372 (unaudited) for the years ended
June 30, 1994 and 1995 and for the six months ended December 31, 1994 and 1995,
respectively. The Company is currently funding operations from the proceeds of
the 1995 Private Placement (see Note 14). The notes payable of $4,987,500 at
December 31, 1995 (unaudited) and related accrued interest of $118,176 is due
September 1, 1996. The Company has also not generated sufficient cash flows to
fund operations due in part to its problems with its major distributor, Acclaim
Entertainment, Inc. ("Acclaim") (see Note 15). The Company plans to effect an
initial public offering to raise proceeds to repay these notes payable and
related accrued interest and to fund its working capital requirements (see Note
14). These factors, among others, raise substantial doubt about 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
this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could materially differ from those estimates.
Continued
F-13
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DISCONTINUED OPERATIONS
In July 1995, the Company approved a formal plan to license the rights to its
music division (which developed and sold sound patches for electronic keyboards
and synthesizers) and sold the related inventory and property and equipment to
an unrelated third party (see Note 12). Accordingly, the Company has classified
such as discontinued operations in the accompanying consolidated financial
statements for all years presented.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Sound Source Interactive, Inc. (a
California corporation). The results of operations of BSA, the acquired
business, have been consolidated with those of Sound Source Interactive, Inc.
commencing May 16, 1994. The results of operations of BSA for the period July
1, 1993 to May 16, 1994 were not material.
All significant intercompany transactions and balances have been eliminated in
consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the six months ended December 31, 1994
and 1995 and the related notes thereto are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at
December 31, 1995, and the results of operations and cash flows for the six
months ended December 31, 1994 and 1995. Results for the 1995 interim period
are not necessarily indicative of the results to be expected for the fiscal year
ended June 30, 1996.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from distributors and retailers of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and returns. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. As of June 30, 1995,
reserves for credit losses and returns totalled $40,000 and $64,250,
respectively. As of December 31, 1995, reserves for returns totalled $447,310
(unaudited). As of December 31, 1995, reserves for credit losses were not
deemed necessary by management of the Company (see Note 5). The Company is
subject to rapid changes in technology and shifts in consumer demand which could
result in product returns in excess of the Company's reserves at June 30, 1995
and December 31, 1995.
INVENTORIES
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis. Provision has been made to
write-down obsolete inventories to market value.
Continued
F-14
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets, generally ranging from five to
seven years.
Depreciation expense related to continuing operations totalled $25,852 and
$27,541 for the years ended June 30, 1994 and 1995, respectively, and totalled
$13,600 (unaudited) and $19,437 (unaudited), respectively, for the six months
ended December 31, 1994 and 1995, and is included in other general and
administrative expense in the accompanying consolidated statements of
operations.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs associated with the issuance of debt.
Deferred financing costs are amortized over the term of the related debt. For
the six months ended December 31, 1995, amortization expense totalled $262,732.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs associated with the Company's intended
Initial Public Offering ("IPO") (see Note 14). Deferred offering costs will be
recorded as a reduction in proceeds upon completion of the intended IPO. If the
IPO is unsuccessful, such costs will be charged to operations.
REVENUE RECOGNITION
Sales are recognized at the time the products are shipped, in accordance with
the provisions of Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION".
While the Company has no obligations to perform future services subsequent to
shipment, the Company provides telephone customer support as an accommodation to
purchasers of its products for a limited time. Costs associated with this
effort are expensed as incurred (see Note 5).
The Company recognizes revenue for product shipped to Acclaim on the date that
Acclaim purchases such product and ships it to their customers. Acclaim is
obligated to pay the Company on the earlier of the month following the date of
receipt of payment by it or 120 days following the end of the month that the
product was shipped. The Company is responsible for product returns, and
records a reserve for returns based on management's evaluation of historical
experience and current industry trends (see Note 15).
Continued
F-15
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ROYALTIES
The Company enters into license agreements with movie studios, actors and sound
developers for recognizable movie and television properties which require the
Company to pay royalties to such movie studios, actors and sound developers.
The license agreements generally require the Company to pay a percentage of
sales of the products but no less than a specified amount (the minimum
guaranteed royalty). The Company records the minimum guaranteed royalty as a
liability and a related asset at the time the agreement is consummated. The
liability is extinguished as payments are made to the license holders and the
asset is amortized on a straight-line basis over the expected number of units to
be sold. Royalties are recognized upon the sale of the related product.
Royalty liabilities in excess of the minimum guaranteed amount are recorded when
such amounts are earned. Royalties for the years ended June 30, 1994 and 1995
amounted to $275,407 and $325,981, respectively. Royalties for the six months
ended December 31, 1994 and 1995 amounted to $252,505 (unaudited) and $190,977
(unaudited), respectively, and are included in cost of sales in the accompanying
consolidated statements of operations.
Generally, the terms of a license agreement state that, upon any bankruptcy or
liquidation of the Company, licensing rights revert to the license holder.
The Company's products are based upon such licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. All of such license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under each agreement will
extend its terms, provided that the Company is in compliance with all
requirements of each license, including most significantly that the Company has
satisfied the applicable minimum royalty guarantees. In the event that any
licensor fails to renew its license agreement, then the subject license will
terminate and the Company will no longer be entitled to sell the licensed
product. The loss of one or more of the licenses could have a material adverse
effect on the Company's revenues and operating results. There can be no
assurance that the Company will satisfy its performance obligations under any
license or development agreement or, that even if such requirements are
satisfied, all material licenses will be renewed.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED," ("SFAS No. 86"), the Company examines its software development costs
after technological feasibility has been established to determine if
capitalization is required. Through December 31, 1995, all software development
costs have been expensed.
INCOME TAXES
The Company accounts for income taxes under Statement on Financial Accounting
Standards No. 109, "ACCOUNTING FOR INCOMES TAXES" ("SFAS No. 109"), which
requires that deferred income taxes be recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting basis at rates based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income.
Continued
F-16
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes (see Note 13).
STOCK SPLIT
In September, 1995, the Company effectuated a 1-for-5.976 reverse stock split of
issued and outstanding common shares and common shares reserved for options in
connection with the August 1995 private placement (see Note 14). The
accompanying consolidated financial statements have been adjusted to reflect the
reverse stock split.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective period. Common stock equivalents include
shares issuable upon the exercise of the Company's stock options. For the years
ended June 30, 1994 and 1995 and for the six months ended December 31, 1994
(unaudited) and 1995 (unaudited), common stock equivalents were excluded from
the computation of loss per common share because the effect of including such in
the computation would have been anti-dilutive (see Notes 10 and 14), except as
discussed below.
Pursuant to Securities and Exchange Commission Staff Bulletin No. 83, common
shares issued for consideration below an assumed initial public offering price
(estimated at $4.00 per share) and stock options granted (see Note 14) with
exercise prices below the IPO price during the twelve-month period preceding the
date of the filing of the Registration Statement have been included in the
calculation of common share equivalents, using the treasury stock method, as if
they were outstanding for all periods presented, including loss years where the
impact is anti-dilutive.
The only securities issued within twelve months of the registration statement
are options to purchase 100,000 shares granted at $3.40 per share (see Note 14).
The computations of the weighted average common shares and equivalents
outstanding follows:
[Enlarge/Download Table]
Year Ended June 30, Six Months Ended December 31,
------------------- -----------------------------
1994 1995 1994 (unaudited) 1995
---- ---- ---- ----
Weighted average common
shares outstanding
during the period 1,611,107 1,847,908 1,854,998 1,853,145
Incremental shares assumed
to be outstanding related
to stock options granted 15,000 15,000 15,000 15,000
--------- --------- --------- ---------
Weighted average common
shares and equivalents
outstanding 1,626,107 1,862,908 1,869,998 1,868,145
--------- --------- --------- ----------
--------- --------- --------- ----------
Continued
F-17
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SEASONALITY
The consumer software business traditionally has been seasonal. Typically, net
sales are 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.
CONCENTRATION OF CREDIT RISK
The Company, at times, maintains cash balances at certain financial institutions
in excess of the federally insured maximum.
RECLASSIFICATIONS
Certain reclassifications have been made to 1994 amounts to conform to the 1995
presentation.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
December 31,
June 30, 1995
1995 (Unaudited)
----------- ------------
Finished goods $ 66,114 $ 390,036
Raw materials (components) 84,206 67,196
----------- -----------
$ 150,320 $ 457,232
----------- ------------
----------- ------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
June 30, 1995
1995 (Unaudited)
----------- ------------
Studio computers and equipment $ 118,496 $ 236,274
Office furniture and equipment 59,069 60,914
----------- ------------
177,565 297,188
Less accumulated depreciation (84,724) (104,161)
----------- ------------
$ 92,841 $ 193,027
----------- ------------
----------- ------------
Continued
F-18
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - NOTES PAYABLE
During the year ended June 30, 1995, the Company repaid a note due to a
stockholder amounting to $19,587. The Company also repaid a $22,000 note due to
an affiliate of a stockholder through issuance of shares in conjunction with the
1994 private placement.
As of June 30, 1995, the Company owed certain officers of the Company $13,500 in
the form of short-term non-interest bearing advances. In July 1995, such
advances were paid.
For discussion of notes payable issued in connection with the August 1995
private placement (see Note 14).
NOTE 5 - SHORT-TERM ADVANCE
In June 1995, the Company entered into a five-year sales and distribution
agreement (the "Agreement") with a subsidiary of Acclaim, a distributor of
entertainment software. Under the terms of the Agreement, Acclaim was
responsible for the distribution of the Company's products on a world-wide basis
to retail accounts. The Company retained the rights to certain direct
distribution, such as direct mail and infomercials.
In conjunction with the signing of the Agreement, the Company received a non-
interest bearing advance from Acclaim in the amount of $400,000. The advance is
due in twelve monthly installments of $33,333 each, commencing no later than 90
days subsequent to first billing by the Company. The installments are to be
deducted from amounts due the Company from Acclaim related to product sales.
Management of the Company expects that this advance will be deducted in its
entirety from amounts due from Acclaim prior to June 30, 1996.
The Company is required under the terms of the Agreement to expend six percent
of the "projected sales revenues", as defined by Acclaim, related to each
product on the advertising and marketing of such product.
Under the Acclaim Distribution Agreement, all risks associated with collection
of accounts receivable with respect to all products sold by the Company through
Acclaim are solely the responsibility of Acclaim, whereas the risk of product
returns remains with the Company. The Company, however, is exposed to the risk
of credit collection from retailers and distributors other than Acclaim. As
discussed in Note 1, the Company establishes reserves for returns that it
believes to be adequate based upon historical return data and its analysis of
current customer inventory levels and sell through rates. Nonetheless, the
Company could be forced to accept substantial product returns to maintain its
relationships with retailers and its access to distribution channels. The
Company's policies also allow for returns of defective merchandise for credit.
Any significant amount of product returns could have a material adverse effect
on the Company's business, operating results and financial condition.
In March 1996, such agreement was terminated (see Note 15).
Continued
F-19
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - DEFERRED REVENUE
In August 1994, the Company entered into a contract to develop computer software
for Fox Interactive, a division of Fox, Inc. In exchange, the Company received
nonrefundable advances based upon the attainment of certain milestones. The
Company recognizes these advances into revenues based upon the percentage of
completion method. As of June 30, 1995 and as of December 31, 1995 (unaudited),
the Company had received $24,000 of advances in excess of earnings and has
therefore recorded such amount as deferred revenue in the accompanying
consolidated balance sheet.
