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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 0-21123
SRS LABS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 33-0714264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (714) 442-1070
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $5,392,280.
State the aggregate market value of the voting stock held by non-affiliates
of the issuer (based on the closing sale price of such stock on the specified
date) as of March 21, 1997: $54,837,998.
State the number of shares of common stock of the issuer outstanding as of
March 21, 1997: 9,535,479.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared in connection with the Annual
Meeting of Stockholders to be held in 1997 -- Part III.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS.................................................. 1
Item 2. DESCRIPTION OF PROPERTY.................................................. 11
Item 3. LEGAL PROCEEDINGS........................................................ 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................... 12
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 12
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................ 13
Item 7. FINANCIAL STATEMENTS..................................................... 17
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................... 32
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT................................... 32
Item 10. EXECUTIVE COMPENSATION................................................... 32
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 32
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 32
Item 13. EXHIBITS AND REPORTS ON FORM 8-K......................................... 32
SIGNATURES......................................................................... 35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SRS Labs, Inc. (the "Company") develops, markets and licenses proprietary
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 (--)(R), the Sound Retrieval
System(R) ("SRS"), to leading original equipment manufacturers ("OEMs")
including Apple, Kenwood, NEC, Packard Bell, Pioneer, Sharp, Sony and Thomson
Consumer Electronics ("RCA"). SRS creates an immersive 3D sound image from any
audio source with as few as two conventional stereo speakers. The technology is
based on the fundamentals of the human hearing system and recreates the
multitude of spatial cues that are present in a live listening environment but
that are lost in recording and playback. SRS can be easily and inexpensively
incorporated by OEMs into the manufacture of a wide variety of audio-related
consumer products such as TVs, computers, stereo receivers, VCRs, car radios,
video games and musical instruments. The technology can also be encoded onto
CDs, cassettes or video tapes during the recording process and reproduced
through a conventional stereo system, multimedia computer, radio or television
broadcast, or the Internet.
SRS was originally developed by Hughes Aircraft Company ("Hughes
Aircraft"), which spent significant resources to develop and patent SRS and
related audio technologies. Since acquiring the SRS technology from Hughes
Aircraft in June 1993, the Company has improved the performance of SRS, reduced
the cost for OEMs to implement the technology, and introduced the technology to
a variety of consumer applications. Since June 1993, the Company's licensee base
has grown from two to over 80 licensees as of December 31, 1996.
While the Company primarily derives its revenues from licensing its
products directly to OEMs, the Company has recently developed licensing
relationships with several semiconductor manufacturers to incorporate SRS and
certain of the Company's other technologies directly into the semiconductors
which can then be purchased by the OEMs. Semiconductor manufacturer licensees
include Chromatic Research, Cirrus Logic, New Japan Radio ("NJRC"), Mitsubishi,
Motorola, Philips, Seiko, S3, SGS-Thomson, Sony and Yamaha. Through these
alliances, the Company believes that it will be able to expand its OEM licensee
and revenue bases as the semiconductor manufacturers' sales forces promote the
easier and more cost-effective implementation of the Company's technologies. The
Company believes this will further facilitate the implementation of SRS as a
standard in audio technology.
During the fiscal year ended December 31, 1996 ("Fiscal 1996"), the Company
added 37 new licensees including Kawai, LG Industries, Power Computing, Samsung,
Toshiba, Trigem and Umax. Ten of these new licensees are chip manufacturers or
mother board manufacturers that will help the Company with its strategy to
further expand the use of SRS and its related technologies in its existing
targeted markets. These licensees include, for example, Chromatic Research, GVC
Corporation (motherboards), Intel Corporation (motherboards), Mitsubishi, NJRC,
Philips and S3. These additional licensees demonstrate a continued strong
interest in the Company's technologies and provide a strong indication that the
SRS technology will continue to penetrate new accounts and additional product
lines.
During Fiscal 1996, the number of companies actually shipping products
including the Company's technology increased from 18 to 39. This growth is
reflected in the quarter by quarter increase in licensing revenue which is
directly associated with the number of products shipped. See "Part II, Item 6.
Management's Discussion and Analysis or Plan of Operation -- Selected Quarterly
Operating Results," herein. The Company anticipates that Chromatic Research,
GVC, Motorola, NJRC, S3 and SGS-Thomson will all begin shipping semiconductors
which include SRS during the fiscal year ending December 31, 1997 ("Fiscal
1997"). These are in addition to those semiconductors which include SRS offered
by Crystal Semiconductor, a subsidiary of Cirrus Logic, Intel (motherboards
only), Mitsubishi, Seponix and Yamaha, which began shipping during Fiscal 1996.
The Company also introduced three new technologies during Fiscal 1996,
F(--)CUS(TM) ("FOCUS"), TRUSURROUND(TM) ("TRUSURROUND") and Acoustic Vector
Technology ("AVT"). See "Description
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of Business -- The Company's Technologies," herein. These new technologies have
been well received by existing licensees and have also opened doors for
discussion with new potential licensees.
The Company successfully completed its initial public offering in August
1996, raising approximately $22 million. The Company added approximately $2.25
million in cash from operations in Fiscal 1996 and began Fiscal 1997 in a solid
cash position. This financial position, coupled with strong business growth
during Fiscal 1996, provides a sturdy platform for continued growth.
SRS Labs, Inc., a Delaware corporation (the "Company"), was incorporated in
the State of California on June 23, 1993 and reincorporated in the State of
Delaware on June 28, 1996. The Company's executive offices are located at 2909
Daimler Street, Santa Ana, California 92705. Its telephone number is (714)
442-1070, and its address on the World Wide Web is http://www.srslabs.com.
INDUSTRY OVERVIEW
Advanced audio technology is becoming increasingly significant in
televisions, stereo components, multimedia computers, automobiles, video and
arcade games, movie theaters, musical instruments, virtual reality entertainment
centers, and the Internet. The Company believes that increasing demand for
advanced audio technology is being driven by: (i) increased consumer
sophistication and demand for a better listening experience; (ii) competition
among OEMs who constantly seek affordable technologies that differentiate their
products; and (iii) the growth of the multimedia entertainment market through
the convergence of traditionally separate product markets such as televisions
and personal computers. As such, the Company believes that its five target
markets described above represent a large and expanding worldwide opportunity
for its proprietary audio technologies.
Mono and stereo have been the audio standards for the past 60 years. Mono
uses a single channel of sound, while stereo uses two channels of sound, each
directed to a separate speaker. Although an improvement over mono, stereo is
limited in providing a realistic listening experience. In order to experience a
true stereo image, the listener must be located in a specific, centrally-located
listening position commonly referred to as the "sweet spot". Additionally, the
stereo image is presented in front of the listener and confined to the area
between the speakers. Moreover, the sound image is discretely identifiable as
emanating from speaker enclosures, which is in contrast to live environments
where the listener experiences an immersive 3D sound image.
Quadraphonic and surround sound technologies were developed in attempts to
overcome some of the limitations of stereo and provide more realistic listening
experiences. Surround sound places speakers strategically around the room in an
attempt to recreate the ambience and sense of space present in a live listening
environment. Surround sound is similar to stereo in that it requires an encoding
process and must be played back through a special decoder that directs sound to
four, five or six speakers. Although an improvement over stereo, surround sound
also has several shortcomings. While sounds can be heard from the front and rear
with proper speaker placement, specific sounds can still be attributed to
individual speakers rather than "immersing" the listener as in a live listening
environment. In addition, surround sound requires two, three or four speakers to
be added to the traditional two-speaker stereo configuration. Accordingly,
implementing surround sound requires additional space for speakers and a
significant upgrade from conventional stereo equipment. In addition, since
surround sound requires special encoding, the listener's existing audio library
does not fully benefit from surround sound.
Numerous other audio enhancement technologies have been developed and
introduced. Dolby(R) and DBX(R) noise reduction, which were developed to reduce
the amount of background "hiss" encountered during recording and playback, have
become standards. Dolby(R), ProLogic(TM), THX(R), DTS(R), SDDS(R), DolbySRD(R)
and AC3(TM) (Dolby Digital) are other examples of emerging audio technologies.
Regardless of the methodology, audio enhancement technologies generally attempt
to achieve the common objective of providing the listener with a more realistic
listening experience.
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THE SRS SOLUTION
The Company's flagship audio technology, SRS, produces a realistic,
natural, 3D sound image from any audio source using as few as two conventional
stereo speakers. The technology is based on research into the fundamentals of
the human hearing system, and recreates the multitude of spacial cues that are
present in a live listening environment but that are lost in recording and
playback. SRS eliminates the "sweet spot" associated with traditional stereo,
thus SRS does not require the listener to be positioned in a specific location
to experience the immersive 3D sound image. The technology enhances any stereo
or surround sound system and is relatively inexpensive to implement. Finally,
SRS enhances any prerecorded audio material and does not require special
encoding. With the capability to enhance any audio media, SRS has a larger
sphere of application and market potential than many other audio enhancement
technologies which require special encoding at the time of recording.
SRS can be easily and inexpensively incorporated by OEMs into the
manufacture of a wide variety of audio-related consumer products such as TVs,
computers, stereo receivers, VCRs, car radios, video games, and musical
instruments. The markets for these consumer electronics products are highly
competitive and generally dominated by large manufacturers. The Company licenses
its technology to manufacturers who differentiate their products by continually
adding new features and increasing product performance. The Company has a number
of additional technologies, and the SRS licensing relationship provides OEMs
with access to the Company's current and future audio technologies.
The Company licenses its technologies to OEMs in five primary markets:
consumer home audio, multimedia personal computers, automobile sound systems,
professional audio equipment (such as movie theaters and musical instruments)
and video and arcade games. The Company believes that, as the multimedia
entertainment industry expands and brings together such related technologies as
home theaters, computers, stereos, DVD players, cable TV, telephone lines,
cellular and satellite systems, and the Internet, the broad application of the
Company's technologies allow it to be well-positioned to provide unique audio
solutions to a wide variety of manufacturers and consumers.
COMPANY STRATEGY
The Company's objective is to become a worldwide leader in developing,
marketing and licensing proprietary entertainment enhancement technologies that
address large and expanding markets. Key elements of the Company's strategy
include:
Enhance Position as a Technology Innovator. The Company seeks to
identify specific limitations in the audio and multimedia entertainment
market and to develop or acquire proprietary solutions to address these
limitations. In addition to SRS, the Company's flagship technology, the
Company is also developing and commercializing new technologies such as
FOCUS, which repositions sound and creates a proper stereo image in
environments where speaker location is not optimal, and ORB(R) (Optimum
Reflective Baffle) ("ORB"), which provides a unique approach to the
physical design of speakers by incorporating a baffle that creates a 180
degrees dispersion of sound. The Company's acquisition and development
programs are designed to maintain a continuous stream of technologies to
attract new licensees and enhance relationships with existing licensees.
Target Global Industry Leaders. To facilitate broad and rapid adoption
of its technologies, the Company targets both brand name leaders in the OEM
market and leading semiconductor manufacturers as licensees of its
technologies. The number of the Company's licensees has grown from two in
June 1993 to over 80 as of December 31, 1996. OEM licensees include Apple,
Kenwood, NEC, Packard Bell, Pioneer, RCA, Sharp, Sony and Toshiba.
Semiconductor licensees include Chromatic Research, Cirrus Logic,
Mitsubishi, Motorola, Philips, Seiko, SGS-Thomson, Sony and Yamaha. The
Company develops new business opportunities through a combination of its
dedicated sales force, independent sales agents and semiconductor licensees
who identify potential OEM licensees and pursue new business opportunities.
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Provide Superior Licensee Support. The Company believes that consumer
acceptance of SRS and the Company's other technologies is best realized by
the joint efforts of the Company and its licensees. Consequently, the
Company dedicates significant resources to its OEM and semiconductor
licensee relationships in the areas of product development, product launch,
training of licensee employees, and ongoing promotional programs designed
to differentiate the licensee's products and highlight the SRS solution.
The Company believes that its independent status as a licensor facilitates
the acceptance of its technologies because the Company does not compete
with its licensees and can encourage multiple parties within the same
industry to adopt and promote its technologies.
Leverage Relationships and Technologies. The Company believes that its
licensing relationships and technologies provide a solid foundation from
which to create new business opportunities. The Company continually works
with licensees to improve the performance of SRS and expand the use of SRS
and the Company's other technologies within the licensees' product lines.
For example, RCA and Sony, which have historically used SRS only in their
television sets, have recently introduced new lines of other consumer home
audio products featuring SRS. In addition, the Company has established
relationships with semiconductor manufacturers to incorporate the Company's
technologies into analog semiconductors and digital signal processors. The
Company believes that these alliances will allow the Company to expand its
licensee and revenue bases by utilizing the sales forces of the
semiconductor manufacturers and by providing OEMs with an easier and more
cost-effective implementation of the Company's technologies, as well as
facilitating the establishment of SRS as a standard.
