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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
COMMISSION FILE NUMBER 0-21123
SRS LABS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0714264
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
2909 Daimler Street, Santa Ana, California 92705
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(714) 442-1070
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(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of April 30, 1997, 9,535,479
shares of the issuer's common stock, par value $.001 per share, were outstanding
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes No X
----- -----
1
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SRS LABS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996 ........................................... 3
Statements of Income for the three month periods
ended March 31, 1997 and 1996 (unaudited)..................... 4
Statements of Cash Flows for the three month periods
ended March 31, 1997 and 1996 (unaudited)..................... 5
Notes to the Interim Unaudited Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis or Plan of Operation..... 8
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............................. 11
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SRS LABS, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,904,434 $ 3,455,997
Royalty receivable 1,294,572 702,966
Interest receivable 311,585 325,822
Other receivables 18,500 20,030
Prepaid expenses 78,656 105,919
Deferred income taxes 218,936 218,936
----------- -----------
Total current assets 5,826,683 4,829,670
INVESTMENTS AVAILABLE FOR SALE 20,798,411 20,969,785
FURNITURE, FIXTURES & EQUIPMENT - net 266,745 281,189
PATENTS - net 120,982 126,827
GOODWILL - net 275,171 280,052
DEFERRED INCOME TAXES 186,576 186,576
----------- -----------
Total Assets $27,474,568 $26,674,099
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 142,744 $ 275,554
Accrued liabilities 552,387 566,139
Income taxes payable 693,807 433,021
Current portion of consideration due on asset purchase 180,000 180,000
----------- -----------
Total current liabilities 1,568,938 1,454,714
CONSIDERATION DUE ON ASSET PURCHASE, net of
current portion 39,629 68,635
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value 2,000,000 shares authorized; no
shares issued and outstanding
Common stock - $.001 par value 56,000,000 shares authorized; 9,535 9,469
9,535,479 (at March 31, 1997) and 9,468,548
(at December 31, 1996) shares issued and outstanding
Additional paid-in capital 24,762,474 24,678,961
Deferred stock option compensation 177,327 154,386
Unrealized gain on investments available for sale 1,443 87,688
Retained earnings 915,222 220,246
----------- -----------
Total Stockholders' equity 25,866,001 25,150,750
----------- -----------
Total Liabilities and Stockholders' Equity $27,474,568 $26,674,099
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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SRS LABS, INC
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
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<S> <C> <C>
REVENUES
Royalty revenues $ 1,802,100 $ 1,034,562
Other revenues 410,000 180
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Total revenues 2,212,100 1,034,742
COST OF SALES 39,194 4,941
----------- -----------
GROSS MARGIN 2,172,906 1,029,801
SALES AND MARKETING 428,662 283,717
RESEARCH AND DEVELOPMENT 183,592 107,737
GENERAL AND ADMINISTRATIVE 715,160 337,784
----------- -----------
INCOME FROM OPERATIONS 845,492 300,563
INTEREST INCOME/(EXPENSE), net 257,644 (2,030)
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,103,136 298,533
PROVISION FOR INCOME TAXES 408,161 80,914
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NET INCOME $ 694,975 $ 217,619
=========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.07 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
USED IN THE CALCULATION OF NET
INCOME PER COMMON AND
COMMON EQUIVALENT SHARE 10,567,237 7,521,540
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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SRS LABS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 694,975 $ 217,619
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 77,305 63,183
Amortization of premium on investments available
for sale 27,301 --
Accretion of consideration due on asset purchase 5,961 9,516
Increase in deferred compensation 22,941 44,548
Ascribed value of services contributed -- 14,500
Changes in operating assets and liabilities:
Increase in royalty receivable (591,606) (457,039)
Increase in accounts receivable -- (8,096)
Decrease in interest receivable 14,237 --
Decrease in other current and long term assets 28,793 556,163
Decrease in accounts payable (132,810) (5,500)
(Decrease) increase in other accrued liabilities (13,752) 14,550
Increase in income taxes payable 318,614 80,914
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Net cash provided by operations 451,959 530,358
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (10,341) (57,777)
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Net cash used in investing activities (10,341) (57,777)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of consideration due on asset purchase (76,761) (70,757)
Issuance of common stock -- 100,000
Exercise of stock options 83,580 --
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Net cash provided by financing activities 6,819 29,243
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NET INCREASE IN CASH AND CASH
EQUIVALENTS 448,437 501,824
CASH AND CASH EQUIVALENTS, beginning of period 3,455,997 384,087
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,904,434 $ 885,911
=========== ===========
SUPPLEMENTAL DISCLOSURES ON NON CASH
TRANSACTIONS
Additional consideration accrued for asset purchase $ 41,794 $ 26,636
Unrealized gain on investments, net $ 86,245 $ --
</TABLE>
See accompanying notes to financial statements.