The Company has entered into various agreements with computer manufacturers to
sell and distribute certain of the Company's products. In exchange, the Company
receives royalties and advances against expected royalties. As of June 30,
1995, the Company received $40,000 of advances in excess of royalties earned.
Accordingly, the Company has recorded such amounts as deferred revenues on the
accompanying June 30, 1995 consolidated balance sheet. As of December 31, 1995,
the Company had earned $10,000 (unaudited) of such advances. As of December 31,
1995, the Company received $12,000 (unaudited) of advance royalties in
connection with the licensing of the music division (see Note 12).
NOTE 7 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with five of its employees,
including three officers, which expire on various dates through April, 1998.
Certain of the employment contracts provided for mandatory increases in salary
if the Company completed an initial public offering or a secondary offering (see
Note 14), provided for commissions based on net sales and provide for automobile
allowances.
In May 1996, the employment contracts of the two officers were modified.
During September 1995, the employment contracts of two of the officers were
modified as follows:
i) The terms were extended through August 31, 1998 and 2000,
respectively.
ii) The contracts no longer provide for commissions after November 1995,
or increases in base salaries other than cost of living increases.
iii) The contracts provide for bonuses based on the attainment of certain
milestones related to gross revenues, gross profits, and pre-tax
profit percentages.
Effective September 5, 1995, another officer of the Company with an employment
contract resigned from the Company.
Effective October 9, 1995, the Company entered into a two-year employment
contract with a new officer of the Company. The contract provides for a minimum
base salary and certain expense reimbursements.
Continued
F-20
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - COMMITMENTS AND CONTINGENCIES, CONTINUED
Future minimum base salaries, by year and in the aggregate, after giving effect
to the modification of two of the contracts, the termination of another due to
resignation of the officer and the new contract, consist of the following at
June 30, 1995:
1996 $ 459,167
1997 485,000
1998 402,500
1999 229,166
2000 200,000
2001 33,333
---------
$ 1,809,166
---------
---------
Commissions under employment contracts for the year ended June 30, 1994 and
1995, related to continuing operations amounted to $44,807 and $132,078,
respectively, and are included in marketing and sales costs in the accompanying
consolidated statements of operations. At June 30, 1995, $156,063 of such
amounts remain unpaid and are included as commissions payable in the
accompanying consolidated balance sheet.
OPERATING LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases which expire at various dates through February 1997.
The facility lease expense is being recognized on a straight-line basis over the
term of the related lease. The excess of the expense recognized over the cost
paid is included in accounts payable and accrued expenses in the accompanying
consolidated balance sheet.
Future minimum annual lease payments at June 30, 1995 are as follows:
1996 $ 89,916
1997 55,667
---------
$ 145,583
---------
---------
Rent expense under operating lease agreements totalled $75,311 and $94,006 for
the years ended June 30, 1994 and 1995, respectively, and $38,903 (unaudited)
and $48,514 (unaudited) for the six months ended December 31, 1994 and 1995,
respectively, and is included in other general and administrative expenses on
the accompanying consolidated statements of operations.
CAPITAL LEASES
The Company leases certain equipment and computers under capital lease
obligations with interest rates ranging from 13.35% to 30.45% per annum.
Aggregate monthly principal and interest payments total $1,717 at June 30, 1995.
Continued
F-21
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - COMMITMENTS AND CONTINGENCIES, CONTINUED
Future minimum lease payments, by year and in the aggregate, under capital
leases for equipment and computers with initial or remaining terms of one year
or more, consist of the following at June 30, 1995:
1996 $ 17,387
1997 11,462
1998 6,513
1999 2,365
---------
37,727
Less amount representing interest (8,035)
---------
Present value of net minimum lease
payments 29,692
Less current portion (12,921)
---------
$ 16,771
---------
---------
During the six months ended December 31, 1995, the Company entered into two
capital leases for certain office equipment aggregating $38,471 (unaudited) with
interest rates ranging from 17.38% to 27.93% (unaudited) per annum and which
expire through 1998 (unaudited).
Interest expense under capital lease obligations amounted to $5,888 and $7,045
for the years ended June 30, 1994 and 1995, respectively, and was insignificant
for the six months ended December 31, 1994 (unaudited) and 1995 (unaudited) and
is included in other income (expense) on the accompanying consolidated
statements of operations.
LITIGATION
In July 1995, a stockholder of the Company filed a complaint in the United
States District Court for the District of Washington, naming, among others, the
Company and its subsidiary, and Bentley Richards Investments (the "Placement
Agent") claiming federal and state securities violations, breach of contract,
and negligent misrepresentation related to the 1994 Private Placement (see Note
8). The complaint sought rescission of all monies paid to the Company and
unspecified amounts of punitive damages, attorney's fees and costs, prejudgment
and postjudgment interest and cost of suit.
In September 1995, the stockholder entered into a settlement agreement whereby
the stockholder dismissed all defendants, including the Company and its
subsidiary, upon delivery of certain shares of the Company's common stock owned
by the Placement Agent and its affiliates. A portion of these shares have been
distributed to the 1994 Private Placement holders and the balance are to be
canceled. Pursuant to the settlement, the Placement Agent's options also were
canceled. The Company was not required to pay any consideration as a part of
the settlement. The Company has been dismissed with prejudice from the
complaint (see Note 8).
Continued
F-22
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - COMMON STOCK
During the fiscal year 1994, the Company engaged a Placement Agent to sell a
private placement of up to 125,502 shares of its common stock at $13.00 per
share. Through June 30, 1994, the Company issued 55,639 shares of its common
stock for $665,000 in cash, net of offering costs of $58,312.
During the fiscal year 1995, the Company issued an additional 59,238 shares of
its common stock in exchange for $706,107 in cash, net of costs of $61,759.
In accordance with the terms of the private offering, the Company agreed to
compensate the Placement Agent with up to 81,997 shares of its common stock and
an option to purchase up to 60,241 shares of its common stock at a price equal
to the closing bid price of the common stock on the first day of trading
following the stock-for-stock exchange (see Note 1). For the years ended June
30, 1994 and 1995, the Placement Agent earned 39,770 and 42,227 shares valued at
$475,315 and $504,686, respectively.
During September 1995, the Placement Agent notified the Company that all shares
held by the Placement Agent or its affiliates, or held in escrow for the benefit
of the Placement Agent or its affiliates, representing and aggregate of 108,769
shares of the Company's common stock, will be distributed to the holders of the
1994 Private Placement shares and approximately 15,000 will be returned to the
Company for retirement (see Note 7).
CANCELLATION OF SHARES
In fiscal 1996, it has been determined by the Company that 35,771 shares of
common stock were improperly issued in 1992 due to the fact no consideration was
received. Accordingly, such common shares were cancelled effective December 31,
1995.
NOTE 9 - SERIES A PREFERRED STOCK
In connection with the Company's reverse acquisition of BSA (see Note 1) on May
16, 1994, the Company issued to its major stockholder 1,000,000 shares of Series
A preferred stock, par value of $.001. The Series A preferred stockholder was
entitled to vote as a single class with the holders of the Company's common
stock on all matters coming before the Company's stockholders for a vote. The
holder of the Series A preferred stock was entitled to ten votes per share
whereas the holders of common stock are entitled to only one vote per share.
The Series A preferred stock was not redeemable or convertible, and the holder
of the Series A preferred stock was not entitled to receive any dividends. The
holder was entitled to a liquidation preference of $.001 per share, provided the
holder would not share any liquidating distribution except to the extent of such
preference. The Company did not ascribe any value to the preferred shares.
Prior to June 30, 1994, the 1,000,000 shares of Series A preferred stock were
converted into 83,669 shares of the Company's common stock. The Company
ascribed a value to the 83,669 shares of common stock of $645,000 and included
such amount under operating costs and expenses in the 1994 accompanying
consolidated statement of operations.
Subsequent to June 30, 1995, the Company amended its articles of incorporation
and deleted the authorization to issued Series A preferred stock.
Continued
F-23
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - STOCK OPTIONS
The Company adopted the 1992 Stock Option Plan (the "Plan") in May, 1992,
authorizing the issuance of up to 2,000,000 shares of common stock to employees,
officers and directors and to employees of companies who do business with the
Company.
Any shares which are subject to an award but are not used because the terms and
conditions of the award are not met, or any shares which are used by
participants to pay all or part of the purchase price of any option may again be
used for awards under the Plan. However, shares with respect to which a stock
appreciation right (see below) has been exercised may not again be made subject
to an award.
At the discretion of a committee comprised of directors, officers and key
employees of the Company and its subsidiaries or employees of companies with
which the Company does business may become participants in the Plan upon
receiving grants in the form of stock options or restricted stock.
Stock options may be granted as non-qualified stock options or incentive stock
options, upon stockholder approval as defined, but incentive stock options may
not be granted at a price less than 100% of the fair market value of the stock
as of the date of grant (110% as to any 10% stockholder at the time of grant);
non-qualified stock options may not be granted at a price less than 85% of fair
market value of the stock as of the date of grant. Restricted stock may not be
granted under the Plan in connection with incentive stock options.
Stock options granted under the Plan may include the right to acquire an
Accelerated Ownership Non-Qualified Stock Option ("AO"). All options granted to
date have included the AO feature. If an option grant contains the AO feature
and if a participant pays all or part of the purchase price of the option with
shares of the Company's common stock, then upon exercise of the option the
participant is granted an AO to purchase, at the fair market value as of the
date of the AO grant, the number of shares of common stock of the Company equal
to the sum of the number of whole shares used by the participant in payment of
the purchase price and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related.
Stock appreciation rights and/or restricted stock may be granted in conjunction
with, or may be unrelated to stock options. A stock appreciation right entitles
a participant to receive a payment, in cash or common stock or a combination
thereof, in an amount equal to the excess of fair market value of the stock at
the time of exercise over the fair market value of the date of grant. Stock
appreciation rights may be exercised during a period of time fixed by the
Committee.
Continued
F-24
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - STOCK OPTIONS, CONTINUED
Restricted stock requires the recipient to continue in service as an officer,
director, employee or consultant for a fixed period of time for ownership of the
shares to vest. If restricted shares or stock appreciation rights are issued in
tandem with options, the restricted stock or stock appreciation right is
canceled upon exercise of the option and the option will likewise terminate upon
vesting of the restricted shares.
On April 6, 1994, the Company issued a non-qualified stock option outside of the
Plan to an officer of the Company to purchase an aggregate of 251,004 shares of
the Company's common stock for $.06 per share and subsequently in fiscal 1994 an
option was granted to the officer to purchase 41,834 shares of the Company's
common stock for $.06 per share. All stock options issued to the officer were
immediately vested and are exercisable for a period of up to four years after
termination of employment from the Company. The difference between the fair
market value of the common stock underlying the options at the date of grant and
the exercise price has been included in operating costs and expenses in the
accompanying 1994 consolidated statement of operations.