Build Brand Name Awareness. The Company seeks to establish SRS and its
other proprietary technologies as industry standards and significant
product differentiators for its licensees, with the objective of making SRS
part of the consumer buying decision. In order to accomplish this
objective, the Company actively promotes the use of Company trademarks and
directs licensees to prominently display the SRS logo on products,
packaging and in advertising. In the cinema market, theaters utilizing SRS
feature a 30 second movie trailer (similar to Dolby(R) and THX(R)) at the
beginning of each show with the phrase, "SRS(--)... everything else is only
stereo." Additionally, the Company uses advertising, public relations,
direct mail, newsletters, America On Line and its World Wide Web page on
the Internet to build brand name awareness. With over 80 licensees as of
December 31, 1996 and SRS-based products now available in every major
industrial country in the world, the Company believes that the SRS logos
are associated with leading edge multimedia technology, quality audio and
an optimum listening experience.
THE COMPANY'S TECHNOLOGIES
The Company's technology strategy is to provide a continuing stream of
technologies to attract new licensees, enhance relationships with existing
licensees and to strengthen the Company's position as a leader in
audio/multimedia technology. The Company's flagship technology, SRS, is a
patented audio technology that creates an immersive 3D sound image from any
audio source using as few as two conventional stereo speakers. SRS compensates
for the difference between the way microphones record and the way that humans
hear. The result is that SRS eliminates the "sweet spot," the centrally-located
position required for a listener to experience the stereo effect of a typical
stereo system. SRS differs from many other technologies in that it works with
any existing recorded material and thus can be used with a listener's existing
audio library. SRS may be implemented through discrete analog components, analog
semiconductors and digital signal processors. These methodologies offer
licensees significant flexibility with respect to the manner in which SRS is
implemented.
The Company also has developed two complementary technologies called FOCUS
and TRUSURROUND for which patents are pending. FOCUS repositions sound and
creates a proper stereo image in environments where speaker location is not
optimal. Thus, the listener will experience a true stereo image as if the
speakers were properly placed in front of the listener, even if the speakers are
on the floor, behind furniture or facing each other. FOCUS is particularly well
suited for use in automobiles where front speakers are located more often in the
doors or under the dash board. FOCUS will be licensed together with SRS, and the
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Company currently expects that FOCUS modules and semiconductors will be
available to OEMs in the Fall of Fiscal 1997. TRUSURROUND was designed to
enhance multi-channel audio systems such as Dolby Digital AC3, the new standard
for DVD. TRUSURROUND renders six channels of audio through two speakers plus a
subwoofer without any loss of audio material, providing the listener with a
listening experience very similar to a full six speaker system. TRUSURROUND has
been implemented in chips from Zoran and Chromatic. Other chip companies are in
the process of completing their designs.
In addition, the Company is commercializing speaker technologies based upon
three patents acquired from Hughes Aircraft. One such technology, ORB, provides
a unique approach to the physical design of speakers by incorporating a baffle
that creates a 180 degrees dispersion of sound. The Company has amended one
license agreement with an OEM to include use of the ORB technology, and is
working with other licensees to include ORB in their product lines. Another
speaker technology, referred to as AVT, projects the listening material so that
the human ear can more easily identify the direction of ambient sounds. A third
speaker technology, BASER, is a high-efficiency design for a subwoofer speaker.
The Company is also exploring commercial applications for a number of its
other existing technologies. There are also a number of other commercial
applications for the flagship SRS technology which the Company may pursue,
including music and CD ROM publishing, the transmission of 3D stereo sound over
the Internet and high end professional sound equipment products for use in
studios.
The Company's flagship technology, SRS, is currently the subject of
numerous license agreements and continues to be actively marketed by the
Company. The TRUSURROUND and ORB technologies also have been licensed by the
Company and continue to be actively marketed by the Company. The FOCUS, BASER,
and AVT technologies have not yet been licensed but are actively being marketed
by the Company. Fixed and per unit licensing royalties associated with SRS and
ORB coupled with technology transfer fees for new technology have accounted for
virtually all of the Company's revenues to date and is expected to continue to
represent the substantial majority of the Company's revenues at least through
Fiscal 1997.
MARKETS AND OEM PRODUCTS
The Company licenses its patented technologies in five worldwide target
markets: consumer home audio, computer multimedia, car audio, professional
sound, and video and arcade game industries. Consumer purchases of new products
in these markets represent multi-billion dollar annual spending. There is also a
large installed base of non-SRS audio products and SRS can be used to upgrade
most of these existing audio products through the use of stand-alone SRS
processor units manufactured by several OEMs.
Consumer Home Audio
The Company believes that the consumer home audio market currently
represents the largest potential market for its technologies. Advanced audio
technology is becoming increasingly significant in televisions, stereo
components, home theater, and other home entertainment products. The markets for
these consumer electronics products are highly competitive and OEMs are
constantly seeking new technologies to differentiate their products.
Television sets were the first products to incorporate SRS. Since
television speakers are typically small and relatively close together, it is
especially difficult to reproduce a true-to-life sound image. Anam, LG
Electronics, RCA, Sharp and Sony feature SRS in their premium and core lines of
television sets.
Other consumer home audio products such as stereo receivers and tuners,
powered speakers, compact disc players, VCRs, laser disc players, mini component
systems, boom boxes, camcorders and TV cable set top units can all be enhanced
through the use of SRS. Hyundai, Kenwood, LG Electronics, RCA, Samsung, Sharp
and Sony introduced consumer home audio products featuring SRS for the 1996
season.
One of the Company's key strategies is to expand the use of SRS into the
various product lines of each OEM. Based on RCA's success with SRS in
televisions, RCA has introduced the RCA High Performance Audio line of home
stereo products featuring SRS. Hyundai, Kenwood, Pioneer, Samsung, Sharp, Sony
and other OEMs have also introduced SRS into multiple product lines.
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A number of semiconductor manufacturers have licensed SRS for
implementation into semiconductors designed for consumer home audio products.
Mitsubishi, NJRC, Seponix and SGS-Thompson are currently shipping such
semiconductors, and Motorola is preparing to introduce such semiconductors.
Computer Multimedia
Consumers are increasingly purchasing multimedia personal computers
incorporating a CD-ROM drive and speakers and typically supporting higher
resolution graphics and sound and, in certain cases, additional capabilities
such as digital video and data and/or voice communications. The demand for these
capabilities has been driven by the proliferation of multimedia-based
entertainment and education applications and video games, as well as the
widespread use of the Internet. The personal computer and peripherals market is
characterized by intense competition and short product lifecycles. As a result,
the Company believes PC and peripheral OEMs are more likely to quickly implement
new technologies such as SRS. Packard Bell, a leader in the consumer PC market,
established a strategic relationship with the Company in January 1994 whereby
Packard Bell licensed SRS for inclusion in all of its personal computers. The
Company's other computer multimedia OEMs include Apple, Aztech Systems, Daewoo,
KDS, Nakamichi, NEC, NMB Technologies, Samsung, Sony, Toshiba and Trigem.
The new generation of multimedia systems are focused on higher quality
audio and often incorporate home stereo quality speakers. During Fiscal 1996,
Nakamichi, a traditional Japan-based audio company known for high-end audio
products in the consumer home audio market, expanded its product line and
introduced computer multimedia speakers utilizing SRS that received the
RetailVision 1996 "Best Multimedia Product" award. Pioneer and Sony also
introduced powered speakers that incorporate SRS.
During Fiscal 1996, the computer multimedia game market has also begun to
feature 3D sound localization technologies. SRS complements and enhances most 3D
sound localization processing as it does with other mono, stereo or surround
soundtracks in the computer game market. For example, SRS can enhance Microsoft
DirectSound(TM) which is an example of computer architecture that implements
sound localization technology.
A number of semiconductor manufacturers have licensed SRS for
implementation into semiconductors designed for computer multimedia products.
Crystal Semiconductor, a subsidiary of Cirrus Logic, NJRC, Seponix and Yamaha
are currently shipping such semiconductors, and Chromatic Research and S3 are
preparing to introduce such semiconductors.
Car Audio
The Company believes the unique listening environment inherent in cars
represents a significant market for SRS and FOCUS. The compartment of the
automobile creates distinct audio challenges that are significantly different
from more traditional listening environments. The location of front speakers in
doors as opposed to the dashboard in front of the driver, the construction of
the automobile and the non-optimal listener positions make it difficult to
provide quality audio in an automobile. Many auto manufacturers are featuring
improved sound systems as a differentiator and marketing advantage. The use of
SRS and FOCUS inexpensively addresses these difficult challenges in the
automobile environment. In January 1996, the Company entered this market with
the introduction of a new car stereo line from Pioneer featuring SRS at the
Winter Consumer Electronics Show. In January 1997, the Company formally
introduced FOCUS at the Winter Consumer Electronics Show. The Company
anticipates that the FOCUS chips will be available during the second half of
Fiscal 1997.
Professional Sound
The Company defines the professional sound market as including cinemas,
musical instruments, professional recording equipment and karaoke systems. The
Company believes that implementation of SRS into movie theaters is an
inexpensive alternative to or enhancement of current audio technologies for the
cinema such as DolbySRD(R), DTS(R)and SDDS(R), and provides an important avenue
to increase consumer awareness of SRS. The first SRS 3D cinema processor debuted
in Bonn, Germany in March 1995 and by
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December 1996, over 250 theaters in 17 countries had implemented SRS 3D Cinema
Sound(TM). In January 1996, Kurzweil introduced a digital piano that
incorporates SRS. The Company does not anticipate that the professional sound
market will be a significant source of revenues in the foreseeable future, but
it believes it is an important avenue to increase consumer awareness of the
Company's technologies.
Video and Arcade Games
SRS can be implemented in video and arcade games by positioning an SRS
processor between the game unit and stereo playback system, implementing SRS
directly into the game unit, or encoding SRS into the game software. The Company
also believes that its technologies are well suited for use in amusement parks
and virtual reality attractions as these markets advance and sound becomes a
larger part of the experience. The Company currently does not derive significant
revenues from the video and arcade game markets and does not anticipate
significant revenues from these markets in the near future.
LICENSEE PROGRAM
As a technology and licensing company, the Company's primary focus is
creating economic and inventive ways for licensees to implement the Company's
technologies. The Company has two general types of licensees: OEM licensees
which build SRS and the Company's other technologies into consumer products; and
semiconductor licensees which build SRS and the Company's other technologies
into semiconductors for use by the OEM licensees. The number of the Company's
licensees has grown from two in June 1993 to over 80 licensees as of December
31, 1996, and SRS has been implemented into an estimated ten million products in
numerous product lines.
OEM LICENSEES
The following table identifies the Company's OEM licensees and the market
or markets in which such licensees are participating or are planning to
participate as of December 31, 1996:
OEM LICENSEES
COMPUTER MULTIMEDIA
Advanced Digital Systems
Apple Computer, Inc.
ATP Corporation
Aura Systems, Inc.
Aztech Systems Ltd.
Boca Research, Inc.
Core Dynamics, Inc.
Daewoo Telecom Ltd.
Diamond Multimedia Systems, Inc.
Diotech SMT Products
Dual Technology Corporation
En K Telecom Co., Ltd.
Formosa Industrial Computing, Inc.
Golden Reagent Investment Ltd.
Goldtron Multimedia Limited
Green-Tech Corporation, Ltd.
GVC Corporation
Intel Corporation
Kenwood Corporation
KDS Co., Ltd.
Leadtek Research, Inc.
Mediatrix Peripherals Inc.
Megaworld
MICS Computers, Inc.
Midiland
Nakamichi Corporation
NEC Technologies, Inc.
NMB Technologies
NuReality
Packard Bell Electronics, Inc.
Palnet Company Ltd.
Pioneer Electronic Corporation
Power Computing
Reveal Computer Products, Inc.
Samsung Electronics Co., Ltd.
SC & T2 International, Inc.
Seohan Electronics, Inc.
Sharp Electronics, Inc.
Sony Corporation
Sugiyama Electronics
TeleVideo Systems, Inc.
Toshiba Corporation
Trigem
Umax Computer Corporation
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CONSUMER HOME AUDIO
Anam Electronics Co., Ltd.
Atlantis Computers, Inc. ("NuReality")
Daewoo Telecom Ltd.
Dooin Electronics
Hatai Electronics Co.
Hitachi Ltd.
Hyundai Electronics Industries Co., Ltd.
Kenwood Corporation
LG Electronics, Inc.
Nakamichi Corporation
Pioneer Electronic Corporation
Samsung Electronics Co., Ltd.
Sharp Electronics Corporation
Shenzen
Sony Corporation
Sun Young Electronics, Inc.
Tai Kwang Industrial Co., Ltd.