5
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SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS
1. GENERAL
GENERAL BUSINESS
SRS Labs, Inc. ("the Company") develops, markets and licenses patented audio
technologies for use in five worldwide markets: consumer home audio, computer
multimedia, car audio, professional sound and video and arcade games.
In August 1996, the Company completed an initial public offering of 3,107,452
shares of common stock for $8.00 per share netting proceeds to the Company after
underwriting discounts and expenses of approximately $22.1 million.
BASIS OF PRESENTATION
The accompanying interim unaudited financial statements have been prepared by
the Company, in conformity with generally accepted accounting principles for
interim financial information and with the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. In the opinion of management, the interim
unaudited financial statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
balance sheets as of March 31, 1997 and December 31, 1996, the statements of
income for the three month periods ended March 31, 1997 and 1996 and the
statements of cash flows for the three month periods ended March 31, 1997 and
1996. The results of operations for the three month period ended March 31, 1997
are not necessarily indicative of the results of operations for the entire
fiscal year ending December 31, 1997. The interim financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
2. INVESTMENTS AVAILABLE FOR SALE
The Company has classified its investments as available-for-sale in accordance
with SFAS No. 115. They are recorded at their fair value. As of March 31, 1997
the Company's available-for-sale investments had a cost of $20,796,001 and an
estimated fair value of $20,798,411 based on quoted market prices. The
unrealized gains on these investments of $2,410, net of income taxes of $967,
have been reported in the Company's balance sheet as an increase in
stockholder's equity.
3. NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding. Weighted average
common and common equivalent shares include common shares outstanding and
equivalent shares issuable upon exercise of stock options using the treasury
stock method.
6
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SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
4. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 128, "Earnings per Share" (SFAS128) which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The Company has applied this statement to the quarter ended
March 31, 1996 and to the quarter ended March 31, 1997 and determined that the
adoption of this statement would not have had a material impact on the earnings
per share calculations for these periods.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
SRS Labs, Inc. (the "Company") develops, markets and licenses patented
audio technologies for use in five worldwide markets: consumer home audio,
computer multimedia, car audio, professional sound and video and arcade games.
The Company licenses its flagship technology, SRS (o)(R), the Sound Retrieval
System(R) ("SRS") to leading original equipment manufacturers.
The following is management's discussion and analysis of the operations
of the Company during the periods included in the accompanying interim
unaudited financial statements.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended March 31, 1997 were
$2,212,100 compared to $1,034,742 for the three months ended March 31, 1996, an
increase of 113.8%. This increase resulted primarily from the growth of the
licensee base and increased shipments of products incorporating SRS on which
royalties are paid by licensees. Of the $2,212,100 in revenues for the three
months ended March 31, 1997, $410,000 related to one time license fees and
$1,802,100 related to on-going royalties.
Cost of Sales
Cost of sales consists primarily of fees paid to third party
representatives for sales administration and support. Cost of sales for the
three months ended March 31, 1997 were $39,194 compared to $4,941 for the three
months ended March 31, 1996, an increase of 693.2%. Cost of sales were 1.8% of
total revenues for the three months ended March 31, 1997 compared to 0.5% for
the three months ended March 31, 1996. This increase resulted from the increase
in license revenue on which the Company pays fees to third party
representatives.