On April 6, 1994, the Company issued options to purchase 199,130 shares of the
Company's common stock at $.06 per share to employees of the Company and to
certain consultants. The difference between fair market value of the common
stock underlying the options at the date of grant and the exercise price has
been included in operating costs and expenses in the accompanying consolidated
statement of operations. These options had an original vesting period of four
years. In connection with the offerings (see Note 14), the Company modified the
vesting period to 50% vested on the first year anniversary from the date of
grant, 25% on the third year anniversary and 25% on the fourth year anniversary
from the date of grant.
On September 5, 1995, in connection with the resignation of an officer of the
Company, 12,550 options were canceled in accordance with the Plan and the
officer's employment contract. In connection with the resignation of such
officer, 4,184 options were exercised effective June 30, 1995.
On October 9, 1995, the Company granted 100,000 options to an employee/officer
with an exercise price of $5.00, the fair market value of the common stock as
determined by the Company. The options vested immediately and expire 10 years
from the date of grant. On March 31, 1996, such options were cancelled and new
options issued (see Note 14).
Continued
F-25
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - STOCK OPTIONS, CONTINUED
The following table summarizes option transactions during the years ended June
30, 1994 and 1995 and for the six months ended December 31, 1995:
Number of Price
Shares Per Share
--------- ---------
Balances at July 1, 1993 --- ---
Granted 491,642 $0.06
Exercised --- ---
Canceled --- ---
--------- -------
Balances at June 30, 1994 491,642 $0.06
Granted --- ---
Exercised (4,184) $0.06
Canceled (12,550) $0.06
--------- -------
Balances at June 30, 1995 474,908 $0.06
Granted 100,000 $5.00
Exercised --- ---
Canceled --- ---
--------- -------
Balances at December 31, 1995
(unaudited) 574,908 $0.06-$5.00
--------- -----------
--------- -----------
Vested as of December 31, 1995
(unaudited) 484,037
---------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
financial statements issued after fiscal year 1996.
NOTE 11 - SIGNIFICANT CUSTOMERS
During the year ended June 30, 1994, four of the Company's customers accounted
for 29% of total revenues. A listing of revenues, as a percentage of total
revenues from continuing operations, for each of such customers for the years
ended June 30, 1994 is as follows:
Customer A 10%
Customer B 8%
Customer C 7%
Customer D 4%
-----
29%
-----
-----
During the year ended June 30, 1995, one customer accounted for 18% of total
revenues from continuing operations.
Continued
F-26
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - SIGNIFICANT CUSTOMERS, CONTINUED
During the six months ended December 31, 1994, three different customers
accounted for an aggregate 17% (unaudited) of total revenues from continuing
operations.
During the six months ended December 31, 1995, one of the Company's customers, a
subsidiary of Acclaim (see Note 5), accounted for 73% (unaudited) of total
revenues from continuing operations. Significantly, all accounts receivable as
of December 31, 1995 is due from such customer.
NOTE 12 - DISCONTINUED OPERATIONS
In July 1995, the Company approved a formal plan to license certain proprietary
assets to Greytsounds Sound Development ("GSD") in exchange for royalties, as
defined. Upon commencement of a license agreement with GSD, $15,000 is to be
paid to the Company representing advance royalties. GSD also is to guarantee
$50,000 of royalties over the license term of two years. The expected date of
the agreement is to be no later than November 1, 1995. The license agreement is
to be exclusive and worldwide.
The proprietary assets licensed to GSD include the Company's musical instrument
sound library, all music related inventory and all music related fixed assets
owned and leased by the Company. As of June 30, 1995, the net carrying value of
these assets included on the accompanying consolidated balance sheet amounted to
$50,913. Net liabilities related to the Company's music division not licensed
to GSD totalled $32,722 as of June 30, 1995.
The Company recorded a liability of $32,000 as of June 30, 1995 representing
estimated losses on disposal and estimated operating losses from July 1, 1995 to
the date of disposal, net of guaranteed royalties of $50,000. The net
liabilities related to the disposal of the music division are included in
accounts payable and accrued expenses on the accompanying consolidated balance
sheet as of June 30, 1995.
Continued
F-27
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - DISCONTINUED OPERATIONS, CONTINUED
The following summarized the assets and liabilities of the music division at
June 30, 1995:
[Download Table]
Assets:
Accounts receivable $ 4,458
Inventory 24,049
Property and equipment, net 26,864
------------
$ 55,371
------------
------------
Liabilities:
Accounts payable and accrued
expenses $ 21,267
Accrued royalties 3,415
Commissions payable 12,498
------------
$ 37,180
------------
------------
As of December 31, 1995 (unaudited) no assets or liabilities of the music
division are included on the accompanying consolidated balance sheet. Included
in deferred revenue on the accompanying consolidated balance sheet is $12,000
(unaudited) as of December 31, 1995.
The following summarizes the results of operations for the discontinued
operations:
[Download Table]
For The Years Ended December 31,
December 31, 1994 1995
1994 1995 (Unaudited) (Unaudited)
---------- ---------- ----------- -----------
Revenues $ 217,837 $ 220,937 $ 138,394 $ ---
Costs and expenses (333,724) (332,043) (151,770) ---
---------- ---------- ---------- ----------
Loss from operations $ (115,887) $ (111,106) $ (13,376) $
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NOTE 13 - INCOME TAXES
The provision for income taxes from continuing operations for the years ended
June 30, 1994 and 1995 is comprised of minimum state taxes only.
A reconciliation of the provision for income taxes from continuing operations
with expected income tax benefit computed by applying the federal statutory
income tax rate to loss before provision for income taxes for the years ended
June 30, 1994 and 1995 is as follows:
[Download Table]
1994 1995
----------------- -----------------
$ % $ %
------- ----- ------- -----
Income tax benefit computed
at federal statutory tax
rate (1,312,484) (34.0)% (540,414) (34.0)%
State and local taxes 1,600 0.0 1,600 0.0
Expenses not deductible
for income tax purposes 1,028,553 26.6 252,173 15.9
Continued
F-28
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - INCOME TAXES, CONTINUED
[Download Table]
1994 1995
----------------- -----------------
$ % $ %
----------------- -----------------
Change in the beginning-of-
the-period balance of the
valuation allowance for
deferred tax assets
allocated to income tax
benefit 283,931 7.4 288,241 18.1
--------- ----- ---------- -----
$ 1,600 0.0% $ 1,600 0.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
The components of the net deferred tax asset recorded in the accompanying
balance sheets for the year ended June 30, 1995 is as follows:
[Download Table]
Accounts receivable, principally due to allowances
for sales returns and doubtful accounts $ 48,104
Accrued liabilities, principally due to accrual for
financial reporting purposes 1,882,280
Net operating loss carryforwards 931,659
Less valuation allowance (2,862,043)
----------
$ ---
----------
----------
The valuation allowance increased $1,185,225 during the year ended June 30,
1995.
At June 30, 1995, the Company had federal and state net operating loss
carryforwards of approximately $2,513,000 and $1,248,000, respectively,
available to offset future taxable federal and state income. The federal and
state carryforward amounts expire in varying amounts through 2011 and 2000,
respectively.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for federal income tax reporting purposes are
subject to annual limitations. Should a change of ownership occur, net
operating loss carryforwards may be limited as to use in future years.
NOTE 14 - SUBSEQUENT EVENTS
1995 BRIDGE FINANCING
During June through August 1995, the Company offered up to $700,000 of Units
(the "1995 Bridge Financing"), each consisting of $9,975 in principal amount of
the Company's 10% Secured Promissory Notes (the "Bridge Notes") and warrants to
purchase 586 shares of the Company's common stock (the "Bridge Warrants").
Pursuant to this offering, the Company sold 32 Units for aggregate proceeds to
the Company of $278,400, net of costs of $41,600. A total of 18,747 Bridge
Warrants were issued in connection therewith which are exercisable as indicated
below. The dealer/manager received 20,918 Bridge Warrants for $50 as partial
consideration for services in connection with this offering which are
exercisable as indicated below.
During August 1995, the Company notified the dealer/manager to discontinue
offering additional units.
Continued
F-29
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - SUBSEQUENT EVENTS, CONTINUED
The principal and accrued interest on the Bridge Notes was due and payable in
full on August 15, 1995. The Company did not repay the Bridge Notes upon their
maturity. During the pendency of any such default, the Bridge Note holders were
entitled to receive a penalty of two percent per month in addition to the
interest otherwise payable on the Bridge Notes. These notes were repaid in full
during September 1995 in connection with the 1995 Private Placement (see below).
The obligations of the Company under the Bridge Notes were secured by a security
interest in all the assets of the Company, including a pledge of all of the
issued and outstanding capital stock of the Subsidiary.
Each Bridge Warrant entitles its holder to purchase one share of common stock.
The Bridge Warrants become exercisable commencing on the earlier of (I) December
31, 1996 or (II) the completion by the Company of an initial registered public
offering of its common stock (IPO). The Bridge Warrants will expire on the
earlier of (I) December 31, 2000 or (II) the date 18 months after completion of
an IPO. The exercise price of the Bridge Warrants will equal 110% of the price
per share of the common stock in the IPO, or if the IPO has not occurred by
December 31, 1996, $5.98 per share. In November 1995, the Bridge Warrant holders
exchanged these Bridge Warrants for new warrants with the same terms as the
warrants issued in connection with the 1995 Private Placement (see below).
1995 PRIVATE PLACEMENT
In August 1995, the Company engaged two dealer/managers to assist in a private
placement (the "1995 Private Placement") to sell a minimum of $1,000,000 of
Units to a maximum of $5,000,000 of Units, each consisting of $95,000 in
principal amount of the Company's 10% Secured Promissory Notes (the "Private
Notes") due on the earlier of September 1, 1996 or the completion by the Company
of an IPO, and 100,000 warrants (the "Private Warrants") to purchase one share
of the Company's common stock. A total of 5,250,000 Private Warrants were
issued in connection therewith which are exercisable as indicated below. As of
December 31, 1995, the Company had sold 52.5 units for aggregate proceeds of
$4,256,400, of which $262,500 represents the Private Warrants, net of costs of
$993,600. In connection with this offering, the Company issued 400,000 Private
Warrants as partial consideration for services provided by a dealer/manager,
which are exercisable as indicated below.
The obligations of the Company under the Private Notes are secured by a security
interest in all the assets of the Company, including a pledge of all of the
issued and outstanding capital stock of its Subsidiary. A portion of the net
proceeds of this private placement were utilized to retire all of the
outstanding indebtedness of the 1995 Bridge Financing.
Each Private Warrant entitles its holder to purchase one share of common stock.
The Private Warrants become exercisable commencing on the earlier of (I)
December 31, 1996 or (II) the completion by the Company of an IPO. The Private
Warrants expire on December 31, 2001. The exercise price of the Private
Warrants will equal 110% of the price per share of the common stock in the IPO,
or if the IPO has not occurred by December 31, 1996, $4.50 per share.
Upon completion of any IPO, each outstanding Private Warrant will be converted
into warrants included in the IPO (the "IPO Warrants"). The terms of the IPO
Warrants may not be any less favorable than the terms of the Private Warrants,
except that the IPO Warrants may be redeemable at the option of the Company upon
certain terms.