Thomson Consumer Electronics S.A. ("RCA")
Thomson Consumer Electronics, Inc. ("RCA")
CAR AUDIO
Hatai Electronics Co.
Hyundai Electronics Industries Co., Ltd.
Kenwood Corporation
Nakamichi Corporation
Pioneer Electronic Corporation
PROFESSIONAL SOUND
ASSA
Elf Systems Co., Ltd.
Kawai Musical Instruments Mfg. Co., Ltd.
Smart Devices, Inc.
Young Chang America, Inc. ("Kurzweil")
VIDEO AND ARCADE GAMES
Golden Reagent Investment Ltd.
Green-Tech Corporation, Ltd.
Leadtek Research, Inc.
NuReality
Palnet Company Ltd.
License agreements with OEMs have terms which typically range from one to
ten years and require per unit royalty payments for all products implementing
the Company's technologies. Certain agreements provide for a fixed annual or
quarterly royalty payment. License agreements also specify the use of the
Company's trademarks and logos and provide for product review and approval by
the Company. The agreements do not have volume requirements and may be
terminated by the OEM or the Company without substantial financial penalty.
The Company has experienced significant concentration and fluctuations in
the use of the Company's technologies by certain licensees. For the year ended
December 31, 1994 ("Fiscal 1994"), NuReality, RCA and Sony accounted for 13%,
64% and 22%, respectively, of the Company's license revenues. For the year ended
December 31, 1995 ("Fiscal 1995"), RCA and Reveal Computer accounted for 38% and
24%, respectively, of the Company's license revenues. For Fiscal 1996, Packard
Bell and NEC accounted for 28% and 10%, respectively, of the Company's license
revenues.
SEMICONDUCTOR LICENSEES
In order to reduce the cost of implementation of its technologies and
increase market penetration, the Company has developed a strategy to work more
closely with semiconductor manufacturers. The Company's semiconductor strategy
is to establish relationships with leading semiconductor manufacturers who will
incorporate certain of the Company's technologies into analog semiconductors and
digital signal processors.
The following table identifies the semiconductor manufacturers who have
entered into licensing agreements with the Company as of December 31, 1996:
SEMICONDUCTOR LICENSEES
<TABLE>
<S> <C>
Chromatic Research, Inc. Nippon Precision Circuits, Inc./Seiko Group
Cirrus Logic, Inc. ("Seiko")
Industrial Technology Research Institute Philips Semiconductors
Mitsubishi Electric Corporation S3 Inc.
Motorola Incorporated Seponix Corporation
Medianix Semiconductor, Inc. Sony Corporation
New Japan Radio Co., Ltd. SGS-Thomson Microelectronics
Yamaha Corporation
</TABLE>
8
<PAGE> 11
The Company has primarily followed the Dolby licensing model whereby
licensees are free to choose a semiconductor solution from a number of choices
and, regardless of the semiconductor choice, the licensee pays a royalty
directly to the Company. However, this methodology is not well established in
the computer multimedia market, and the Company is testing a different model
whereby the royalty is "bundled" into the cost of the semiconductor. This
provides the OEM with an easier business decision and simplifies the process for
the semiconductor manufacturer. In this model, the royalty is collected directly
from the semiconductor company after the chip has been sold to the OEM. During
Fiscal 1996, the Company signed license agreements with Intel and GVC, both of
which incorporate SRS directly on the computer motherboard.
The Company believes that the business relationships based on SRS as well
as those based on new technologies such as FOCUS and TRUSURROUND will increase
the Company's channels of distribution by leveraging the sales forces of the
semiconductor manufacturers. These relationships also will provide OEMs with an
easier and more cost-effective implementation of the Company's technologies.
Finally, the Company believes it will develop additional revenue streams from
new technologies implemented and marketed through licensed semiconductor
manufacturers.
LICENSEE SUPPORT
The Company seeks to work closely with its licensees to enhance their
success in selling products and semiconductors that incorporate the Company's
technologies through a variety of targeted licensee support programs. The
Company's licensee support programs include customized audio-CDs to showcase the
OEM products and semiconductors and the Company's technology, sales training,
press tours and targeted mailings.
The Company's corporate communications program includes press releases,
monthly technical updates, quarterly newsletters and sales informational
mailings. The Company also produces and distributes audio CD/CD ROMs that
demonstrate SRS and provides technical assistance and general consumer-related
information on the World Wide Web and America Online. The Company conducts tours
and presentations for the press and other media outlets to promote the Company's
technologies and licensee products.
The Company regularly participates in trade shows to increase awareness of
its technologies, to support its licensees and to generate new licensee
relationships with existing and potential customers. The Company also has
initiated a development program with its OEM and semiconductor licensees to
actively explore other opportunities to utilize the Company's technologies in
new products and/or markets. The Company has also retained the services of an
outside public relations firm to supplement these communications efforts
produced by the Company's internal marketing department.
RESEARCH AND DEVELOPMENT
Prior to the Company's acquisition of SRS and related audio technologies
from Hughes Aircraft in 1993, Hughes Aircraft spent significant resources to
develop and patent these technologies. Since the acquisition, the Company has
spent approximately 2.1%, 16.2%, 15.8% and 15.8% of total operating expenses on
research and development in Fiscal 1993, 1994, 1995, and 1996, respectively. The
Company's research and development efforts are primarily targeted at developing
new technologies, improving the performance of its existing technologies and
reducing the cost for OEMs to implement its technologies. Research and
development efforts are also focused on responding to licensees' requirements
with respect to implementing the Company's technologies, expanding applications
for the Company's technologies in the Company's five target markets and
exploring implementation of the Company's technologies in new markets.
The market for the Company's technologies is subject to rapid and
significant changes and frequent new technology and product introductions. The
Company believes that its future success will depend on its ability to continue
to enhance its existing technologies and to introduce or acquire new
technologies on a competitive basis. There can be no assurance, however, that
the Company will be able to successfully enhance existing technologies or
introduce or acquire new technologies.
9
<PAGE> 12
MARKETING AND ADVERTISING
In addition to its licensee support programs, the Company markets its
business on a worldwide basis. As part of the Company's global strategy, its
sales and marketing efforts are organized into new business development and
licensee relationship management functions. The Company develops new business
opportunities through a combination of its dedicated sales force, independent
sales agents and semiconductor licensees which identify potential licensees and
pursue interactive product development with these licensees. An integral part of
the Company's sales and marketing worldwide is conducted by its independent
sales agents. The Company actively promotes the use of Company trademarks, and
directs licensees to prominently display the SRS logo on products, packaging and
in advertising. In the cinema market, theaters utilizing SRS feature a 30 second
movie trailer (similar to Dolby(R) and THX(R)) at the beginning of each show
with the phrase, "SRS(--) . . . everything else is only stereo." Additionally,
the Company uses public relations, direct mail, newsletters, America On Line and
its World Wide Web page on the Internet to build brand name awareness.
COMPETITION
The Company competes in its market segments with a number of companies
which produce a variety of audio enhancement technologies, processes and
products. These technologies, processes and products include THX(R), which is a
certification program that indicates if a movie theater or particular piece of
audio equipment meets certain specifications, Dolby(R) A-type, B-type and C-type
noise reduction, Dolby SR(R), which provides noise reduction and encodes analog
sound using four sound channels, ProLogic(TM), which is a surround sound system
incorporating an active center channel, DolbySRD(R), which encodes a six channel
digital sound track on a movie print, DTS(R), which uses CDs to reproduce six
channels of digital sound synchronized with a movie print, and SDDS(R), which
encodes six or eight channels of digital sound on both sides of a movie print.
Because SRS works with any existing recorded material whether mono, stereo,
surround sound or other encoding process, SRS can be used either as an
alternative or as a complement and enhancement to almost any competing audio
technology. The Company also directly competes in the field of 3D audio
enhancement with providers of other 3D audio technologies, including Qsound
Labs, Inc. and Spatializer. In addition, the Company's technologies may, in the
future, compete with audio technologies developed by other companies, some of
whom may be current licensees of SRS.
Certain of these companies have, or may have, substantially greater
resources than the Company to devote to further technologies and new product
developments. The Company believes that it will compete based primarily on the
quality and performance of its proprietary technologies, brand name awareness,
the ease and cost of implementing its technologies, the ability to meet OEMs'
needs to differentiate their products, and the strength of its licensee
relationships. There can be no assurance that based on these factors the Company
will continue to be competitive with existing or future products or technologies
of its competitors.
INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are important
for success. The Company relies on a variety of intellectual property
protections for its products and services, including patent, copyright,
trademark and trade secret laws, and contractual obligations, and pursues a
policy of vigorously enforcing such rights. There can be no assurance, however,
that the Company's intellectual property rights will be adequate to ensure the
Company's competitive position, or that competitors will not be able to produce
a non-infringing competitive product or service. There can be no assurance that
third parties will not assert infringement claims against the Company, or that
if required to obtain any third party licenses as a result of an infringement
dispute the Company will be able to obtain such licenses. The Company believes
that its patents and trademarks are important to its business.
SRS is the subject of four U.S. patents containing a combined total of 260
claims. The expiration dates for these U.S. patents are May 31, 2005, June 20,
2006, September 12, 2006 and October 5, 2010, respectively. In addition, the
Company has 45 issued foreign patents relating to SRS and over 40 additional
10
<PAGE> 13
foreign patents pending. The expiration dates for these foreign patents varies
depending on the particular patent and the particular country, but in most cases
the duration of such foreign patents will extend into the year 2006.
The Company also owns three U.S. patents for speaker technology, one of
which covers its ORB technology, and has 22 issued foreign patents for these
technologies with several other foreign patents pending. The expiration dates
for these U.S. patents are April 4, 2006, June 6, 2006 and January 10, 2010,
respectively. The expiration dates for these foreign patents varies depending on
the particular patent and the particular country, but in most cases the duration
of such foreign patents will extend into the year 2006. The Company has multiple
new audio technology patents pending in the U.S. and worldwide for improvements
to SRS and its FOCUS and TRUSURROUND technologies.
The Company also is the owner of the federally registered trademarks
SRS(R), the SRS logo "(--)(R)", Sound Retrieval System(R), ORB(R), BASER(R) and
"everything else is only stereo". Trademark applications have been filed for
F(--)CUS(TM), TRUSURROUND(TM), AVT(TM), 3D STEREO(TM), 3D STEREO II(TM), 3D
CINEMA SOUND(TM), MEGA WIDE(TM), MEGA SPACE(TM) and ORS(TM). The initial
duration of the Company's registered trademarks ranges from August 23, 1998 to
September 23, 2001. The duration of these trademarks can be maintained
indefinitely provided proper maintenance fees are paid and the trademarks are
continually used or licensed by the Company. The Company currently intends to
maintain all of these trademarks.
EMPLOYEES
The Company employed 17 full-time individuals and one part-time individual
as of December 31, 1996. None of the Company's employees are covered by a
collective bargaining agreement or is presently represented by a labor union.
The Company has not experienced any work stoppages and considers its employee
relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an 11,700 square foot facility in Santa Ana, California
consisting of office and warehouse space. The Company leases the facility from
Daimler Commerce Partners, L.P. (the "Partnership"), an affiliated partnership.
The general partner of the Partnership is Conifer Investments, Inc. ("Conifer").
The sole shareholders of Conifer are Thomas C.K. Yuen and Misako Yuen, as
co-trustees of the Thomas Yuen Family Trust (the "Trust"), and the executive
officers of Conifer include Mr. and Mrs. Yuen. Mr. and Mrs. Yuen, as co-trustees
of the Trust also beneficially own, as of March 21, 1997, 31.9% of the Company's
outstanding common stock. Mr. Yuen is the Chairman of the Board and Chief
Executive Officer of the Company.
The lease term commenced on June 1, 1994, and will expire on May 31, 1997.
Rent for the first year was $.45 per square foot per month (an initial annual
rent of $63,180) plus common area expenses, real property taxes, utilities,
insurance premiums and maintenance. A provision in the lease provides that the
landlord may increase the rent by up to 4% on each of June 1, 1995 and 1996.
Pursuant to the lease, the Company paid the Partnership rent of $52,463 during
Fiscal 1994, $63,180 during Fiscal 1995 and $63,430 during Fiscal 1996.
The Company anticipates that it will enter into a new lease agreement with
the Partnership to lease 23,400 square feet of space at the same facility prior
to the expiration of the current lease on May 31, 1997.
The Company believes that its current facilities together with the addition
of the 11,700 square feet referenced above, will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need further
additional space, management believes that the Company will be able to secure
additional space at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
As of March 27, 1997, the Company is not a party to any pending legal
proceeding. The Company may from time to time be involved in routine legal
matters incidental to their businesses. In the opinion of the Company, the
resolution of such matters will not have a material effect on its financial
condition or results of operations.