Sales and Marketing
Sales and marketing expenses consist of contracted services
and salaries of marketing personnel (including sales commissions), customer
service activities, and advertising, promotional, marketing and trade show
costs. Sales and marketing expenses for the three months ended March 31, 1997
were $428,662 compared to $283,717 for the three months ended March 31, 1996, an
increase of 51.1%. The increase from the three months ended March 31, 1996 to
the three months ended March 31, 1997 was primarily attributable to increased
staffing, increased travel costs to support our global presence and an increase
in marketing and promotional activities aimed at establishing SRS as an
international standard. However, as a percentage of total revenues, sales and
marketing expenses decreased to 19.4% in the three months ended March 31, 1997
from 27.4% in the three months ended March 31, 1996 as the Company leveraged its
expenses on higher sales volumes.
8
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Research and Development
Research and development expenses consist primarily of
salaries paid to personnel engaged in research, development and engineering
activities, amounts paid to consultants and the cost of materials used in the
development of audio technologies. Research and development expenses for the
three months ended March 31, 1997 were $183,592 compared to $107,737 for the
three months ended March 31, 1996, an increase of 70.4%. This increase from the
three months ended March 31, 1996 to the three months ended March 31, 1997 was
primarily attributable to increased salary and costs associated with the
internal development of new and existing technologies. However, as a percentage
of total revenues, research and development expenses decreased to 8.3% in the
three months ended March 31, 1997 from 10.4% in the three months ended March 31,
1996 as the Company leveraged its expenses on higher sales volumes.
General and Administrative
General and administrative expenses consist primarily of
salaries and facility costs for administrative and executive personnel, as well
as certain consulting expenses, insurance costs, professional fees and other
costs. General and administrative expenses for the three months ended March 31,
1997 were $715,160 compared to $337,784 for the three months ended March 31,
1996, an increase of 111.7%. This increase from the three months ended March 31,
1996 to the three months ended March 31, 1997 was primarily attributable to
increased staffing, increases in professional fees associated with maintaining
patent and trademark rights in the U.S. and foreign countries and costs
associated with being a public company. As a percentage of total revenues,
general and administrative expenses decreased to 32.3% in the three months ended
March 31, 1997 from 32.6% in the three months ended March 31, 1996 as the
Company leveraged its expenses on higher sales volumes.
Interest Income (expense)
Interest income was $257,644 for the three months ended March
31, 1997 compared to interest expense of $2,030 for the three months ended March
31, 1996. This increase is due to interest earned on investing the proceeds from
the initial public offering.
Provision for Income Taxes
Income tax expenses for the three months ended March 31, 1997
were $408,161 compared to $80,914 for the three months ended March 31, 1996, an
increase of 404.4%. The effective tax rate for the three months ended March 31,
1997, which is based on current estimates of the annual effective income tax
rate, was 37% compared to 27% for the three months ended March 31, 1996.
Estimated higher pre-tax earnings for 1997 and the full utilization of the net
operating loss carryforwards in 1996 were responsible for the increase in the
estimated effective rate.
9
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LIQUIDITY AND CAPITAL RESOURCES
From inception through August 1996, the Company financed its
operations primarily through the private placement of equity securities. In
August 1996, the Company completed an initial public offering of 3,107,452
shares of common stock at $8.00 per share from which net proceeds to the Company
were $22.1 million.
The Company's principal source of liquidity at March 31, 1997
consisted of cash, cash equivalents and long term investments of $24.7 million.
At March 31, 1997, the Company had cash and cash equivalents of $3.9 million and
long term investments of approximately $20.8 million.
The Company primarily finances its operations through cash
provided by its operations, existing cash balances and investments available for
sale. The Company's operating activities provided $451,959 in cash for the three
months ended March 31, 1997 and $530,358 for the three months ended March 31,
1996. The $78,397 decrease in cash provided by operations was due to the
increase in royalties receivable partially offset by the increase in income
taxes payable. The Company has no significant commitments for capital
expenditures.