Continued
F-30
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - SUBSEQUENT EVENTS, CONTINUED
STOCKHOLDER PRIVATE PLACEMENT
Concurrent with the 1995 Private Placement, a current stockholder conducted a
private placement of up to 200,000 shares of common stock, held by such
stockholder, at a purchase price of $5.00 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an initial
public offering of the Company's subsidiary's common stock is completed, the
common stock purchased in this private placement will be exchanged for shares of
the Company's subsidiary's common stock on a one-for-one basis. Through
December 31, 1995, the stockholder had sold 107,500 shares.
REGISTRATION STATEMENT
The Company has filed a registration statement on Form SB-2, as amended, with
the Securities and Exchange Commission for an initial public offering of
2,400,000 shares at an estimated offering price of $4.00 and 1,200,000
redeemable warrants at $.25 per warrant. In connection with the proposed
offering, the Company has incurred expenses amounting to $106,160. Such
expenses have been capitalized on the accompanying balance sheet as of December
31, 1995 (unaudited).
In connection therewith, the Company is also registering 340,000 shares of its
common stock and 20,000 shares of common stock held by selling stockholders to
cover over-allotments and 107,500 shares of common stock registered for the
account of certain selling stockholders. The Company is also registering
180,000 redeemable warrants to cover over-allotments.
The Company has also, in connection with the IPO, given the underwriter a
warrant, for $50, which entitles the underwriter to purchase 240,000 shares of
common stock and/or 120,000 redeemable warrants at 120 percent of the IPO price.
ASSI WARRANTS
On May 1, 1996, in consideration of certain financial and personnel consulting
service provided to the Company in 1996, including advising the Company
regarding capital raising alternatives and executive recruiting, the company has
entered into an agreement to issue to ASSI, Inc. warrants to purchase 2,000,000
shares of common stock at an exercise price of $4.40 per share (the "ASSI
Warrants"). The terms of the ASSI Warrants will be identical to those of the
public warrants except that they will not be mandatorily redeemable. The ASSI
Warrants and shares issuable upon their exercise will not be transferable for
one year following the effective date of the Registration Statement, other than
to than to officers of ASSI, Inc. The holders of the ASSI Warrants and the
shares issuable upon their exercise will have one demand registration right,
providing for registration, at the Company's expense, of the shares issuable
pursuant to the ASSI Warrants. The demand registration rights will expire five
years from the date of the registration statement discussed above. Until and
unless exercised, the holders of the ASSI Warrants will have no voting, dividend
or other rights as stockholders of the Company.
Continued
F-31
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - SUBSEQUENT EVENTS, CONTINUED
OPTIONS
On October 9, 1995, the Company adopted the 1995 stock option plan, whereby the
Company can grant up to 500,000 options for shares of the Company's common
stock. Currently, no options have been granted under this plan. On March 31,
1996, an employee/officer agreed to the termination of his existing 100,000
share option in consideration for the Company's agreement to grant to him a new
200,000 share option pursuant to the 1992 stock option plan. Such option will
be vested and exercisable upon the date of its grant as to 100,000 shares at a
purchase price of $3.40 per share, and will become vested and exercisable as to
100,000 shares ratably between June 30, 1996 and September 30, 1997 at a
purchase price of $4.00 per share. The employee/officer's employment agreement
further provides that following the voluntary or involuntary termination of his
employment by the Company, the employee/officer is entitled to a single demand
registration right with respect to the common stock held by or issuable to him
pursuant to his option agreement.
The Company has also agreed to grant 13,610 options under the 1995 stock option
plan to other non-executive employees at an exercise price of $4.00 per share.
EMPLOYMENT CONTRACTS
In April 1996, the Company modified the employment contracts of two officers.
Such modifications reduced the annual base compensation by a specified amount.
Upon the Company achieving specified sales levels, the annual base compensation
is increased by the amount of the specified reduction. The Company also
modified the employment contract of a third officer in April 1996 to change the
number and vesting period of options previously granted and to grant additional
options (see Note 1).
NOTE 15 - TERMINATION OF DISTRIBUTION AGREEMENT
The Company and Acclaim have terminated the distribution agreement as of April
30, 1996. On or before June 30, 1996, Acclaim will render a final accounting to
the Company together with payment of the balances of any amounts due to the
Company under the distribution agreement. Acclaim has notified its accounts
that it will not accept returns of any of the Company's software products after
June 30, 1996. The Company, however, will remain liable for all such returns
regardless of when received by Acclaim.
F-32
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sound Source Interactive, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
May 3, 1996
[GRAPHIC] [GRAPHIC]
Interactive MovieBook-TM- - Storybooks designed to promote literacy with
definitions, synonyms, and spelling activities and early learning games for
young children. Shown here: Screen shots form "Babe-TM-".(Universal Pictures)
[GRAPHIC] [GRAPHIC]
Creativity Centers - Designed to foster creativity in kids and challenge
their critical thinking skills.
Shown here: Work in progress from "Dragonheart-TM-" (Universal Pictures)
[GRAPHIC] [GRAPHIC]
Entertainment Utilities - Products designed to put the fun and excitement
back into your workday. Shown here: Screen saver image and user interface from
"Babylon 5-TM-" (Warner Bros.)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by the Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security by any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information in this Prospectus is correct as of any time subsequent to
the date of this Prospectus.
________________________
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . 3
Risk Factors . . . . . . . . . . 10
Use of Proceeds . . . . . . . . . 25
Dividend Policy . . . . . . . . . 26
Dilution . . . . . . . . . . . . 27
Capitalization . . . . . . . . . 30
Selected Financial Data . . . . 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . 33
Business . . . . . . . . . . . . 38
Management . . . . . . . . . . . 51
Principal and Selling
Stockholders . . . . . . . . . . 62
Resale of Outstanding Securities . 63
Certain Transactions . . . . . . 63
Description of Securities . . . . 66
Shares Eligible for Future Sale . 69
Underwriting . . . . . . . . . . 72
Legal Matters . . . . . . . . . . 74
Experts . . . . . . . . . . . . 74
Additional Information . . . . . 74
Index to Consolidated Financial
Statements . . . . . . . . . . . 76
Until __________, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This obligation is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2,400,000 SHARES OF COMMON STOCK
AND
1,200,000 REDEEMABLE
WARRANTS
[SOUND SOURCE
INTERACTIVE, INC.
LOGO]
________________________
P R O S P E C T U S
________________________
THE BOSTON GROUP, L.P.
JOSEPH STEVENS & COMPANY, L.P.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 9, 1996
PROSPECTUS
[SOUND SOURCE
INTERACTIVE, INC. LOGO]
107,500 SHARES OF COMMON STOCK
5,689,665 REDEEMABLE WARRANTS
9,069,665 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF REDEEMABLE WARRANTS
---------------------
This Prospectus relates to the registration by Sound Source Interactive,
Inc. (the "Company"), at its expense, for the account of certain non-affiliated
security holders (the "Selling Security Holders") of 107,500 shares of common
stock, par value $.001 (the "Common Stock"), and 5,689,665 Redeemable Warrants
(the "Redeemable Warrants") (the Common Stock and Redeemable Warrants offered by
the Selling Security Holders are sometimes collectively referred to herein as
the "Selling Security Holders' Securities"). The Selling Security Holders'
Securities are not being underwritten in this offering and the Company will not
receive any proceeds from the sale of the Selling Security Holders Securities.
See "Selling Security Holders". The Selling Security Holders' Securities may be
sold by the Selling Security Holders or their respective transferees commencing
on the date of this Prospectus. Sales of the Selling Security Holders'
Securities may depress the price of the Common Stock and Redeemable Warrants in
any market that may develop for the Common Stock and Redeemable Warrants. See
"Prospectus Summary -- The Offering," "Selling Security Holders" and "Certain
Transactions."
This Prospectus also relates to the registration by the Company for its own
account of 9,069,665 shares of Common Stock issuable by the Company upon
exercise of the 5,689,665 Redeemable Warrants being registered for the account
of the Selling Security Holders as described in the preceding paragraph,
1,380,000 Redeemable Warrants issued by the Company pursuant to a separate
Prospectus (the "Primary Offering Prospectus") filed with the Registration
Statement of which this Prospectus is a part, and 2,000,000 warrants issued by
the Company to ASSI, Inc., a consultant to and creditor of the Company. This
Prospectus, except for this Cover Page, the back Cover Page and the information
contained herein under the heading "Selling Security Holders" and "Plan of
Distribution," is identical to the Primary Offering Prospectus. This Prospectus
includes certain information that may not be pertinent to the sale by the
Selling Security Holders.
Prior to this offering, there has been no public market for the Common Stock
or the Redeemable Warrants and there can be no assurance that such a market will
exist after this offering.
------------------------
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION"
COMMENCING ON PAGES 10 AND 26, RESPECTIVELY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1996
SS-1
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Selling Security Holders' Securities
pursuant to this Prospectus at a fixed price or at a negotiated price which is,
in either case, other than the prevailing market price or in a block transaction
to a purchaser who resells, or if any Selling Security Holder pays compensation
to a broker-dealer that is other than the usual and customary discounts,
concessions or commissions, or if there are any arrangements either individually
or in the aggregate that would constitute a distribution of the Selling Security
Holders' Securities, a post-effective amendment to the Registration Statement of
which this Prospectus is a part would need to be filed and declared effective by
the Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
SS-2
SELLING SECURITY HOLDERS
An aggregate of 107,500 shares of Common Stock and 5,689,665 Redeemable
Warrants are being registered in this offering for the account of the Selling
Security Holders. The Selling Security Holders' Securities may be sold by the
Selling Security Holders or their respective transferees commencing on the date
of this Prospectus. Sales of such shares of Common Stock by the Selling
Security Holders or their respective transferees may depress the price of the
Common Stock and Redeemable Warrants in any market that may develop for such
securities.
The following table sets forth certain information with respect to persons
for whom the Company is registering such shares of Common Stock and Redeemable
Warrants for resale to the public. The Company will not receive any of the
proceeds from the sale of such shares of Common Stock and Redeemable Warrants.
None of the Selling Security Holders has had any position, office or material
relationship with the Company or its affiliates during the last three years
except for Financial West Group, Inc., which served as dealer manager for the
Company's 1995 Bridge Offering and 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement." The
Selling Security Holders' Securities are not being underwritten by the
Underwriters. The Selling Security Holders, however, may sell the Selling
Security Holders' Securities through the Underwriters.
[Enlarge/Download Table]
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
NAME OF SELLING / WARRANTS OWNED / WARRANTS BEING / WARRANTS OWNED
SECURITY HOLDER(1) BEFORE OFFERING REGISTERED AFTER OFFERING(2)
---------------------------------------- ---------------- ---------------- ----------------
Robert Ahr and Antoinette Ahr, Joint
Tenants with Right of Survivorship 50,000 (4) 50,000 (wt) 0
Stanley S. Arkin 100,000 (4) 100,000 (wt) 0
Lester C. Aroh 100,000 (4) 100,000 (wt) 0
5,000 (5) 5000 (sh) 0
Assi, Inc. 3,100,000 (4) 1,100,000 (wt) 2,000,000
40,000 (5) 40,000 (sh)
Jonathan Axelrod 200,000 (4) 200,000 (wt) 0
10,000 (5) 10,000 (sh) 0
Harvey Bibicoff 100,000 (4) 100,000 (wt) 0
5,000 (5) 5,000 (sh) 0
Marvin H. Bluman 50,000 (4) 50,000 (wt) 0
Charles R. Buckridge, Grantor and Trustee
of Charles R. Buckridge Revocable Trust 100,000 (4) 100,000 (wt) 0
Robert Burkhardt 50,000 (4) 50,000 (wt) 0
Burford A. Carlson and Joan E. Carlson,
Grantors and Trustees for Burford A.