11
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The common stock of the Company was accepted for trading on the Nasdaq
Stock Market as a National Market System Security, effective August 8, 1996,
where it trades under the symbol SRSL. There was no active trading market for
the Company's common stock prior to August 8, 1996.
The table below reflects the high and low bid prices of the Company's
common stock as reported by The Nasdaq Stock Market, Inc. from August 8, 1996,
through the end of Fiscal 1996. Such quotations are inter-dealer quotations
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
--------------------------------------------------------------- ---- ---
<S> <C> <C>
Third Quarter (beginning August 8, 1996)....................... 15 5/8 8
Fourth Quarter................................................. 16 8 5/8
</TABLE>
HOLDERS
The number of stockholders of record as of March 21, 1996 was 35.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain its available funds from earnings for future growth
and, therefore, does not anticipate paying any dividends in the foreseeable
future.
SALES OF UNREGISTERED SECURITIES
On January 17, 1996, an individual believed to be an "accredited investor,"
as defined in Regulation D promulgated under the Securities Act of 1993, as
amended (the "Securities Act"), exercised an option granted in August 1993 to
purchase 362,064 shares of common stock of the Company. No underwriter was
involved in such transaction. The above-referenced securities were issued in
reliance on the private offering exemption set forth in Section 4(2) of the
Securities Act and on analogous provisions contained in applicable state
securities laws on the basis that they were issued under circumstances not
involving a public offering.
12
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the fiscal years ended December 31, 1994, 1995 and 1996, which has been derived
from the Company's financial statements which appear elsewhere in this Report
and which have been audited by Deloitte & Touche LLP, independent auditors. Such
selected financial data should be read in conjunction with Management's
Discussion and Analysis or Plan of Operation in this Item 6 and the Financial
Statements of the Company and Notes thereto included in Part II, Item 7 of this
Report.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE AND SELECTED OPERATING
DATA)
<S> <C> <C> <C>
Revenues:
Royalty revenues............................................. $ 547 $ 823 $4,620
Other revenues............................................... 440 21 772
------- ------- ------
Total revenues............................................ 987 844 5,392
Cost of sales.................................................. 678 15 95
------- ------- ------
Gross margin................................................. 309 829 5,297
Operating costs and expenses
Sales and marketing.......................................... 674 937 1,163
Research and development..................................... 340 384 522
General and administrative................................... 1,079 1,107 1,616
------- ------- ------
Total operating expenses..................................... 2,093 2,428 3,301
------- ------- ------
Income (loss) from operations.................................. (1,784) (1,599) 1,996
Interest income (expense), net............................... (92) (41) 366
------- ------- ------
Income (loss) from operations before income tax expense........ (1,876) (1,640) 2,362
Provision for income taxes..................................... 1 1 501
------- ------- ------
Net income (loss).............................................. (1,877) (1,641) 1,861
======= ======= ======
Net income (loss) per share of common stock.................. $ (0.37) $ (0.27) $ 0.21
======= ======= ======
Weighted average number of common stock and common stock
equivalents outstanding...................................... 5,076 6,032 8,686
======= ======= ======
Selecting Operating Data:
Total licensees.............................................. 19 43 82
</TABLE>
OVERVIEW
The Company develops, markets and licenses proprietary 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, to leading original equipment manufacturers. This
Management's Discussion and Analysis or Plan of Operation should be read in
conjunction with the Company's Financial Statements and Notes thereto included
in Part II, Item 7 of this Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total revenues in Fiscal 1996 were $5,392,280 compared to $843,789 in
Fiscal 1995, an increase of 539.1%. This increase resulted primarily from growth
of the licensee base from 43 licensees at the end of 1995 to 82 licensees at
December 31, 1996, and increased shipments of products incorporating SRS on
which
13
<PAGE> 16
royalties are paid by licensees. Of the $5,392,280 in revenues in Fiscal 1996,
$772,180 related to one-time license fees and $4,620,100 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 in Fiscal
1996 were $95,378 compared to $14,957 in Fiscal 1995, an increase of 537.7%.
Cost of sales were 1.8% of total revenues in both Fiscal 1996 and 1995.
Sales and Marketing
Sales and marketing expenses were $1,163,409 in Fiscal 1996 compared to
$937,293 in Fiscal 1995, an increase of 24.1%. This increase was primarily
attributable to increased staffing and an increase in marketing and promotional
activities. As a percentage of total revenues, sales and marketing expenses
decreased to 21.6% in Fiscal 1996 from 111.1% in Fiscal 1995 as the Company
leveraged its expenses on higher sales volumes.
Research and Development
Research and development expenses were $521,482 in Fiscal 1996 compared to
$383,948 in Fiscal 1995, an increase of 35.8%. This increase was primarily
attributable to increased staffing and an increase in expenses associated with
the internal development of new and existing technologies. As a percentage of
total revenues, research and development expenses decreased to 9.7% in Fiscal
1996 from 45.5% in Fiscal 1995 as the Company leveraged its expenses on higher
sales volumes.
General and Administrative
General and administrative expenses were $1,615,648 in Fiscal 1996 compared
to $1,106,519 in Fiscal 1995, an increase of 46.0%. This increase was primarily
attributable to increased staffing and general management expenses for the
support of the licensing activities and new business development. As a
percentage of total revenues, general and administrative expenses decreased to
30.0% in Fiscal 1996 from 131.1% in Fiscal 1995 as the Company leveraged its
expenses on higher sales volumes.
Interest Income (expense)
Interest income was $365,583 in Fiscal 1996 compared to interest expense of
$41,035 in Fiscal 1995. The increase is due to interest earned on investing the
proceeds from the Company's initial public offering.
Income Tax Expense
Income tax expense in Fiscal 1996 was $500,937 compared to $800 in Fiscal
1995, which represented minimum state income taxes as the Company had a net loss
during that period. Income tax expenses in Fiscal 1996 are partially offset by
the use of federal and state tax loss carryforwards.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Total revenues in Fiscal 1995 were $843,789 compared to 987,109 in Fiscal
1994, a decrease of 14.5%. This decrease resulted from decreased revenues from
sales of products acquired from Hughes Aircraft. Revenues from product sales in
Fiscal 1995 were $21,230 compared to $439,830 in Fiscal 1994, a decrease of
95.2%. The decrease reflects completion of the liquidation of the inventory of
products acquired from Hughes Aircraft. License revenues in Fiscal 1995 were
$822,559 compared to $547,279 in Fiscal 1994, an increase of 50.3%. This
increase was primarily due to license revenues received on increased shipments
of units incorporating SRS in existing markets and the launch of SRS in new
markets.
14
<PAGE> 17
Cost of Sales
The Company's gross margin has varied as a result of changes in the mix of
revenues. Cost of sales during Fiscal 1995 consists primarily of fees paid to
third party representatives for sales administration and support. Cost of sales
during Fiscal 1994 consists primarily of costs associated with the inventory of
products acquired from Hughes Aircraft. Cost of sales in Fiscal 1995 were
$14,957 compared to $678,396 in Fiscal 1994, a decrease of 97.8%. Cost of sales
were 1.8% of total revenues in Fiscal 1995 compared to 68.7% in Fiscal 1994.
This decrease reflects completion of the liquidation of the inventory of SRS
products acquired from Hughes Aircraft.
Sales and Marketing Expenses
Sales and marketing expenses were $937,293 in Fiscal 1995 compared to
$673,683 in Fiscal 1994, an increase of 39.1%. This increase was primarily
attributable to increased staffing and an increase in marketing and promotional
activities. As a percentage of total revenues, selling and marketing expenses
increased to 111.1% in Fiscal 1995 from 68.2% in Fiscal 1994 because sales and
marketing expenses grew while revenues decreased.
Research and Development Expenses
Research and development expenses were $383,948 in Fiscal 1995 compared to
$340,109 in Fiscal 1994, an increase of 12.9%. This increase was primarily
attributable to increased expenses associated with the internal development of
new and existing technologies at a time when the Company was redirecting its
focus to that of a licensing company. As a percentage of total revenues,
research and development expenses increased to 45.5% in Fiscal 1995 from 34.5%
in Fiscal 1994 because research and development expenses grew while revenues
decreased.
General and Administrative Expenses
General and administrative expenses were $1,106,519 in Fiscal 1995 compared
to $1,078,987 in Fiscal 1994, an increase of 2.6%. This increase resulted
primarily from increases in professional fees associated with maintaining patent
and trademark rights in the U.S. and foreign countries, and to a lesser extent
from increases in general management expenses for the support of the licensing
activities and new business development. As a percentage of total revenues,
general and administrative expenses increased to 131.1% in Fiscal 1995 from
109.3% in Fiscal 1994 because general and administrative expenses grew while
revenues decreased.
Interest Income (expense)
Interest expense was $41,035 in Fiscal 1995 compared to interest expense of
$91,793 in Fiscal 1994, a decrease of 55%. The decrease was due to the payoff of
a note payable to Hughes Aircraft in Fiscal 1995.
Income Tax Expenses
Income tax expenses for Fiscal 1994 and 1995 were $800, the amount of
minimum state taxes, due to net operating losses and the availability of net
operating loss carryforwards. For all periods prior to January 1, 1995, the
Company elected to be treated as an S corporation under the Internal Revenue
Code and first became subject to regular state and federal income taxes in
Fiscal 1995.
15
<PAGE> 18
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain quarterly financial data for the
eight quarters in the period ended December 31, 1996. The quarterly information
is based upon unaudited financial statements prepared by the Company on a basis
consistent with the Company's audited financial statements and, in management's
opinion, includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the information for the periods
presented. This information should be read in conjunction with the Company's
audited Financial Statements and Notes thereto appearing elsewhere in this
Report. The operating results for any quarter are not necessarily indicative of
results for any future period. The Company's quarterly operating results have
varied significantly in the past and are expected to vary significantly in the
future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- --------- ------------ --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalty Revenues...... $ 147 $ 186 $ 126 $ 364 $ 985 $ 890 $ 1,151 $1,594
Other Revenues........ 12 3 2 4 50 174 300 248
----- ----- ----- ----- ------ ------ ------ ------
Total Revenues..... 159 189 128 368 1,035 1,064 1,451 1,842
Gross Margin............ 158 189 127 355 1,030 1,047 1,421 1,799
Operating Expenses...... 584 550 623 671 729 657 774 1,141
----- ----- ----- ----- ------ ------ ------ ------
Operating Income
(Loss)................ (426) (361) (496) (316) 301 390 647 658
Net Income (Loss)..... (447) (373) (499) (322) 218 289 633 721
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In August 1996, the Company completed an initial public offering of
3,107,452 shares of common stock at $8.00 per share. Net proceeds to the Company
were $22.1 million.
From inception through August 1996, the Company financed its operations
primarily through the private placement of equity securities. As of December 31,
1996, cash, cash equivalents, and long-term investments totaled $24.4 million.
The Company's operating activities provided $2,255,320 in cash in Fiscal 1996,
primarily resulting from the Company achieving profitable operations due to the
increase in licensing royalties. The Company's cash used in operating activities
increased to $1,704,865 for Fiscal 1995 from $810,585 for Fiscal 1994, primarily
resulting from an increase in the Company's net loss resulting from increased
operating, sales and marketing activities for the development and sales of the
Company's technologies.
The Company's principal source of liquidity at December 31, 1996 consisted
of cash, cash equivalents and long term investments of $24.4 million. The
Company has adopted investment guidelines which restrict the types and quality
of investments the Company is authorized to enter into. At December 31, 1996,
the Company had cash and cash equivalents of $3.4 million and long term
investments of approximately $21.0 million. Long term investments include
municipal bonds rated a minimum of A1. 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 proceeds from the initial public offering
together with current cash balances and cash flow from operations will be
sufficient to meet the Company's operating and capital requirements through
Fiscal 1997.
FORWARD-LOOKING INFORMATION
Included in this Item 6. Management's Discussion and Analysis or Plan of
Operation, in Part I, Item 1. Description of Business, 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.
16
<PAGE> 19
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.
PERSONAL HOLDING COMPANY STATUS
Under the Internal Revenue Code of 1986, as amended (the "Code"), a
corporation will be deemed to be a "personal holding company" subject to a 39.6%
tax on its undistributed personal holding company income, if (in general) (i) at
any time during the last half of a taxable year more than 50% in value of its
outstanding stock is owned by, or on behalf of, five or fewer individuals, and
(ii) at least 60% of the corporation's adjusted ordinary gross income for the
taxable year consists of "personal holding company income." Personal holding
company income is defined to include such passive types of income as royalties,
dividends, interest, annuities and certain rents. Undistributed personal holding
company income is defined as taxable income, with certain adjustments
(including, among others, a deduction for Federal income taxes), less any
amounts distributed as dividends. The tax imposed on a personal holding company
is in addition to the regular corporate income tax and is meant to force a
personal holding company to distribute its income currently.