The Company currently does not have commitments for credit
facilities, such as revolving credit agreements or lines of credit that could
provide additional working capital. The Company believes that the cash flow from
operations, current cash balances and investments available for sale will be
sufficient to meet the Company's operating and capital requirements for the
foreseeable future.
FORWARD LOOKING INFORMATION
Included in this Item 2. Management's Discussion and Analysis
or Plan of Operation and elsewhere in this Report are certain forward-looking
statements reflecting management's current expectations. Although the Company
believes that its expectations are based upon reasonable assumptions, there can
be no assurances that the Company's financial goals will be realized. Numerous
factors may affect the Company's actual results and may cause results to differ
materially from those expressed in forward-looking statements made by or on
behalf of the Company. Some of these factors include the extent to which the
Company's licensees incorporate SRS or the Company's other technologies into
products, the increase in the Company's licensee base, the acceptance of the
Company's new technologies, the rate the Company's semiconductor licensees
manufacture and distribute chips to OEMs, the Company's ability to continue to
effectively compete with others in the field of audio enhancement technologies
processes and products and general business and economic conditions,
particularly those effecting the consumer electronics market.
10
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed below are filed herewith as
part of this Report.
Exhibit No.
Material Contracts Relating to Management Compensation Plans or
---------------------------------------------------------------
Arrangements
- ------------
10.1 Amendment to Employment Agreement dated as of March 14, 1997,
between the Company and Thomas C.K. Yuen, previously filed with the U.S.
Securities and Exchange Commission (the "Commission") as Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 (File No. 0-21123) (the "1996 Form 10-KSB"), which is incorporated herein
by reference.
10.2 Amendment to Employment Agreement dated as of March 14, 1997,
between the Company and Arnold I. Klayman, previously filed with the Commission
as Exhibit 10.5 to the 1996 Form 10-KSB, which is incorporated herein by
reference.
10.3 SRS Labs, Inc. Supplemental Executive Incentive Bonus Plan,
previously filed with the Commission as Exhibit 10.14 to the 1996 Form 10-KSB,
which is incorporated herein by reference.
Other Exhibits
--------------
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's first
quarter ended March 31, 1997.
11
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SRS LABS, INC.,
a Delaware Corporation
Date: May 14, 1997 By: /s/ JANET M. BISKI
--------------------------------
Janet M. Biski
Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
12
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Material Contracts Relating to Management Compensation Plans
------------------------------------------------------------
or Arrangements
---------------
10.1 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Thomas C.K. Yuen, previously
filed with the U.S. Securities and Exchange Commission (the
"Commission") as Exhibit 10.2 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996
(File No. 0-21123) (the "1996 Form 10-KSB"), which is
incorporated herein by reference.
10.2 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Arnold I. Klayman, previously
filed with the Commission as Exhibit 10.5 to the 1996 Form
10-KSB, which is incorporated herein by reference.
10.3 SRS Labs, Inc. Supplemental Executive Incentive Bonus
Plan, previously filed with the Commission as Exhibit 10.14 to
the 1996 Form 10-KSB, which is incorporated herein by
reference.
Other Exhibits
--------------
27 Financial Data Schedule.
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,904,434
<SECURITIES> 20,798,411
<RECEIVABLES> 1,294,572
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,826,683
<PP&E> 468,793
<DEPRECIATION> 202,048
<TOTAL-ASSETS> 27,474,568
<CURRENT-LIABILITIES> 1,568,938
<BONDS> 0
0
0
<COMMON> 9,535
<OTHER-SE> 25,856,466
<TOTAL-LIABILITY-AND-EQUITY> 27,474,568
<SALES> 2,212,100
<TOTAL-REVENUES> 2,212,100
<CGS> 39,194
<TOTAL-COSTS> 1,366,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (257,644)
<INCOME-PRETAX> 1,103,136
<INCOME-TAX> 408,161
<INCOME-CONTINUING> 694,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694,975
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