Carlson Revocable Trust 586 (3) 586 (wt) 0
Mark Jeffrey Chayet, Grantor and Trustee
for Mark Jeffrey Chayet Revocable Trust 100,000 (4) 100,000 (wt) 0
Cliffdale Investments, Inc. 100,000 (4) 100,000 (wt) 0
Arlene Colman-Schwimmer, Grantor and 100,000 (4) 100,000 (wt) 0
Trustee for Arlene Colman-Schwimmer APC 5,000 (5) 5,000 (sh) 0
Profit Sharing Plan and Trust
SS-3
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
NAME OF SELLING / WARRANTS OWNED / WARRANTS BEING / WARRANTS OWNED
SECURITY HOLDER(1) BEFORE OFFERING REGISTERED AFTER OFFERING(2)
---------------------------------------- ---------------- ---------------- ----------------
David B. Coward and Linda J. Coward, 50,000 (4) 50,000 (wt) 0
Grantors and Trustees for David B. and 2,500 (5) 2,500 (sh) 0
Linda J. Coward Trust
Deller Capital Corporation 1,758 (3) 1,758 (wt) 0
Laura M. Durso 50,000 (4) 50,000 (wt) 0
Gerald F. Edelstein 50,000 (4) 50,000 (wt) 0
Financial West Group, Inc. 20,918 (6) 420,918 (wt) 0
400,000 (6)
Robert Gault and Thelma Gault, Joint
Tenants with Right of Survivorship 100,000 (4) 100,000 (wt) 0
25,000 (5) 25,000 (sh) 0
Barbara Goldstein 100,000 (4) 100,000 (wt) 0
Larry R. Gordon 600,000 (4) 600,000 (wt) 0
Nicholas Gotten Jr. and Pamela Gotten,
Joint Tenants with Right of Survivorship 2,929 (3) 2,929 (wt) 0
Donald B. Greenwood 50,000 (4) 50,000 (wt) 0
Prabhakar R. Guniganti 100,000 (4) 100,000 (wt) 0
W. Burns Hoffman 100,000 (4) 100,000 (wt) 0
Edward Hookstratten 100,000 (4) 100,000 (wt) 0
Richard Houlihan 100,000 (4) 100,000 (wt) 0
Edward Jones 50,000 (4) 50,000 (wt) 0
John Paul DeJoria 100,000 (4) 100,000 (wt) 0
Gabriel Kaplan 250,000 (4) 250,000 (wt) 0
10,000 (5) 10,000 (sh) 0
Gabriel Kaplan, P/ADM City National Bank
C/F Rotunda Productions Inc. MPPP 250,000 (4) 250,000 (wt) 0
Hazen Peter Kelley and Valerie Kelley, Joint
Tenants with Right of Survivorship 50,000 (4) 50,000 (wt) 0
Honorata Knight 586 (3) 586 (wt) 0
Marc Levin 50,000 (4) 50,000 (wt) 0
Fred Martell and Barbara Martell, Joint
Tenants with Right of Survivorship 100,000 (4) 100,000 (wt) 0
Edward I. Miller 586 (3) 586 (wt) 0
L.A. Moore 50,000 (4) 50,000 (wt) 0
Louis M. Mucci 100,000 (4) 100,000 (wt) 0
David A. Mulkey, Grantor and Trustee for 100,000 (4) 100,000 (wt) 0
David A. Mulkey 1987 Living Trust 5,000 (5) 5,000 (sh) 0
T.W. Muller 2,929 (3) 2,929 (wt) 0
SS-4
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
NAME OF SELLING / WARRANTS OWNED / WARRANTS BEING / WARRANTS OWNED
SECURITY HOLDER(1) BEFORE OFFERING REGISTERED AFTER OFFERING(2)
---------------------------------------- ---------------- ---------------- ----------------
Steve Natale 100,000 (4) 100,000 (wt) 0
Saburo Oto 100,000 (4) 100,000 (wt) 0
Resources Trust Co., FBO Donald B. Pooley 1,172 (3) 1,172 (wt) 0
Patrick J. Riley 100,000 (4) 100,000 (wt) 0
Patricia C. Rinaldi 2,929 (3) 2,929 (wt) 0
Stanley B. Schneider 100,000 (4) 100,000 (wt) 0
Izhar Shy and Nitza Shy, Trustees for Izhar 1,172 (3) 1,172 (wt) 0
and Nitza Shy Revocable Estate Trust
David H. Smith 4,100 (3) 4,100 (wt) 0
Isaac Starkman 100,000 (4) 100,000 (wt) 0
Triventures 50,000 (4) 50,000 (wt) 0
James Edward Willard 50,000 (4) 50,000 (wt) 0
--------------------
(1) Information set forth in the table regarding the Non-Affiliated Selling
Security Holders' Securities is provided to the best knowledge of the
Company based on information furnished to the Company by the respective
Non-Affiliated Selling Security Holders and/or available to the Company
through its stock ledgers.
(2) Assumes that each Selling Security Holder sells all of the Selling
Security Holders' Securities held by such Selling Security Holder.
(3) Pursuant to the 1995 Bridge Financing, 32 Units were sold, each Unit
consisting in part of 586 Bridge Warrants, each such warrant to purchase
one share of Common Stock. See "Certain Transactions."
(4) Pursuant to the 1995 Private Placement, 52.5 Units were sold, each Unit
consisting in part of 100,000 Private Warrants, each such warrant to
purchase one share of Common Stock. See "Certain Transactions."
(5) Pursuant to the Concurrent Secondary Placement, 107,500 shares of Common
Stock were sold. See "Certain Transactions."
(6) Dealer Manager Warrants.
(sh) Shares of Common Stock.
(wt) Redeemable Warrants, each warrant to purchase one share of Common Stock.
SS-5
PLAN OF DISTRIBUTION
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Selling Security Holders' Securities,
pursuant to this Prospectus at a fixed price or at a negotiated price which is,
in either case, other than the prevailing market price or in a block transaction
to a purchaser who resells, or if any Selling Security Holder pays compensation
to a broker-dealer that is other than the usual and customary discounts,
concessions or commissions, or if there are any arrangements either individually
or in the aggregate that would constitute a distribution of the Selling Security
Holders' Securities, a post-effective amendment to the Registration Statement of
which this Prospectus is a part would need to be filed and declared effective by
the Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Selling Security Holders may effect transactions in their Selling
Security Holders' Securities by selling such securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Securities as
principals and thereafter sell such securities from time to time in the over-
the-counter market, in negotiated transactions, or otherwise. Such broker-
dealers, if any, may receive compensation in the form of discounts, concessions
or commissions from the Selling Security Holders and/or the purchasers for whom
such broker-dealers may act as agents or to whom they may sell as principals or
both.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
SS-6
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by the Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security by any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information in this Prospectus is correct as of any time subsequent to
the date of this Prospectus.
________________________
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . . __
Risk Factors . . . . . . . . . . __
Use of Proceeds . . . . . . . . . __
Dividend Policy . . . . . . . . . __
Dilution . . . . . . . . . . . . __
Capitalization . . . . . . . . . __
Selected Financial Data . . . . __
Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . __
Business . . . . . . . . . . . . __
Management . . . . . . . . . . . __
Principal Stockholders . . . . . __
Selling Security Holders . . . . __
Certain Transactions . . . . . . __
Description of Securities . . . . __
Shares Eligible for Future Sale . __
Plan of Distribution . . . . . . __
Legal Matters . . . . . . . . . . __
Experts . . . . . . . . . . . . __
Additional Information . . . . . __
Index to Consolidated Financial
Statements . . . . . . . . . . . __
Until __________, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This obligation is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
107,500 SHARES OF COMMON
STOCK
5,689,665 REDEEMABLE WARRANTS
AND
9,069,665 SHARES OF
COMMON STOCK ISSUABLE
UPON EXERCISE OF
REDEEMABLE
WARRANTS
[SOUND SOURCE
INTERACTIVE, INC.
LOGO]
________________________
P R O S P E C T U S
________________________
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended (the
"Delaware GCL"), permits under certain circumstances, the indemnification of any
person with respect to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative, to which
such person was or is a party or is threatened to be made a party by reason of
the fact that such person is or was a director, officer, employee, or agent of
the corporation or was serving in a similar capacity for another enterprise at
the request of the corporation. To the extent that a director, officer,
employee, or agent of the corporation has been successful in defending any such
proceeding, the Delaware GCL provides that he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
With respect to a proceeding by or in the right of the corporation, such
person may be indemnified against expenses (including attorneys' fees) if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. The statute provides,
however, that no indemnification is allowed in such a proceeding if such person
is adjudged liable to the corporation unless, and only to the extent that, the
court may, upon application, determine that he is entitled to indemnification
under the circumstances. With respect to proceedings other than those brought
by or in the right of the corporation, such person may be indemnified against
judgments, fines, and amounts paid in settlement, as well as expenses, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action, had no reasonable cause to believe his conduct was unlawful,
notwithstanding the outcome of the proceeding. Except with respect to mandatory
indemnification of expenses to successful defendants as described in the
preceding paragraph or pursuant to a court order, the indemnification described
in this paragraph may be made only upon a determination in each specific case by
majority vote of a quorum of directors not parties to the proceeding, by written
opinion of independent legal counsel, or by the stockholders, that the defendant
met the applicable standard of conduct described above.
The Delaware GCL permits a corporation to advance expenses incurred by a
proposed indemnitee in advance of final disposition of the proceeding provided
the indemnitee undertakes to repay such advanced expenses if it is ultimately
determined that he is not entitled to indemnification. A corporation may
purchase insurance on behalf of an indemnitee against any liability asserted
against him in his designated capacity, whether or not the corporation itself
would be empowered to indemnify him against such liability.
Delaware law also provides that the above rights shall not be deemed
exclusive of other rights of indemnification or advancement of expenses under
any bylaw, agreement, vote of stockholders or disinterested directors, or
otherwise. The Registrant's Bylaws generally require the Registrant to
indemnify and advance expenses to its directors and its officers, employees and
other agents to the fullest extent permitted by the Delaware GCL as the same
exists or may hereafter be amended. The Registrant also has entered into
indemnification agreements with each of its directors whereby the Company will
indemnify each such person against certain claims arising out of certain past,
present or future acts, omissions or breaches of duty committed by an indemnitee
while serving as a Company director. Such indemnification does not apply to
acts or omissions which are knowingly fraudulent, deliberately dishonest or
arise from willful misconduct. Indemnification will only be provided to the
extent that the indemnitee has not already received payments in respect of a
claim from the Company
II-1
or from an insurance company. Under certain circumstances, such indemnification
(including reimbursement of expenses incurred) will be allowed for liability
arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.