The Company expects that it will exceed the stock ownership threshold
described above. However, the Company believes that the licensing royalties it
receives are specifically excluded from the category of personal holding company
income based upon a safe harbor exclusion in the Code which generally is
applicable so long as the Company's operating expenses (as adjusted in a
specified manner) equal or exceed 25% of its revenues. Consequently, based upon
its projections, the Company does not expect to have significant personal
holding Company income. Moreover, the Company intends to manage its affairs so
as to avoid the imposition of such tax, to the extent consistent with its other
business goals.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 18
Balance Sheets as of December 31, 1995 and 1996....................................... 19
Statements of Operations for the years ended December 31, 1994, 1995 and 1996......... 20
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994,
1995 and 1996....................................................................... 21
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996......... 22
Notes to Financial Statements......................................................... 23
</TABLE>
17
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
>SRS Labs, Inc.:
We have audited the accompanying balance sheets of SRS Labs, Inc. (the
"Company") as of December 31, 1995 and 1996, the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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, such financial statements present fairly, in all material
respects, the financial position of SRS Labs, Inc. as of December 31, 1995 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
January 31, 1997
18
<PAGE> 21
SRS LABS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS (Note 2):
Cash and cash equivalents.............................................. $ 384,087 $ 3,455,997
Royalty receivable..................................................... 42,961 702,966
Accounts receivable (Note 8)........................................... 11,961 --
Interest receivable.................................................... -- 325,822
Other receivables (Note 7)............................................. 500,000 20,030
Inventories............................................................ 1,144 --
Prepaid expenses....................................................... 89,638 105,919
Deferred income taxes (Note 6)......................................... -- 218,936
----------- -----------
Total current assets............................................... 1,029,791 4,829,670
INVESTMENTS AVAILABLE FOR SALE (Note 3)................................ -- 20,969,785
FURNITURE, FIXTURES AND EQUIPMENT, net of accumulated depreciation
(Notes 2 and 4)...................................................... 205,010 281,189
PATENTS, net of accumulated amortization of $23,845 (1995) and $46,913
(1996) (Note 2)...................................................... 35,254 126,827
GOODWILL, net of accumulated amortization of $413,482 (1995)
and $ 594,002 (1996) (Note 2)........................................ 427,492 280,052
DEFERRED INCOME TAXES (Note 6)......................................... -- 186,576
----------- -----------
$ 1,697,547 $26,674,099
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 8).............................................. $ 153,912 $ 275,554
Accrued liabilities, including deferred income of $185,346 (1995) and
$256,686 (1996) and accrued salaries of $129,216 (1996).............. 264,999 566,139
Income taxes payable................................................... -- 433,021
Current portion of consideration due on asset purchase
(Notes 2 and 8)...................................................... 180,000 180,000
----------- -----------
Total current liabilities.......................................... 598,911 1,454,714
CONSIDERATION DUE ON ASSET PURCHASE, net of current portion
(Notes 2 and 8)...................................................... 210,959 68,635
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 7):
Preferred stock -- $.001 par value; 2,000,000 shares authorized; no
shares issued and outstanding........................................ -- --
Common stock -- $0.001 par value; 56,000,000 shares authorized;
5,999,032 (1995) and 9,468,548 (1996) shares issued and
outstanding.......................................................... 6,000 9,469
Additional paid-in capital............................................. 2,500,475 24,678,961
Deferred stock option compensation..................................... 21,965 154,386
Unrealized gain on investments available for sale (net of income taxes
of $58,795).......................................................... -- 87,688
Retained earnings (accumulated deficit)................................ (1,640,763) 220,246
----------- -----------
Total stockholders' equity......................................... 887,677 25,150,750
----------- -----------
$ 1,697,547 $26,674,099
=========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE> 22
SRS LABS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES (Note 8):
Royalty revenues..................................... $ 547,279 $ 822,559 $4,620,100
Other revenues....................................... 439,830 21,230 772,180
----------- ----------- ----------
Total revenues............................. 987,109 843,789 5,392,280
COST OF SALES........................................ 678,396 14,957 95,378
----------- ----------- ----------
GROSS MARGIN......................................... 308,713 828,832 5,296,902
SALES AND MARKETING.................................. 673,683 937,293 1,163,409
RESEARCH AND DEVELOPMENT............................. 340,109 383,948 521,482
GENERAL AND ADMINISTRATIVE (Note 8).................. 1,078,987 1,106,519 1,615,648
----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS........................ (1,784,066) (1,598,928) 1,996,363
INTEREST INCOME (EXPENSE), net....................... (91,793) (41,035) 365,583
----------- ----------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES...... (1,875,859) (1,639,963) 2,361,946
PROVISION FOR INCOME TAXES (Note 6).................. 800 800 500,937
----------- ----------- ----------
NET INCOME (LOSS).................................... $(1,876,659) $(1,640,763) $1,861,009
=========== =========== ==========
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT
SHARE.............................................. $ (0.37) $ (0.27) $ 0.21
=========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES USED IN THE
CALCULATION OF NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE............................ 5,075,509 6,031,898 8,686,408
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE> 23
SRS LABS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON RETAINED
------------------ PAID-IN DEFERRED INVESTMENTS, EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION NET (DEFICIT) TOTAL
--------- ------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994... 2,751,681 $2,752 $ 130,248 $ -- $ -- $ (233,367) $ (100,367)
Issuance of common stock
(Note 7)................. 2,389,621 2,390 1,707,610 -- -- -- 1,710,000
Ascribed value of services
contributed (Note 7)..... -- -- 40,000 -- -- -- 40,000
Net loss................... -- -- -- -- -- (1,876,659) (1,876,659)
--------- ------ ----------- ------- ------- ----------- -----------
BALANCE, December 31,
1994..................... 5,141,302 5,142 1,877,858 -- -- (2,110,026) (227,026)
Issuance of common stock
(Note 7)................. 857,730 858 2,682,643 -- -- -- 2,683,501
Reclassification of
accumulated deficit (Note
7)....................... -- -- (2,110,026) -- -- 2,110,026 --
Deferred compensation (Note
7)....................... -- -- -- 21,965 -- -- 21,965
Ascribed value of services
contributed (Note 7)..... -- -- 50,000 -- -- -- 50,000
Net loss................... -- -- -- -- -- (1,640,763) (1,640,763)
--------- ------ ----------- ------- ------- ----------- -----------
BALANCE, December 31,
1995..................... 5,999,032 6,000 2,500,475 21,965 -- (1,640,763) 887,677
Issuance of common stock
(Note 7)................. 3,107,452 3,107 22,049,848 -- -- -- 22,052,955
Proceeds from exercise of
stock options............ 362,064 362 99,638 -- -- -- 100,000
Deferred compensation (Note
7)....................... -- -- -- 132,421 -- -- 132,421
Ascribed value of services
contributed (Note 7)..... -- -- 29,000 -- -- -- 29,000
Unrealized gain on
investments available for
sale, net of tax (Note
3)....................... -- -- -- -- 87,688 -- 87,688
Net income................. -- -- -- -- -- 1,861,009 1,861,009
--------- ------ ----------- ------- ------- ----------- -----------
BALANCE, December 31,
1996..................... 9,468,548 $9,469 $24,678,961 $154,386 $87,688 $ 220,246 $25,150,750
========= ====== =========== ======= ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE> 24
SRS LABS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,876,659) $(1,640,763) $ 1,861,009
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 221,671 240,109 285,063
Deferred income taxes..................................... -- -- (405,512)
Amortization of premium on investments available for
sale................................................... -- -- 27,300
Loss on disposal of fixed assets.......................... -- 7,095 --
Write-down of inventories................................. 93,522 -- --
Accretion of consideration due on asset purchase.......... 62,740 50,990 38,064
Increase in deferred compensation......................... -- 21,965 132,421
Ascribed value of services contributed.................... 40,000 50,000 29,000
Changes in operating assets and liabilities:
Increase in royalty receivable......................... -- (42,961) (660,005)
Decrease (increase) in accounts receivable............. (36,364) 51,659 11,961
Increase in interest receivable........................ -- -- (325,822)
Decrease in inventories................................ 445,396 6,638 1,144
Decrease (increase) in other current and long term
assets............................................... (16,635) (546,140) 463,689
(Decrease) increase in accounts payable................ 253,247 (118,112) 121,642
Increase in other accrued liabilities.................. 31,101 222,846 301,140
Decrease in interest payable........................... (28,604) (8,191) --
Increase in income taxes payable....................... -- -- 374,226
----------- ----------- ------------
Net cash provided by (used in) operating
activities...................................... (810,585) (1,704,865) 2,255,320
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............... (80,045) (105,653) (157,654)
Expenditures related to patents............................. (38,597) -- (114,641)
Purchases of investments, available for sale................ -- -- (22,050,602)
Proceeds from sale of investments, available for sale....... -- -- 1,200,000
----------- ----------- ------------
Net cash used in investing activities............. (118,642) (105,653) (21,122,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of deposits received from prospective investors... (170,311) -- --
Repayment of notes payable to stockholders.................. (180,000) -- --
Principal payments on note payable.......................... (266,708) (311,907) --
Payment of consideration due on asset purchase.............. (291,720) (231,421) (213,468)
Issuance of common stock.................................... 1,710,000 2,683,501 22,152,955
----------- ----------- ------------
Net cash provided by financing activities......... 801,261 2,140,173 21,939,487
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ (127,966) $ 329,655 $ 3,071,910
CASH AND CASH EQUIVALENTS, beginning of period.............. 182,398 54,432 384,087
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 54,432 $ 384,087 $ 3,455,997
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash
paid during the period for:
Income taxes.............................................. $ 2,400 $ 800 $ 126,711
=========== =========== ============
Interest.................................................. $ 73,233 $ 20,721 $ --
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Additional consideration accrued for asset purchase
(Note 2)................................................ $ 111,137 $ 51,243 $ 33,080
Unrealized gain on investments, net (Note 3).............. $ -- $ -- $ 87,688
</TABLE>
See accompanying notes to financial statements.
22
<PAGE> 25
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- SRS Labs, Inc. (the Company) was incorporated
under the laws of the State of California on June 23, 1993 (See Note 2). The
Company licenses SRS, a three dimensional audio sound enhancement technology, to
original equipment manufacturers of various types of media equipment. During
1994, the Company altered its business strategy to direct its efforts to
licensing technology. As a result of this change, the Company recorded a
write-down of inventory totaling $93,522 during the year ended December 31,
1994.
The Company's success is dependent on its licensing of proprietary
technology to companies engaged in the manufacture of consumer electronics
primarily in the multi-media equipment sector. The Company's licensees, which
are located throughout the world, are subject to several market risks, including
but not limited to, changing consumer preferences, consumer demand and
technology changes. The market for the Company's technologies is also highly
competitive. Changes in these and other market conditions could adversely impact
future operating results of the Company. Additionally, the Company's future
operating success is dependent, at least in part, on its ability to maintain
proprietary technology and enforce its rights under its patents.
Cash Equivalents -- The Company considers all highly-liquid investments
with an original maturity of three months or less to be cash equivalents.
Investments -- Investments, consisting primarily of municipal bonds, have
been classified as available for sale and are reported at fair value, based on
quoted market prices, in noncurrent assets in the accompanying balance sheet.
Unrealized gains, net of applicable income taxes, are reported as a separate
component of stockholders' equity.
Furniture, Fixtures and Equipment -- Furniture, fixtures and equipment are
stated at cost, net of accumulated depreciation. Depreciation is provided for
using the straight-line method which amortizes cost over the estimated useful
lives of the respective assets or as to leasehold improvements, the term of the
related lease if less than the estimated service life ranging from three to five
years.
Patents -- Costs paid by the Company related to the establishment and
transfer of patents, primarily legal costs, are capitalized and amortized over
periods ranging from five to ten years, depending on the estimated life of the
technology patented.
Goodwill -- Consideration for the purchase of assets in excess of the fair
market value of specifically identified tangible assets has been capitalized as
goodwill in the accompanying balance sheets. Goodwill is being amortized over an
estimated useful life of five years. The recoverability of goodwill is
determined by comparing the carrying value of goodwill to the estimated future
operating income of the Company on an undiscounted cash flow basis. Should the
carrying value of goodwill exceed the estimated operating income for the
expected period of benefit, an impairment for the excess is recorded at that
time.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily 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 revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Revenue Recognition -- Royalty revenues associated with ongoing royalty
license agreements are recognized when license payments are due, generally when
paid by the licensee. Royalties are generally due approximately 30 to 60 days
after the end of each quarter upon receipt of reports from licensees stating the
number of products implementing SRS on which royalties are due. Licensing
revenues for one time
23
<PAGE> 26
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
technology transfer fees are recognized in the period in which the license
agreement is consummated, and are included in other revenue in the accompanying
statement of operations.
Research and Development -- Research and development costs are expensed as
incurred.
Income Taxes -- Effective January 1, 1995, the Company revoked its election
to be taxed as an S corporation for federal and state tax purposes. For all
periods prior to January 1, 1995, the Company elected to be treated as an S
corporation for both federal and state taxation purposes. Due to the Company's
net loss in periods in which the Company was an S corporation, pro forma income
taxes are not reflected in the accompanying financial statements (see Note 7).
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred taxes
on income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes.
Net Income (Loss) Per Common and Common Equivalent Share -- Net income
(loss) per common and common equivalent share has been computed by dividing the
net income (loss) by the weighted average number of common and common equivalent
shares outstanding during the period. Common stock equivalent shares include
common stock options (using the treasury stock method) and are excluded in loss
periods as they are anti-dilutive for computing per share information.
Additionally, pursuant to Securities and Exchange Commission Staff Accounting
Bulletin Topic 4D, stock options granted during the twelve months prior to the
date of the initial filing of the Company's Form SB-2 Registration Statement
have been included in the calculation of common equivalent shares using the
treasury stock method, as if they were outstanding as of the beginning of each
of the years ending December 31, 1994 and 1995.
Initial Public Offering -- In August 1996, the Company completed an initial
public offering of 3,107,452 shares of its common stock at an offering price of
$8 per share for net proceeds of $22.1 million.
Reverse Stock Split and Reincorporation -- On June 27, 1996, the Company
effected a .7241279-for-one stock split of its authorized and outstanding shares
of common stock. Additionally, on June 28, 1996 the Company reincorporated in
the State of Delaware and increased its authorized shares of common stock to
56,000,000 shares and shares of preferred stock to 2,000,000 shares. All share
and per share data relating to periods prior to the reverse stock split and
reincorporation have been restated to give effect to the reverse stock split.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principle Board's Opinion (APB) No. 25, Accounting for Stock Issued to
Employees.
Customer Concentration -- During the year ended December 31, 1994, four
customers accounted for 100% of the Company's license revenue. During the years
ended December 31, 1995 and 1996, two customers accounted for 62% and 38%,
respectively, of license revenue.
Concentrations of Credit Risk -- Accounts receivable and royalty
receivable, which represent the Company's only significant financial instruments
with potential credit risk, are from customers in various industries and
geographic locations. The Company makes periodic evaluations of the
creditworthiness of its customers and generally does not require collateral. To
date, the Company has not experienced any material write-offs or collection
problems.
Reclassifications -- Certain amounts as previously reported have been
reclassified to conform to the current year presentation.
24
<PAGE> 27
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
2. TECHNOLOGY ACQUISITION
On June 30, 1993 (the Closing Date), the Company purchased from Hughes
Aircraft Company (Hughes) certain assets related to Hughes' Sound Retrieval
System (SRS) and ORB product lines for $200,000 cash, a $625,481 note payable
and future royalty payments, subject to certain minimums. The note payable was
paid in full during 1995. The assets acquired included inventory, equipment and
the direct ownership of the SRS technology (goodwill) which had estimated fair
market values at the date of acquisition of $719,030, $106,451 and $678,594,
respectively.
In accordance with the purchase agreement (the Agreement), the Company is
required to pay Hughes additional consideration based on certain percentages,
ranging from 10% to 63%, of gross profits from the sale of certain products to,
and licensing royalties from, certain existing and target customers, as defined
in the Agreement. Such additional amounts are payable for a period equal to the
longer of the term of the applicable license agreements or five years. This
additional consideration is subject to a minimum of $180,000 per year (the
Guaranteed Minimum) for five years from the Closing Date. The aggregate
Guaranteed Minimum has been discounted at 10% yielding an initial value of
$678,594, and is included as part of the purchase price on June 30, 1993. This
balance is reflected as "goodwill" and "consideration due on asset purchase" in
the accompanying balance sheets. Additional consideration paid during the
five-year period in excess of the Guaranteed Minimum is capitalized and
amortized over the remaining estimated life of goodwill (see Note 1). At the end
of the five years subsequent to the Closing Date, the Company is required to pay
Hughes royalties based upon certain percentages, ranging from 10% to 50% of
gross profits from the sale of certain product to, and licensing royalties from
two customers, as defined in the Agreement, for an indefinite period.
In addition, the Company is required to pay Hughes a royalty of 3% of net
sales of all SRS or ORB products manufactured by the Company, excluding
inventory acquired from Hughes as specified in the Agreement, over the remaining
lives of the applicable patents. There were no sales of applicable products in
the years ended December 31, 1995 and 1996.
Under the terms of the Agreement, all license fees subject to the
Guaranteed Minimum will be deposited into an escrow account to cover any amounts
due to Hughes under the Agreement. The note payable and Guaranteed Minimum
payments are secured by assets held in trust owned by one of the Company's
stockholders and substantially all of the Company's assets.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table summarizes the Company's investment securities
available for sale as of December 31, 1996.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Municipal bonds available for
sale............................. $ 20,823,302 $ 146,555 $(72) $ 20,969,785
============ ========= ==== ============
</TABLE>
25
<PAGE> 28
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
The contractual maturities of investments at December 31, 1996 are shown
below. Expected maturities may differ from contractual maturities.
<TABLE>
<CAPTION>
1996
----------------------------
ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Municipal bonds:
Due in one year or less......................... $ -- $ --
Due in one to five years........................ 2,533,864 2,567,370
Due in five to ten years........................ 17,289,438 17,402,415
Due after ten years............................. 1,000,000 1,000,000
----------- -----------
$ 20,823,302 $ 20,969,785
=========== ===========
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Furniture and fixtures................................ $234,153 $ 319,866
Equipment............................................. 66,644 133,944
Leasehold improvements................................ -- 4,641
-------- ---------
300,797 458,451
Less accumulated depreciation......................... (95,787) (177,262)
-------- ---------
$205,010 $ 281,189
======== =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain office equipment under
noncancelable operating leases.
During 1994, the Company leased its office and storage facilities on a
month-to-month basis from an affiliate of one of the Company's stockholders.
Expenses incurred under this lease aggregated $28,200 for the year ended
December 31, 1994. Due to an office relocation in 1994, the Company terminated
this lease, incurred a $12,500 early lease termination penalty and entered into
a new office facility lease agreement effective June 1, 1994 with a Company
stockholder and officer. Total rent expense incurred on office facilities was
$52,463, $46,447 (net of sublease income of $16,733) and $63,430 for the years
ended December 31, 1994, 1995 and 1996, respectively. Future annual minimum
lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
OFFICE
FACILITY EQUIPMENT TOTAL
------- ------- -------
<S> <C> <C> <C>
1997.......................................... $27,395 $ 4,836 $32,231
1998.......................................... -- 4,836 4,836
1999.......................................... -- 4,836 4,836
2000.......................................... -- 4,836 4,836
2001.......................................... -- 4,836 4,836
------- ------- -------
$27,395 $24,180 $51,575
======= ======= =======
</TABLE>
In June 1996, the Company entered into employment agreements with two
Company officers and two significant employees. Minimum aggregate compensation
under those employment agreements are $237,500 (1996), $565,000 (1997) and
$165,000 (1998).
26
<PAGE> 29
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
6. INCOME TAXES
For the years ended December 31, 1995 and 1996, the provision for income
taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Current:
Federal............................................ $ -- $ 574,970
State.............................................. 800 168,256
Foreign............................................ -- 163,223
--------- ---------
800 906,449
Deferred:
Federal............................................ (530,298) 371,428
State.............................................. (97,932) 47,884
Valuation Allowance................................ 628,230 (824,824)
--------- ---------
$ 800 $ 500,937
========= =========
</TABLE>
The reconciliation of the provision for income taxes computed at U.S.
federal statutory rates to the provision for income taxes for the years ended
December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Tax at U.S. federal statutory rates.................. $(540,859) $ 803,062
State income taxes................................... (64,107) 142,653
Tax exempt interest.................................. -- (105,862)
Restoration of deferred income tax assets in
connection with the Company's conversion to a C
corporation........................................ (196,594) 126,123
Change in valuation allowance........................ 824,824 (824,824)
Accruals without tax effect.......................... (22,464) 359,785
--------- ---------
Total income tax expense........................... $ 800 $ 500,937
========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
State income taxes.............................. $ (48,490) $ 30,816
Depreciation and amortization................... 154,615 186,576
Accruals not currently deductible............... 193,974 188,120
Other........................................... 45,220 --
Net operating losses............................ 479,505 --
--------- --------
824,824 405,512
Valuation allowance............................. (824,824) --
--------- --------
Total net deferred tax assets................ $ -- $ 405,512
========= ========
</TABLE>
27
<PAGE> 30
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
For all periods prior to January 1, 1995, the Company elected to be treated
as an S corporation under the provisions of the Internal Revenue Code. Effective
January 1, 1995, the Company converted to a C corporation and became subject to
regular federal and state income taxes on a go-forward basis.
Under the Internal Revenue Code of 1986, as amended (the "Code"), a
corporation will be deemed to be a "personal holding company" subject to a 39.6%
tax on its undistributed personal holding company income, if (in general) (i) at
any time during the last half of a taxable year more than 50% in value of its
outstanding stock is owned by, or on behalf of, five or fewer individuals, and
(ii) at least 60% of the corporation's adjusted ordinary gross income for the
taxable year consists of "personal holding company income." Personal holding
company income is defined to include such passive types of income as royalties,
dividends, interest, annuities and certain rents. Undistributed personal holding
company income is defined as taxable income, with certain adjustments
(including, among others, a deduction for Federal income taxes), less any
amounts distributed as dividends. The tax imposed on a personal holding company
is in addition to the regular corporate
income tax and is meant to force a personal holding company to distribute its
income currently.
The Company expects that it will exceed the stock ownership threshold
described above. However, the Company believes that the licensing royalties it
receives are specifically excluded from the category of personal holding company
income based upon a safe harbor exclusion in the Code which generally is
applicable so long as the Company's operating expenses (as adjusted in a
specified manner) equal or exceed 25% of its revenues. Consequently, based upon
its projections, the Company does not expect to have significant personal
holding Company income through at least the year ended 1997.
7. STOCKHOLDERS' EQUITY
Sale of Common Stock -- On January 27, 1994, the Company sold 2,389,621
shares of its common stock to an individual investor for $1,710,00 or $0.72 per
share. The investor also acquired common stock from certain shareholders and, in
the aggregate, became the owner of a majority of the Company.
On January 9, 1995, the Company entered into a Stock Purchase Agreement
with Packard Bell Electronics, Inc. (Packard Bell), pursuant to which Packard
Bell purchased 572,061 newly issued shares of common stock at $2.62 per share
for a total purchase price of $1,500,000, payable in three equal installments.
The first installments were made on January 9, 1995 and July 14, 1995, and the
remaining installment was due on December 29, 1995 and was paid January 17,
1996. The final installment of $500,000 due December 29, 1995 was included in
other receivables at December 31, 1995. In connection with the Stock Purchase
Agreement, Packard Bell also entered into (i) a License Agreement with the
Company to license SRS for use in multimedia computers, and (ii) a Stock Option
Agreement with the Company whereby the Company granted an option to purchase
382,104 shares of common stock at an exercise price of $4.14 per share.
In April 1995, the Company sold 285,669 shares of its common stock to an
individual investor for $1,183,501 or $4.14 per share.
In January 1996, a former director exercised his options to purchase
362,064 shares of common stock at an exercise price of $.28 per share.
During the years ended December 31, 1994, 1995 and 1996, the Company
recorded $40,000, $50,000 and $29,000, respectively, of additional paid-in
capital related to the estimated fair value of services performed by a Company
officer for which no cash consideration was paid by the Company.
In August 1996, the Company completed an initial public offering of
$3,107,452 shares of its common stock at an offering price of $8.00 per share
for net proceeds of $22.1 million.
28
<PAGE> 31
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
Reclassification -- Upon electing to revoke its election to be taxed as an
S corporation (see Note 1), on January 1, 1995, in accordance with a regulation
of the Securities and Exchange Commission, the Company reclassified its
accumulated deficit of $2,110,026 to additional paid-in capital.
Stock Award/Option Plans -- On December 10, 1993, the Company's Board of
Directors and shareholders adopted an Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan (the "1993 Plan"). Under the 1993
Plan, 801,971 shares of the Company's common stock are reserved for issuance to
executives, employees and non-employee directors of the Company at the
discretion of the Board of Directors or the committee administering the 1993
Plan. The Compensation Committee of the Board has been appointed to administer
the 1993 Plan. Options issued under the 1993 Plan vest in the manner prescribed
by the Compensation Committee. As of December 31, 1996, options to purchase
801,971 shares of the Company's common stock were granted under the 1993 Plan.
In January 1994, the Company entered into stock option agreements with two
Company officers whereby options to purchase 181,032 shares of the Company's
common stock were granted to each of the officers at an exercise price of $0.14
per share (collectively, the "Executive Option Agreements").