Section 102(b)(7) of the Delaware GCL permits Delaware corporations in
their certificates of incorporation to eliminate or limit the personal liability
of directors to the corporation or its stockholders for monetary damages for
breaches of certain duties. Under the Registrant's Certificate of
Incorporation, a director of the Registrant shall, to the maximum extent
currently or hereafter permitted by Section 102(b)(7) of the Delaware GCL (or
any successor provision), have no personal liability to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the Delaware GCL provides that Delaware corporations may
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) as provided under Section 174 of the Delaware
GCL (involving certain unlawful dividends and stock purchases or redemptions),
or (iv) for any transaction from which the director derived an improper peroneal
benefit.
The foregoing descriptions are general summaries only. Reference is made
to the full text of Registrant's Certificate of Incorporation and Bylaws filed
as part of this Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates except the Securities and Exchange
Commission registration and NASD filing fees.
Securities and Exchange Commission registration fee. . . . . . . . $21,157.85
NASD fees and expenses . . . . . . . . . . . . . . . . . . . . . . *
Nasdaq listing fee . . . . . . . . . . . . . . . . . . . . . . . . *
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . *
Printing and engraving expenses . . . . . . . . . . . . . . . . . *
Transfer agent and registrar (fees and expenses) . . . . . . . . . *
Blue Sky fees and expenses (including counsel fees). . . . . . . . *
Other legal fees and legal expenses. . . . . . . . . . . . . . . . *
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
-------------------
* To be supplied by amendment.
II-2
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 16, 1994, the Registrant consummated the 1994 Acquisition, whereby
the Registrant acquired all the issued and outstanding capital stock of the
Subsidiary in exchange for newly issued stock of the Company. Pursuant to the
1994 Acquisition, the Registrant issued 1,278,515 shares of Common Stock and
1,000,000 shares of the Registrant's Series A Preferred Stock to Vincent J.
Bitetti, 73,394 shares of Common Stock to Martin H. Meyer and 122,323 shares of
Common Stock to Mark Lane. Each of such persons was an "accredited investor" as
defined in Securities Act Rule 501(a). The issuance of Common Stock to such
persons was exempt from the registration requirements of the Securities Act of
1993, as amended (the "Securities Act") pursuant to Section 4(2) thereof.
During May through August 1994, the Registrant conducted a private offering
of its Common Stock (the "1994 Private Placement"). Pursuant to that offering,
a total of 113,036 shares of Common Stock were sold for total cash consideration
of approximately $1,492,000. An additional 1,841 shares were issued to the
brother of the Chief Executive Officer in payment of a $22,000 note payable.
The 1994 Private Placement was made on a private basis only to persons who were
"accredited investors" as defined in Securities Act Rule 501(a). The issuance
of Common Stock to such persons was exempt from the registration requirements of
the Securities Act pursuant to Sections 4(2) and 4(6) thereof.
As compensation for its services as the placement agent for the 1994
Private Placement, the Registrant paid Bentley, Richards Investments ("Bentley,
Richards"), an affiliate of the Registrant's then controlling stockholders, Jehu
Hand and Eric Anderson, 81,997 shares of Common Stock, and issued to Bentley,
Richards an option to purchase up to 60,241 shares of Common Stock, subject to
the satisfaction of certain contingencies, at a price to be determined in
accordance with a formula. In July 1995, one of the investors in the 1994
Private Placement filed a suit naming as defendants the following: Jehu Hand
and Eric Anderson (who together organized the Registrant and managed it prior to
the 1994 Acquisition), and their spouses Jacqueline Hand and Marie Anderson; the
Registrant and the Subsidiary; and Bentley Richards. No then current director
or officer of the Registrant was named as a defendant. Such litigation was
settled in September 1995. In connection with such settlement, Bentley,
Richards distributed all 81,997 shares of Common Stock issued to it for its
services as placement agent for the 1994 Private Placement to the investors in
the 1994 Private Placement. Bentley, Richards also agreed to the cancellation
of its option to purchase 60,241 shares of the Registrant's Common Stock. In
addition, Jehu Hand distributed an additional 26,772 shares of Common Stock held
by him to the investors in the 1994 Private Placement, and returned 15,120
shares of Common Stock to the Company, which were cancelled. The Company did
not pay any consideration to any party in connection with such settlement.
During May 1992 through October 1994, the Registrant, pursuant to its 1992
Stock Option Plan, issued options to purchase 190,763 shares of Common Stock to
its directors, employees and one unaffiliated party. The issuance of such
options to such persons was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof. Of these, options to purchase
a total of 184,070 shares of Common Stock currently are issued pursuant to the
1992 Stock Option Plan. All of such options are non-qualified stock options
with an exercise price of $.06 per share, and are presently exercisable. On
June 30, 1995, David Weiss, then an executive officer and director of the
Registrant, exercised an option to purchase 4,184 shares of Common Stock for an
aggregate purchase price of $251, which option had been granted pursuant to the
Registrant's 1992 Stock Option Plan. The issuance of Common Stock to Mr. Weiss
upon such exercise was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) and 4(6) thereof. No one other than Mr.
Weiss has ever exercised an option granted pursuant to the 1992 Stock Option
Plan.
II-3
In April 1994, the Registrant granted Eric H. Winston, its President, an
option to purchase 251,004 shares of Common Stock. In June 1994, the Registrant
granted Mr. Winston an option to purchase 41,834 shares of Common Stock. The
issuance of such options to such person was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
During June through August of 1995, the Registrant conducted a private
offering (the "1995 Bridge Financing") of Units consisting of notes and
warrants. Pursuant to that offering, a total of 32 Units were sold at a price
of $10,000 per Unit. Each Unit consisted of $9,975 principal amount of the
Registrant's 10% Secured Promissory Notes due August 15, 1995 and warrants to
purchase 586 shares of Common Stock (the "Bridge Warrants"). The gross offering
proceeds of the 1995 Bridge Financing were $320,000. The 1995 Bridge Financing
was made on a private basis only to persons who were "accredited investors" as
defined in Securities Act Rule 501(a). The issuance of the Units to such
persons was exempt from the registration requirements of the Securities Act
pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of Regulation D
thereunder. In consideration for its services as dealer manager for the 1995
Bridge Offering, the Registrant paid Financial West Group, Inc. aggregate
commissions and fees of $41,600. The Registrant also issued to Financial West
Group, Inc. a Bridge Warrant to purchase 20,918 shares of Common Stock for $50.
Such Bridge Warrant is on the same terms as the other Bridge Warrants, except
that the Company separately agreed that it may be exercised on a cashless basis.
During November 1995, the Registrant effectuated an exchange offer with the
holders of the Bridge Warrants, whereby all of the Bridge Warrants originally
issued in connection with the 1995 Bridge Financing were exchanged for new
Bridge Warrants having terms substantially identical to those of the Private
Warrants referred to below. Such exchange offer was made on a private basis
only to persons who were "accredited investors" as defined in Securities Act
Rule 501(a). The exchange offer was exempt from the registration requirements
of the Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of
Regulation D thereunder.
As described under "Certain Transactions -- 1995 Bridge Financing," upon
the effectiveness of this Registration Statement, all of the Bridge Warrants
(including the warrant issued to Financial West Group, Inc.) will be converted
to Redeemable Warrants. In connection with the 1995 Bridge Financing, the
Registrant retained Financial West Group, Inc. as its warrant agent for the
Bridge Warrants. Subsequently, Financial West Group, Inc. assigned to The
Boston Group, L.P. (the "Representative") its right to serve as warrant agent
for the Bridge Warrants. As compensation for such services as warrant agent,
the Representative will receive a solicitation fee of five percent of the
exercise price of the Bridge Warrants, payable upon exercise of the Bridge
Warrants.
In September and October 1995, the Registrant conducted a private offering
(the "1995 Private Placement"). Pursuant to that offering, a total of 52.5
Units were sold at a price of $100,000 per Unit. Each Unit consisted of $95,000
principal amount of the Registrant 10% Secured Promissory Notes due 1996 and
warrants to purchase 100,000 shares of Common Stock (the "Private Warrants").
The gross offering proceeds of the 1995 Private Placement were $5,250,000. The
1995 Private Placement was made on a private basis only to persons who were
"accredited investors" as defined in Securities Act Rule 501(a). The issuance
of the Units to such persons was exempt from the registration requirements of
the Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of
Regulation D thereunder. In consideration for its services as dealer manager
for the 1995 Private Placement, the Registrant paid Financial West Group, Inc.
aggregate commissions and fees of $199,500. Additionally, $483,000 was
allocated to the Representative for its services as a selected broker. The
Registrant also issued to Financial West Group, Inc. a warrant to purchase
400,000 shares of Common Stock. Such warrant is on the same terms as the
Private Warrants, except that the Company separately agreed that it may be
exercised on a cashless basis. As described under "Certain Transactions -- 1995
Private Placement," upon the effectiveness of this Registration Statement all of
II-4
the Private Warrants (including the warrant issued to Financial West Group,
Inc.) will be converted to Redeemable Warrants. In connection with the 1995
Private Placement, the Registrant retained Financial West Group, Inc. as its
warrant agent for the Private Warrants. Subsequently, Financial West Group,
Inc. assigned to the Representative its right to serve as warrant agent for the
Private Warrants. As compensation for its services as warrant agent, the
Representative will receive a solicitation fee of five percent of the exercise
price of the Private Warrants, payable upon exercise of the Private Warrants.
On October 9, 1995, the Registrant granted to Ulrich E. Gottschling, who is
the Chief Financial Officer, Treasurer and a director of the Registrant, an
option to purchase 100,000 shares of Common Stock pursuant to the Registrant's
1992 Stock Option Plan. On April 30, 1996, Mr.Gottschling agreed to the
termination of the existing 100,000 share option in consideration for the
Registrant's granting him a new 200,000 share option. Such transactions were
exempt from the registration requirements of the Securities Act pursuant to
Sections 4(2) and 4(6) thereof.
On April 30, 1996, the Company granted ASSI, Inc. warrants to purchase
2,000,000 shares of Common Stock. Such transaction was exempt from the
registration requirements of the Securities Act pursuant to Sections 4(2) and
4(6) thereof.
See "Certain Transactions" for additional information concerning the
Registrant's stock issuances for the past three years.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exh.
No. Description of Exhibits
---- -----------------------
1 Form of Underwriting Agreement, between the Registrant and The
Boston Group, L.P. ("Representative"), as Representative of the
Several Underwriters (as defined therein). Filed herewith.
3.1 Second Restated Articles of Incorporation of the Registrant.
Previously filed.
3.2 Amended and Restated Bylaws of the Registrant. Previously filed.
4.1 Specimen Common Stock Certificate. Previously filed.
4.2 Form of Warrant Agreement and Warrant. Filed herewith.
4.3 Form of Representative's Warrant Agreement and Warrant. Filed
herewith.
4.4 Warrant dated April 30, 1996 issued to ASSI, Inc. Filed herewith.
5 Opinion of McDermott, Will & Emery. Filed herewith.
9.1 Stockholder Voting Agreement, dated as of April 30, 1996, among
ASSI, Inc., Vincent J. Bitetti and Eric H. Winston. Filed herewith.
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April
30, 1996. Filed herewith.
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30,
1996. Filed herewith.
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April
30, 1996. Filed herewith.
10.1 Second Amended and Restated Employment Agreement of Vincent J.
Bitetti dated as of April 30, 1996. Filed herewith.
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston
dated as of April 30, 1996. Filed herewith.