In July 1996, the Company's Board of Directors adopted, and the Company's
stockholders approved, the 1996 Long-Term Incentive Plan (the "1996 Plan"), for
which 1,000,000 shares of the Company's common stock are reserved for issuance
to officers, employees and consultants of the Company. The Compensation
Committee of the Board of Directors has been appointed to administer the 1996
Plan. Options issued under the 1996 Plan vest in the manner prescribed by the
Compensation Committee. As of December 31, 1996, options to purchase 625,801
shares of the Company's common stock were granted under the 1996 Plan.
In July 1996, the Company's Board of Directors adopted, and the Company's
stockholders approved, the 1996 Non-employee Directors Stock Option Plan (the
"Non-employee Directors Plan"), a non-discretionary formula plan for which
120,000 shares of the Company's common stock are reserved for issuance to the
Company's Non-employee Directors. The Non-employee Directors Plan is
administered by a committee consisting of all directors who are not eligible to
participate in the Non-employee Directors Plan and the Chief Financial Officer
of the Company. With the exception of the initial option granted to a
non-employee director, which vests immediately, options granted under the
Non-employee Directors Plan vest over a three year period, the first installment
vesting on the date of grant. As of December 31, 1996, options to purchase
30,000 shares of common stock were granted under the Non-employee Directors
Plan.
The following table summarizes stock option activity under the 1993 Plan,
the 1996 Plan, the Executive Option Agreements, the Non-employee Director Plan
and the stock option grant to Packard Bell for the periods indicated:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at December 31, 1994.................... 939,194 $ 0.28
Granted........................................... 936,424 $ 3.81
---------
Outstanding at December 31, 1995.................... 1,875,618 $ 2.04
Granted........................................... 688,386 $ 8.11
Stock options exercised........................... (362,064) $ 0.28
Forfeited......................................... (25,344) $10.36
---------
Outstanding at December 31, 1996.................... 2,176,596 $ 4.16
=========
</TABLE>
29
<PAGE> 32
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED WEIGHTED
OPTIONS CONTRACTUAL AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Range of exercise
prices:
$0.14 - $0.76...... 577,130 85 months $ 0.29 511,239 $ 0.23
$2.62 - $4.56...... 936,424 98 months $ 3.81 520,688 $ 3.99
$8.00 - $10.36..... 663,042 116 months $ 8.03 30,000 $ 8.00
--------- ---------
2,176,596 $ 4.16 1,061,927 $ 2.30
========= =========
</TABLE>
On December 1, 1995, options were granted for the purchase of up to 300,875
common shares at prices of $4.14 to $4.56 per share, which the Company's Board
of Directors deemed the fair market value of the common stock at the date of
grant. The Company will record compensation expense resulting from the
difference between the option price per share and the estimated fair market
value of the common stock ($4.99) determined by a third-party appraisal
completed in May 1996, totaling $236,456. This amount will be recorded ratably
over the vesting period of the respective options. During the years ended
December 31, 1995 and 1996, the Company had recorded $21,965 and $132,421,
respectively, of deferred compensation expense associated with these stock
option grants.
Additional Stock Plan Information -- As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB No. 25, Accounting for Stock Issued to Employees, and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
five years; stock volatility, 1%; risk-free interest rates, 5.5%; and no
dividends during the expected term. The Company's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the 1995 and 1996 awards had been amortized to
expense over the vesting period of the awards, pro forma net income (loss) would
have been ($1,659,858), or ($.28) per share in 1995 and $1,762,497, or $.21 per
share in 1996. However, the impact of outstanding nonvested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
8. RELATED PARTY TRANSACTIONS
The Company shares certain general and administrative expenses with an
affiliated company which is 100% owned by a Company officer/stockholder.
Pursuant to a written agreement, one-half of these expenses are allocated to the
Company.
30
<PAGE> 33
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (CONTINUED)
Total revenue from an affiliated company during the years ended December
31, 1994, 1995 and 1996, which is 100% owned by a Company officer/stockholder,
amounted to $185,499, $71,217 and $28,449, respectively. As of December 31, 1994
and 1995 accounts receivable from this affiliated company were $16,144 and
$3,000, respectively. Amounts due to this affiliated company were $49,237,
$14,956 and $12,639 as of December 31, 1994, 1995 and 1996, respectively.
An officer/stockholder of the Company has pledged certain personal assets
to secure amounts due related to the acquisition of certain assets (see Note 2).
A stockholder of the Company paid $1,500,000 in license royalties to the
Company during the year ended December 31, 1996.
9. EMPLOYEE BENEFIT PLAN
The Company's employees may participate in a salary deferral plan (the
"401(k) Plan") in which eligible employees can contribute up to 15% of their
eligible compensation. The Company also may contribute on a discretionary basis.
During the years ended December 31, 1995 and 1996, the Company did not
contribute to the 401(k) Plan.
31
<PAGE> 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the captions "ELECTION OF DIRECTORS" and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of Stockholders scheduled to be held in June
1997, is incorporated herein by reference. The Proxy Statement will be filed
with the Commission not later than 120 days after the close of Fiscal 1996.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the captions "COMPENSATION OF EXECUTIVE
OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD -- Compensation of Directors" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS. The Exhibits listed below (to the extent not incorporated by
reference as an exhibit) are filed with this annual report on Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
3.1 Certificate of Incorporation of the Company, previously filed with the U.S.
Securities and Exchange Commission (the "Commission") as Exhibit 3.1 to the
Company's Registration Statement on Form SB-2, specifically included in
Amendment No. 1 to such Registration Statement filed with the Commission on
July 3, 1996 (File No. 333-4974-LA) (the "Registration Statement Amendment
No. 1"), which is incorporated herein by reference.
3.2 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2
to the Registration Statement Amendment No. 1, which is incorporated herein
by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1 Employment Agreement dated July 1, 1996, between the Company and Thomas C.K.
Yuen, previously filed with the Commission as Exhibit 10.8 to the
Registration Statement Amendment No. 1, which is incorporated herein by
reference.
10.2 Amendment to Employment Agreement dated as of March 14, 1997, between the
Company and Thomas C.K. Yuen.
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
10.3 Employment Agreement dated July 1, 1996, between the Company and Stephen V.
Sedmak, previously filed with the Commission as Exhibit 10.9 to the
Registration Statement Amendment No. 1, which is incorporated herein by
reference.
10.4 Employment Agreement dated July 1, 1996, between the Company and Arnold I.
Klayman, previously filed with the Commission as Exhibit 10.10 to the
Registration Statement Amendment No. 1, which is incorporated herein by
reference.
10.5 Amendment to Employment Agreement dated as of March 14, 1997, between the
Company and Arnold I. Klayman.
10.6 Employment Agreement dated July 1, 1996, between the Company and Alan D.
Kraemer, previously filed with the Commission as Exhibit 10.11 to the
Registration Statement Amendment No. 1, which is incorporated herein by
reference.
10.7 Letter Agreement of Employment dated September 6, 1996, between the Company
and Robert A. Veri.
10.8 SRS Labs, Inc. Incentive Stock Option, Nonqualified Stock Option and
Restricted Purchase Plan -- 1993, as amended and restated, previously filed
with the Commission as Exhibit 10.12 to the Company's Registration Statement
on Form SB-2 filed with the Commission on June 3, 1996 (File No.
333-4974-LA) (the "Registration Statement"), which is incorporated herein by
reference.
10.9 Stock Option Agreement dated January 19, 1994, between the Company and
Stephen V. Sedmak, as amended, previously filed with the Commission as
Exhibit 10.13 to the Registration Statement, which is incorporated herein by
reference.
10.10 Stock Option Agreement dated January 19, 1994, between the Company and James
S. Lucas, previously filed with the Commission as Exhibit 10.14 to the
Registration Statement, which is incorporated herein by reference.
10.11 SRS Labs, Inc. 1996 Long-Term Incentive Plan, previously filed with the
Commission as Exhibit 10.15 to the Company's Registration Statement on Form
SB-2, specifically included in Amendment No. 2 to such Registration
Statement filed with the Commission on August 2, 1996 (File No. 333-4974-LA)
(the "Registration Statement Amendment No. 2"), which is incorporated herein
by reference.
10.12 SRS Labs, Inc. 1996 Nonemployee Directors Stock Option Plan, previously
filed with the Commission as Exhibit 10.16 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.13 Annual Incentive Bonus Plan, previously filed with the Commission as Exhibit
10.18 to the Registration Statement Amendment No. 1, which is incorporated
herein by reference.
10.14 SRS Labs, Inc. Supplemental Executive Incentive Bonus Plan.
10.15 Form of Indemnification Agreement, previously filed with the Commission as
Exhibit 10.20 to the Registration Statement Amendment No. 1, which is
incorporated herein by reference.
Other Material Contracts
10.16 Shareholders Agreement dated as of January 27, 1994, between the Company and
the Shareholders of the Company named therein, previously filed with the
Commission as Exhibit 9.3 to the Registration Statement Amendment No. 2,
which is incorporated herein by reference.
10.17 Shareholders Agreement II dated as of January 9, 1995, between the Company
and the Shareholders of the Company named therein, previously filed with the
Commission as Exhibit 9.1 to the Registration Statement, which is
incorporated herein by reference.
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
10.18 Shareholders Agreement III dated as of April 21, 1995, between the Company
and the Shareholders of the Company named therein, previously filed with the
Commission as Exhibit 9.2 to the Registration Statement, which is
incorporated herein by reference.
10.19 Asset Purchase Agreement dated as of June 30, 1993, between the Company and
Hughes Aircraft, previously filed with the Commission as Exhibit 10.1 to the
Registration Statement, which is incorporated herein by reference.
10.20 First Amendment to Security Agreement dated as of September 14, 1994, by and
among the Company, Hughes Aircraft, Cruttenden & Company, Walter W.
Cruttenden III, Pacific National Bank and The Thomas Yuen Family Trust,
previously filed with the Commission as Exhibit 10.2 to the Registration
Statement, which is incorporated herein by reference.
10.21 Stock Purchase Agreement dated as of January 9, 1995, between the Company
and Packard Bell Electronics, Inc. d/b/a Packard Bell Corporation,
previously filed with the Commission as Exhibit 10.3 to the Registration
Statement Amendment No. 2, which is incorporated herein by reference.
10.22 Amended and Restated Stock Option Agreement dated as of January 9, 1995,
between the Company and Packard Bell Electronics, Inc. d/b/a/ Packard Bell
Corporation, previously filed with the Commission as Exhibit 10.4 to the
Registration Statement, which is incorporated herein by reference.
10.23 License Agreement dated as of January 9, 1995, between the Company and
Packard Bell Electronics, Inc. d/b/a/ Packard Bell Corporation, previously
filed with the Commission as Exhibit 10.5 to the Company's Registration
Statement on Form SB-2, specifically included in Amendment No. 3 to such
Registration Statement filed with the Commission on August 7, 1996 (File No.
333-4974-LA) (the "Registration Statement Amendment No. 3"), which is
incorporated herein by reference.
10.24 License Agreement dated as of June 27, 1988, between Hughes Aircraft and
Sony Corporation, as amended and assigned to the Company, previously filed
with the Commission as Exhibit 10.6 to the Registration Statement Amendment
No. 3, which is incorporated herein by reference.
10.25 Real Property Lease dated June 1, 1994, between the Company and Daimler
Commerce Partners, L.P., a California Limited Partnership, previously filed
with the Commission as Exhibit 10.7 to the Registration Statement, which is
incorporated herein by reference.
10.26 Stock Divestment Agreement dated July 1, 1996, between the Company, Thomas
C.K. Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed
with the Commission as Exhibit 10.17 to the Registration Statement Amendment
No. 2, which is incorporated herein by reference.
10.27 Services Agreement dated July 1, 1996, between the Company and Sierra
Digital Productions, Inc., previously filed with the Commission as Exhibit
10.19 to the Registration Statement Amendment No. 1, which is incorporated
herein by reference.
23 Consent of Deloitte & Touche LLP dated March 28, 1997.
24 Power of attorney (included on page 35 of the Form 10-KSB).
27 Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter of the fiscal year covered by this Form 10-KSB.
34
<PAGE> 37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SRS LABS, INC.