II-5
10.3 Employment Agreement of Ulrich E. Gottschling, as amended. Filed
herewith.
10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. Previously
filed.
10.5 Sound Source Interactive, Inc. 1995 Stock Option Plan. Previously
filed.
10.6 Warrant Agreement, dated as of September 26, 1995, among the
Registrant, Sound Source Interactive, Inc., a California corporation
("Subsidiary") and Financial West Group, Inc., a California
corporation ("FWG"), as Warrant Agent, pertaining to the Bridge
Warrants (as defined in the Prospectus). Previously filed.
10.7 Warrant Agreement, dated as of June 30, 1995, between the Registrant
and FWG, as Warrant Agent, pertaining to the Private Warrants (as
defined in the Prospectus). Previously filed.
10.8 Form of Bridge Warrant and Private Warrant. Previously filed.
10.9 Form of 10% Secured Promissory Note due 1996 of the Registrant (the
"Private Notes"). Previously filed.
10.10 Company Security Agreement, dated as of September 26, 1995, among
the Registrant, the Secured Parties (as defined therein) and Paradox
Holdings, Inc. ("PHI"), as Security Agent, pertaining to the Private
Notes. Previously filed.
10.11 Guaranty of the Subsidiary, dated September 26, 1995, pertaining to
the Private Notes. Previously filed.
10.12 Subsidiary Security Agreement, dated as of September 26, 1995, among
the Registrant, the Subsidiary and PHI, as Security Agent,
pertaining to the Private Notes. Previously filed.
10.13 Sales and Distribution Agreement, dated as of June 15, 1995, between
the Registrant and Acclaim Distribution, Inc. Previously filed.
10.14 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Willy 2." Previously filed.
10.15 Retail License Agreement, dated July 7, 1995, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
television series, "Babylon 5." Previously filed.
10.16 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "The Secret Garden." Previously filed.
10.17 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Black Beauty." Previously filed.
10.18 Merchandising License Agreement, dated March 7, 1995, between Sony
Signature, Inc., as agent for Columbia Pictures Industries, Inc.,
and the Subsidiary, pertaining to the motion picture, "Close
Encounters of the Third Kind." Previously filed.
10.19 CD-ROM Development Agreement, dated August 30, 1994, between Fox
Electronic Publishing, Inc., doing business as Fox Interactive, and
"Sound Source Interactive." Previously filed.
10.20 (a) Merchandising Licensing Agreement, dated December 5, 1994,
between MCA/Universal Merchandising, Inc. and "Sound Source
Interactive," pertaining to the motion picture, "The Little
Rascals." Previously filed.
(b) Multimedia Rights License, dated June 14, 1995, between The
Harry Fox Agency, Inc. and "Sound Source Interactive," pertaining to
the motion picture, "The Little Rascals." Previously filed.
(c) Letter of Agreement, dated June 28, 1995, between Roy Shield
Music Company and "Sound Source Interactive," pertaining to the
motion picture, "The Little Rascals." Previously filed.
II-6
(d) Multi Media Rights License, dated July 27, 1995, between MCA,
Inc. and "Sound Source Interactive," pertaining to the motion
picture, "The Little Rascals." Previously filed.
10.21 Merchandising Licensing Agreement, dated March 16, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the animated television series, "ExoSquad."
Previously filed.
10.22 Merchandising Licensing Agreement, dated August 10, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Babe." Previously filed.
10.23 (a) License Agreement, dated October 1, 1994, between Lucasfilm Ltd.
("LFL") and "Sound Source Interactive," pertaining to AUDIOCLIPS-C-
of sound effects, dialogue and movie soundtracks for the motion
pictures, "Star Wars," "The Empire Strikes Back," and "Return of the
Jedi." Previously filed.
(b) License Agreement, dated October 1, 1994, between LFL and "Sound
Source Interactive," pertaining to VISUALCLIPS-C- of film/video cues
for the motion pictures, "Star Wars," "The Empire Strikes Back," and
"Return of the Jedi." Previously filed.
(c) Soundtrack License Agreement, dated October 1, 1994, between LFL
and "Sound Source Interactive," pertaining to the use of the
soundtrack of the "Star Wars Films" (as defined therein).
Previously filed.
(d) Film Footage License, dated October 1, 1994, between LFL and
"Sound Source Interactive," pertaining to the use of the film
footage of the "Star Wars Films" (as defined therein). Previously
filed.
(e) Letter of Intent and Star Wars Classic License Agreement, dated
September 15, 1995, between LFL and "Sound Source Interactive,
Inc.," pertaining to the grant of a license for sales in Canada.
Previously filed.
(f) Addendum to the agreement dated October 28, 1992, between
Horatio Productions and the Subsidiary, pertaining to the use of
preexisting dialogue of the Darth Vader character. Previously
filed.
10.24 Merchandising License Agreement, dated July 8, 1994, between Viacom
Consumer Products, as agent for Paramount Pictures Corporation, and
"Sound Source Interactive, Inc.," pertaining to the television
series, "Star Trek: The Original Series," the first six motion
pictures based thereon and the television series, "Star Trek: The
Next Generation." Previously filed.
10.25 (a) License Agreement, dated as of July 10, 1995, between DC Comics
and "Sound Source Interactive," pertaining to the animated
television series initially entitled "Batman: The Animated Series"
and thereafter entitled, "The Adventures of Batman and Robin."
Previously filed.
(b) Interactive/Multimedia Adherence Letter, dated November 10,
1995, between the Screen Actors Guild and "Sound Source
Interactive," pertaining to the animated television series initially
entitled "Batman: The Animated Series" and thereafter entitled,
"The Adventures of Batman and Robin." Previously filed.
10.26 Licensing Agreement, dated as of June 14, 1994 among CBS
Entertainment ("CBS"), Rod Serling Trust and "Sound Source
Interactive," pertaining to the television series, "The Twilight
Zone." Previously filed.
10.27 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Total Recall."
Previously filed.
10.28 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Terminator 2:
Judgment Day." Previously filed.
II-7
10.29 License Agreement, dated as of September 20, 1994, between Palladium
Limited Partnership and "Sound Source Interactive," pertaining to
the motion picture, "Lassie." Previously filed.
10.30 License Agreement, dated as of September 20, 1994, between Broadway
Video Entertainment and "Sound Source Interactive," pertaining to
the television series, "Saturday Night Live." Previously filed.
10.31 Merchandising License Agreement, dated as of October 12, 1995,
between DESILU, TOO, CBS and "Sound Source Interactive," pertaining
to the television series, "I Love Lucy." Previously filed.
10.32 Memorandum of Understanding, dated May 26, 1994, between Brian
Leader, doing business as Sentient Software, and "Sound Source
Interactive, Inc.," pertaining to program development and licensing
agreements related to MOVIEBOOKS-TM-. Previously filed.
10.33 (a) Royalty Programming Contract, dated July 12, 1993, between Rhode
Island Soft Systems ("RISS") and the Subsidiary, pertaining to
screen saver modules. Previously filed.
(b) Amendment to Royalty Programming Contract, dated September 12,
1994, between RISS and the Subsidiary. Previously filed.
(c) Agreement, dated April 12, 1995, between RISS and "Sound Source
Interactive," pertaining to MOVIEBOOKS-TM-. Previously filed.
(d) Letter of Intent, dated August 24, 1995, between RISS and "Sound
Source Interactive," pertaining to MOVIEBOOKS-TM-. Previously
filed.
10.34 Merchandising License Agreement, dated September 1, 1995, between
Greytsounds Sound Development and "Sound Source Interactive,"
pertaining to Registrant's Sound Library. Previously filed.
10.35 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Vincent J. Bitetti. Filed herewith.
10.36 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Eric H. Winston. Filed herewith.
10.37 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Ulrich Gottschling. Filed herewith.
10.38 Merchandising License Agreement, dated October 24, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Dragonheart." Filed herewith.
10.39 Merchandising License Agreement, dated January 10, 1996, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion pictures, "The Land Before Time" (I, II and
III). Filed herewith.
10.40 Agreement, dated March 18, 1996, between Musicians' Union and "Sound
Source Interactive," pertaining to the use of music from the motion
pictures, "The Land Before Time" (I, II and III). Filed herewith.
10.41 License Agreement, dated February 27, 1996, between MGM/UA
Merchandising, Inc. and Subsidiary, pertaining to the motion
picture, "All Dogs Go To Heaven 2." Filed herewith.
10.42 Agreement, dated January 4, 1996, between Universal Studios Florida
and "Sound Source Interactive," pertaining to the "Universal Studios
Florida T2 Screensaver Sweepstakes." Filed herewith.
10.43 Agreement, dated January 24, 1996, between Warner Bros. Television
and "Sound Source Interactive," pertaining to the "Babylon 5
Contest." Filed herewith.
10.44 Form of Registration Procedures Agreement for execution between the
Company and each of the Selling Security Holders. Filed herewith.
II-8
10.45 Consulting Agreement, dated as of April 30, 1996, between the
Company and ASSI, Inc. Filed herewith.
10.46 Share Purchase Agreement, dated April 3, 1995, between Eric Winston
and Vincent Bitetti. Filed herewith.
21.1 Subsidiary of the Registrant. Previously filed.
23.1 Consent of Corbin & Wertz. Filed herewith.
23.2 Consent of McDermott, Will & Emery (included in Exhibit 5).
24.1 Power of Attorney (incorporated by reference to page II-11 of the
Registration Statement on Form SB-2).
(b) Financial Statement Schedules
None Required
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually,
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(Section 230.424(b) of this Chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-9
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising from the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
polish as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on May 6, 1996.
SOUND SOURCE INTERACTIVE, INC.
By: /S/ VINCENT J. BITETTI
----------------------------
Vincent J. Bitetti, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Vincent J. Bitetti and/or Eric H. Winston his true and lawful attorney-in-fact
and agent, acting alone, with full powers of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, any Amendments thereto and any Registration Statement for the same
offering which is effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, each acting alone,
full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
CHIEF
EXECUTIVE OFFICER /s/ Vincent J. Bitetti Director, Chairman of May 6, 1996
---------------------- the Board and Chief
Vincent J. Bitetti Executive Officer
PRINCIPAL
ACCOUNTING OFFICER /s/ Ulrich E. Gottschling Director, May 6, 1996
------------------------- Chief Financial Officer,
Ulrich E. Gottschling Treasurer and Secretary
PRESIDENT /s/ Eric H. Winston Director, May 6, 1996
------------------------ President and
Eric H. Winston Chief Operating Officer
II-11
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
(No. 33-80827)
UNDER
THE SECURITIES ACT OF 1933
----------------
SOUND SOURCE INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Registration Statement on Form SB-2 Exhibit Volume Index
Exh. Sequential
No. Description of Exhibits Page No.
----- ----------------------- ----------
1 Form of Underwriting Agreement, between the Registrant and The Boston
Group, L.P. ("Representative"), as Representative of the Several
Underwriters (as defined therein). Filed herewith.
3.1 Second Restated Articles of Incorporation of the Registrant. Previously
filed.
3.2 Amended and Restated Bylaws of the Registrant. Previously filed.
4.1 Specimen Common Stock Certificate. Previously filed.
4.2 Form of Warrant Agreement and Warrant. Filed herewith.
4.3 Form of Representative's Warrant Agreement and Warrant. Filed herewith.
4.4 Warrant dated April 30, 1996 issued to ASSI, Inc. Filed herewith.
5 Opinion of McDermott, Will & Emery. Filed herewith.
9.1 Stockholder Voting Agreement, dated as of April 30, 1996, among ASSI,
Inc., Vincent J. Bitetti and Eric H. Winston. Filed herewith.
9.2 Irrevocable Proxy of Vincent J. Bitetti to ASSI, Inc., dated April 30,
1996. Filed herewith.
9.3 Irrevocable Proxy of Eric H. Winston to ASSI, Inc., dated April 30, 1996.
Filed herewith.
9.4 Irrevocable Proxy of ASSI, Inc. to Vincent J. Bitetti, dated April 30,
1996. Filed herewith.
10.1 Second Amended and Restated Employment Agreement of Vincent J. Bitetti
dated as of April 30, 1996. Filed herewith.
10.2 Second Amended and Restated Employment Agreement of Eric H. Winston dated
as of April 30, 1996. Filed herewith.
10.3 Employment Agreement of Ulrich E. Gottschling, as amended. Filed
herewith.
10.4 Sound Source Interactive, Inc. 1992 Stock Option Plan. Previously filed.
10.5 Sound Source Interactive, Inc. 1995 Stock Option Plan. Previously filed.
10.6 Warrant Agreement, dated as of September 26, 1995, among the Registrant,
Sound Source Interactive, Inc., a California corporation ("Subsidiary")
and Financial West Group, Inc., a California corporation ("FWG"), as
Warrant Agent, pertaining to the Bridge Warrants (as defined in the
Prospectus). Previously filed.
10.7 Warrant Agreement, dated as of June 30, 1995, between the Registrant and
FWG, as Warrant Agent, pertaining to the Private Warrants (as defined in
the Prospectus). Previously filed.
10.8 Form of Bridge Warrant and Private Warrant. Previously filed.
10.9 Form of 10% Secured Promissory Note due 1996 of the Registrant (the
"Private Notes"). Previously filed.
10.10 Company Security Agreement, dated as of September 26, 1995, among the
Registrant, the Secured Parties (as defined therein) and Paradox
Holdings, Inc. ("PHI"), as Security Agent, pertaining to the Private
Notes. Previously filed.
10.11 Guaranty of the Subsidiary, dated September 26, 1995, pertaining to the
Private Notes. Previously filed.
10.12 Subsidiary Security Agreement, dated as of September 26, 1995, among the
Registrant, the Subsidiary and PHI, as Security Agent, pertaining to the
Private Notes. Previously filed.
10.13 Sales and Distribution Agreement, dated as of June 15, 1995, between the
Registrant and Acclaim Distribution, Inc. Previously filed.
Registration Statement on Form SB-2 Exhibit Volume Index
Exh. Sequential
No. Description of Exhibits Page No.
----- ----------------------- ----------
10.14 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Willy 2." Previously filed.
10.15 Retail License Agreement, dated July 7, 1995, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
television series, "Babylon 5." Previously filed.
10.16 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "The Secret Garden." Previously filed.
10.17 Retail License Agreement, dated June 16, 1994, between Warner Bros.
Consumer Products and "Sound Source Interactive," pertaining to the
motion picture, "Black Beauty." Previously filed.
10.18 Merchandising License Agreement, dated March 7, 1995, between Sony
Signature, Inc., as agent for Columbia Pictures Industries, Inc., and the
Subsidiary, pertaining to the motion picture, "Close Encounters of the
Third Kind." Previously filed.
10.19 CD-ROM Development Agreement, dated August 30, 1994, between Fox
Electronic Publishing, Inc., doing business as Fox Interactive, and
"Sound Source Interactive." Previously filed.
10.20 (a) Merchandising Licensing Agreement, dated December 5, 1994, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "The Little Rascals." Previously
filed.
(b) Multimedia Rights License, dated June 14, 1995, between The Harry Fox
Agency, Inc. and "Sound Source Interactive," pertaining to the motion
picture, "The Little Rascals." Previously filed.
(c) Letter of Agreement, dated June 28, 1995, between Roy Shield Music
Company and "Sound Source Interactive," pertaining to the motion picture,
"The Little Rascals." Previously filed.
(d) Multi Media Rights License, dated July 27, 1995, between MCA, Inc.
and "Sound Source Interactive," pertaining to the motion picture, "The
Little Rascals." Previously filed.
10.21 Merchandising Licensing Agreement, dated March 16, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the animated television series, "ExoSquad." Previously
filed.
10.22 Merchandising Licensing Agreement, dated August 10, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Babe." Previously filed.
10.23 (a) License Agreement, dated October 1, 1994, between Lucasfilm Ltd.
("LFL") and "Sound Source Interactive," pertaining to AUDIOCLIPS-C- of
sound effects, dialogue and movie soundtracks for the motion pictures,
"Star Wars," "The Empire Strikes Back," and "Return of the Jedi."
Previously filed.
(b) License Agreement, dated October 1, 1994, between LFL and "Sound
Source Interactive," pertaining to VISUALCLIPS-C- of film/video cues for
the motion pictures, "Star Wars," "The Empire Strikes Back," and "Return
of the Jedi." Previously filed.
(c) Soundtrack License Agreement, dated October 1, 1994, between LFL and
"Sound Source Interactive," pertaining to the use of the soundtrack of
the "Star Wars Films" (as defined therein). Previously filed.
-2-
Registration Statement on Form SB-2 Exhibit Volume Index
Exh. Sequential
No. Description of Exhibits Page No.
----- ----------------------- ----------
(d) Film Footage License, dated October 1, 1994, between LFL and "Sound
Source Interactive," pertaining to the use of the film footage of the
"Star Wars Films" (as defined therein). Previously filed.
(e) Letter of Intent and Star Wars Classic License Agreement, dated
September 15, 1995, between LFL and "Sound Source Interactive, Inc.,"
pertaining to the grant of a license for sales in Canada. Previously
filed.
(f) Addendum to the agreement dated October 28, 1992, between Horatio
Productions and the Subsidiary, pertaining to the use of preexisting
dialogue of the Darth Vader character. Previously filed.
10.24 Merchandising License Agreement, dated July 8, 1994, between Viacom
Consumer Products, as agent for Paramount Pictures Corporation, and
"Sound Source Interactive, Inc.," pertaining to the television series,
"Star Trek: The Original Series," the first six motion pictures based
thereon and the television series, "Star Trek: The Next Generation."
Previously filed.
10.25 (a) License Agreement, dated as of July 10, 1995, between DC Comics and
"Sound Source Interactive," pertaining to the animated television series
initially entitled "Batman: The Animated Series" and thereafter
entitled, "The Adventures of Batman and Robin." Previously filed.
(b) Interactive/Multimedia Adherence Letter, dated November 10, 1995,
between the Screen Actors Guild and "Sound Source Interactive,"
pertaining to the animated television series initially entitled "Batman:
The Animated Series" and thereafter entitled, "The Adventures of Batman
and Robin." Previously filed.
10.26 Licensing Agreement, dated as of June 14, 1994 among CBS Entertainment
("CBS"), Rod Serling Trust and "Sound Source Interactive," pertaining to
the television series, "The Twilight Zone." Previously filed.
10.27 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Total Recall."
Previously filed.
10.28 Merchandising License Agreement, dated as of October 30, 1992, among
Carolco Pictures Inc., Carolco International N.V. and "Sound Source
Unlimited, Inc.," pertaining to the motion picture, "Terminator 2:
Judgment Day." Previously filed.
10.29 License Agreement, dated as of September 20, 1994, between Palladium
Limited Partnership and "Sound Source Interactive," pertaining to the
motion picture, "Lassie." Previously filed.
10.30 License Agreement, dated as of September 20, 1994, between Broadway Video
Entertainment and "Sound Source Interactive," pertaining to the
television series, "Saturday Night Live." Previously filed.
10.31 Merchandising License Agreement, dated as of October 12, 1995, between
DESILU, TOO, CBS and "Sound Source Interactive," pertaining to the
television series, "I Love Lucy." Previously filed.
10.32 Memorandum of Understanding, dated May 26, 1994, between Brian Leader,
doing business as Sentient Software, and "Sound Source Interactive,
Inc.," pertaining to program development and licensing agreements related
to MOVIEBOOKS-TM-. Previously filed.
-3-
Registration Statement on Form SB-2 Exhibit Volume Index
Exh. Sequential
No. Description of Exhibits Page No.
----- ----------------------- ----------
10.33 (a) Royalty Programming Contract, dated July 12, 1993, between Rhode
Island Soft Systems ("RISS") and the Subsidiary, pertaining to screen
saver modules. Previously filed.
(b) Amendment to Royalty Programming Contract, dated September 12, 1994,
between RISS and the Subsidiary. Previously filed.
(c) Agreement, dated April 12, 1995, between RISS and "Sound Source
Interactive," pertaining to MOVIEBOOKS-TM-. Previously filed.
(d) Letter of Intent, dated August 24, 1995, between RISS and "Sound
Source Interactive," pertaining to MOVIEBOOKS-TM-. Previously filed.
10.34 Merchandising License Agreement, dated September 1, 1995, between
Greytsounds Sound Development and "Sound Source Interactive," pertaining
to Registrant's Sound Library. Previously filed.
10.35 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Vincent J. Bitetti. Filed herewith.
10.36 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Eric H. Winston. Filed herewith.
10.37 Indemnification Agreement, dated as of January 1, 1996, between the
Company and Ulrich Gottschling. Filed herewith.
10.38 Merchandising License Agreement, dated October 24, 1995, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion picture, "Dragonheart." Filed herewith.
10.39 Merchandising License Agreement, dated January 10, 1996, between
MCA/Universal Merchandising, Inc. and "Sound Source Interactive,"
pertaining to the motion pictures, "The Land Before Time" (I, II and
III). Filed herewith.
10.40 Agreement, dated March 18, 1996, between Musicians' Union and "Sound
Source Interactive," pertaining to the use of music from the motion
pictures, "The Land Before Time" (I, II and III). Filed herewith.
10.41 License Agreement, dated February 27, 1996, between MGM/UA Merchandising,
Inc. and Subsidiary, pertaining to the motion picture, "All Dogs Go To
Heaven 2." Filed herewith.
10.42 Agreement, dated January 4, 1996, between Universal Studios Florida and
"Sound Source Interactive," pertaining to the "Universal Studios Florida
T2 Screensaver Sweepstakes." Filed herewith.
10.43 Agreement, dated January 24, 1996, between Warner Bros. Television and
"Sound Source Interactive," pertaining to the "Babylon 5 Contest." Filed
herewith.
10.44 Form of Registration Procedures Agreement for execution between the
Company and each of the Selling Security Holders. Filed herewith.
10.45 Consulting Agreement, dated as of April 30, 1996, between the Company and
ASSI, Inc. Filed herewith.
10.46 Share Purchase Agreement, dated April 3, 1995, between Eric Winston and
Vincent Bitetti. Filed herewith.
21.1 Subsidiary of the Registrant. Previously filed.
23.1 Consent of Corbin & Wertz. Filed herewith.
-4-
Dates Referenced Herein and Documents Incorporated by Reference
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