Date: March 28, 1997 By: /s/ THOMAS C.K. YUEN
------------------------------------
Thomas C.K. Yuen
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that such person whose signature appears
below constitutes and appoints Stephen V. Sedmak and Janet M. Biski, and each of
them his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-KSB and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the U.S. Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power 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 that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- --------------------------------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ THOMAS C.K. YUEN Director, Chairman of the Board March 28, 1997
- --------------------------------------------- and Chief Executive Officer
Thomas C.K. Yuen (Principal Executive Officer)
/s/ STEPHEN V. SEDMAK Director, President and Chief March 28, 1997
- --------------------------------------------- Operating Officer
Stephen V. Sedmak
/s/ JANET M. BISKI Vice President, Chief Financial March 28, 1997
- --------------------------------------------- Officer, Secretary and
Janet M. Biski Treasurer (Principal Financial
and Accounting Officer)
/s/ JOHN AUYEUNG Director March 28, 1997
- ---------------------------------------------
John AuYeung
/s/ JEFFREY I. SCHEINROCK Director March 28, 1997
- ---------------------------------------------
Jeffrey I. Scheinrock
/s/ JOHN TU Director March 28, 1997
- ---------------------------------------------
John Tu
</TABLE>
35
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Company, previously filed with the U.S.
Securities and Exchange Commission (the "Commission") as Exhibit 3.1 to the
Company's Registration Statement on Form SB-2, specifically included in Amendment
No. 1 to such Registration Statement filed with the Commission on July 3, 1996
(File No. 333-4974-LA) (the "Registration Statement Amendment No. 1"), which is
incorporated herein by reference.
3.2 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2 to the
Registration Statement Amendment No. 1, which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1 Employment Agreement dated July 1, 1996, between the Company and Thomas C.K. Yuen,
previously filed with the Commission as Exhibit 10.8 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.2 Amendment to Employment Agreement dated as of March 14, 1997, between the Company
and Thomas C.K. Yuen.
10.3 Employment Agreement dated July 1, 1996, between the Company and Stephen V. Sedmak,
previously filed with the Commission as Exhibit 10.9 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.4 Employment Agreement dated July 1, 1996, between the Company and Arnold I. Klayman,
previously filed with the Commission as Exhibit 10.10 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.5 Amendment to Employment Agreement dated as of March 14, 1997, between the Company
and Arnold I. Klayman.
10.6 Employment Agreement dated July 1, 1996, between the Company and Alan D. Kraemer,
previously filed with the Commission as Exhibit 10.11 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.7 Letter Agreement of Employment dated September 6, 1996, between the Company and
Robert A. Veri.
10.8 SRS Labs, Inc. Incentive Stock Option, Nonqualified Stock Option and Restricted
Purchase Plan -- 1993, as amended and restated, previously filed with the
Commission as Exhibit 10.12 to the Company's Registration Statement on Form SB-2
filed with the Commission on June 3, 1996 (File No. 333-4974-LA) (the "Registration
Statement"), which is incorporated herein by reference.
10.9 Stock Option Agreement dated January 19, 1994, between the Company and Stephen V.
Sedmak, as amended, previously filed with the Commission as Exhibit 10.13 to the
Registration Statement, which is incorporated herein by reference.
10.10 Stock Option Agreement dated January 19, 1994, between the Company and James S.
Lucas, previously filed with the Commission as Exhibit 10.14 to the Registration
Statement, which is incorporated herein by reference.
10.11 SRS Labs, Inc. 1996 Long-Term Incentive Plan, previously filed with the Commission
as Exhibit 10.15 to the Company's Registration Statement on Form SB-2, specifically
included in Amendment No. 2 to such Registration Statement filed with the
Commission on August 2, 1996 (File No. 333-4974-LA) (the "Registration Statement
Amendment No. 2"), which is incorporated herein by reference.
10.12 SRS Labs, Inc. 1996 Nonemployee Directors Stock Option Plan, previously filed with
the Commission as Exhibit 10.16 to the Registration Statement Amendment No. 1,
which is incorporated herein by reference.
10.13 Annual Incentive Bonus Plan, previously filed with the Commission as Exhibit 10.18
to the Registration Statement Amendment No. 1, which is incorporated herein by
reference.
10.14 SRS Labs, Inc. Supplemental Executive Incentive Bonus Plan.
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
10.15 Form of Indemnification Agreement, previously filed with the Commission as Exhibit
10.20 to the Registration Statement Amendment No. 1, which is incorporated herein
by reference.
Other Material Contracts
10.16 Shareholders Agreement dated as of January 27, 1994, between the Company and the
Shareholders of the Company named therein, previously filed with the Commission as
Exhibit 9.3 to the Registration Statement Amendment No. 2, which is incorporated
herein by reference.
10.17 Shareholders Agreement II dated as of January 9, 1995, between the Company and the
Shareholders of the Company named therein, previously filed with the Commission as
Exhibit 9.1 to the Registration Statement, which is incorporated herein by
reference.
10.18 Shareholders Agreement III dated as of April 21, 1995, between the Company and the
Shareholders of the Company named therein, previously filed with the Commission as
Exhibit 9.2 to the Registration Statement, which is incorporated herein by
reference.
10.19 Asset Purchase Agreement dated as of June 30, 1993, between the Company and Hughes
Aircraft, previously filed with the Commission as Exhibit 10.1 to the Registration
Statement, which is incorporated herein by reference.
10.20 First Amendment to Security Agreement dated as of September 14, 1994, by and among
the Company, Hughes Aircraft, Cruttenden & Company, Walter W. Cruttenden III,
Pacific National Bank and The Thomas Yuen Family Trust, previously filed with the
Commission as Exhibit 10.2 to the Registration Statement, which is incorporated
herein by reference.
10.21 Stock Purchase Agreement dated as of January 9, 1995, between the Company and
Packard Bell Electronics, Inc. d/b/a Packard Bell Corporation, previously filed
with the Commission as Exhibit 10.3 to the Registration Statement Amendment No. 2,
which is incorporated herein by reference.
10.22 Amended and Restated Stock Option Agreement dated as of January 9, 1995, between
the Company and Packard Bell Electronics, Inc. d/b/a/ Packard Bell Corporation,
previously filed with the Commission as Exhibit 10.4 to the Registration Statement,
which is incorporated herein by reference.
10.23 License Agreement dated as of January 9, 1995, between the Company and Packard Bell
Electronics, Inc. d/b/a/ Packard Bell Corporation, previously filed with the
Commission as Exhibit 10.5 to the Company's Registration Statement on Form SB-2,
specifically included in Amendment No. 3 to such Registration Statement filed with
the Commission on August 7, 1996 (File No. 333-4974-LA) (the "Registration
Statement Amendment No. 3"), which is incorporated herein by reference.
10.24 License Agreement dated as of June 27, 1988, between Hughes Aircraft and Sony
Corporation, as amended and assigned to the Company, previously filed with the
Commission as Exhibit 10.6 to the Registration Statement Amendment No. 3, which is
incorporated herein by reference.
10.25 Real Property Lease dated June 1, 1994, between the Company and Daimler Commerce
Partners, L.P., a California Limited Partnership, previously filed with the
Commission as Exhibit 10.7 to the Registration Statement, which is incorporated
herein by reference.
10.26 Stock Divestment Agreement dated July 1, 1996, between the Company, Thomas C.K.
Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed with the
Commission as Exhibit 10.17 to the Registration Statement Amendment No. 2, which is
incorporated herein by reference.
10.27 Services Agreement dated July 1, 1996, between the Company and Sierra Digital
Productions, Inc., previously filed with the Commission as Exhibit 10.19 to the
Registration Statement Amendment No. 1, which is incorporated herein by reference.
23 Consent of Deloitte & Touche LLP dated March 28, 1997.
24 Power of attorney (included on page 35 of the Form 10-KSB).
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EX-10.2
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is
entered into as of March 14, 1997, between SRS Labs, Inc., a Delaware
corporation (the "Company"), and Thomas C.K. Yuen, an individual (the
"Employee").
RECITALS
A. The Company and the Employee entered into a certain
Employment Agreement dated as of July 1, 1996 (the "Agreement").
B. The Company and the Employee now desire to amend the
Agreement to provide that the Employee shall not be entitled to paid vacation
under the Agreement, and the Employee desires to acknowledge that he waives all
rights he may have to accrue paid vacation after the date hereof during the
term of the Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the provisions set forth
in this Amendment, and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Capitalized terms used herein shall have the meanings
ascribed to such terms in the Agreement unless otherwise defined herein.
2. Section 3.5 of the Agreement is hereby amended and
restated in its entirety to read as follows:
"3.5 Other Benefits. The Employee shall be
eligible to participate in, and be covered by, all such other
employee benefits generally provided to an executive officer
of the Company, except the Employee shall not be entitled to
any paid vacation. Such benefits include but are not limited
to, health (including coverage for family members subject to
plan limitations), life and disability insurance (excluding
tax gross up amounts) and sick leave."
3. The Employee hereby waives any rights he may have to
accrue paid vacation after the date of this Amendment during the term of the
Agreement, whether such rights arise under the Company's employee benefit
plans, applicable law or otherwise.
<PAGE> 2
4. This Amendment shall be deemed to be an amendment to
the Agreement, and the Agreement, as amended hereby, is hereby ratified,
approved and confirmed in each and every respect. All references to the
Agreement in any other document, instrument, agreement or writing shall
hereafter be deemed to refer to the Agreement as amended hereby.
5. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.
COMPANY:
SRS LABS, INC., a Delaware corporation
By: /s/ STEPHEN V. SEDMAK
-------------------------------------
Stephen V. Sedmak
President and Chief Operating Officer
EMPLOYEE:
/s/ THOMAS C.K. YUEN
-------------------------------------
Thomas C. K. Yuen
<PAGE> 1
EX-10.5
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (this "Amendment") is
entered into as of March 14, 1997, between SRS Labs, Inc., a Delaware
corporation (the "Company"), and Arnold Klayman, an individual (the
"Employee").
RECITALS
A. The Company and the Employee entered into a certain
Employment Agreement dated as of July 1, 1996 (the "Agreement").
B. The Company and the Employee now desire to amend the
Agreement to (i) increase the Employee's Initial Base Salary under Section
3.1.1. of the Agreement and (ii) extend the term of the Agreement under Section
2 of the Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the provisions set forth
in this Amendment, and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Capitalized terms used herein shall have the meanings
ascribed to such terms in the Agreement unless otherwise defined herein.
2. Section 2 of the Agreement is hereby amended and
restated in its entirety to read as follows:
"2. Term. The initial term of this Agreement shall
commence as of May 1, 1996 and shall continue in effect until
December 31, 1999. On December 31, 1999, and on the 31st day
of December of each year thereafter (unless this Agreement
shall have been previously terminated), the term of this
Agreement shall be automatically extended for an additional
term of one year unless either party shall provide the other
with at least 30-days written notice prior to such December
31st of the party's intent to terminate this Agreement. In
the event that the Company shall provide written notice of
termination to the Employee, the Employee will be entitled to
the severance benefits set forth in Section 4.3 herein. Upon
the payment of such severance benefits, the Company shall be
relieved from any liability for the unexpired term of this
Agreement."
<PAGE> 2
3. Section 3.1.1 of the Agreement is hereby amended and
restated in its entirety to read as follows:
"3.1.1. Initial Base Salary. The initial Base
Salary to be paid to the Employee hereunder is $90,000 per
year for the Company's 1996 fiscal year. The Base Salary to
be paid to the Employee hereunder during the Company's 1997
fiscal year shall be $95,000 from January 1, 1997 to March 31,
1997 and $110,000 from April 1, 1997 to December 31, 1997. In
addition, during the Company 1998 and 1999 fiscal years, the
Base Salary to be paid to the Employee shall be $120,000 and
$130,000 per year, respectively."
4. This Amendment shall be deemed to be an amendment to
the Agreement, and the Agreement, as amended hereby, is hereby ratified,
approved and confirmed in each and every respect. All references to the
Agreement in any other document, instrument, agreement or writing shall
hereafter be deemed to refer to the Agreement as amended hereby.
5. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.
COMPANY:
SRS LABS, INC., a Delaware corporation
By: /s/ STEPHEN V. SEDMAK
-------------------------------------
Stephen V. Sedmak
President and Chief Operating Officer
EMPLOYEE:
/s/ ARNOLD KLAYMAN
-------------------------------------
Arnold Klayman
<PAGE> 1
EXHIBIT 10.7
[SRS LETTERHEAD]
September 6, 1996
Mr. Robert A. Veri
37 Toulon
Laguna Niguel, CA 92677
Dear Bob:
Congratulations. It is with great pleasure that I invite you to join SRS Labs,
Inc. as General Manager. As we have discussed, this is an extremely important
position as you will be responsible for sales, marketing and engineering on a
day-to-day basis.
Your position as General manager will have a monthly salary of $10,833.00.
Additionally, you will receive a monthly non-recoverable draw-against-bonus in
the amount of $2,167.00 for the first 12 months of your employment. This
monthly draw is against the company bonus program which is equal to 20% of your
base salary when performance meets plan. A copy of the bonus program will be
provided to you during your first week of employment.
As General Manager, you will receive a grant of 50,000 stock options for SRS
Labs. The grant date will be set by the Compensation Committee of the Board of
Directors. These stock options will be governed by the company stock option
program. A copy of the company stock option plan will be provided to you
during your first week of employment.
You will be eligible on your first day to enroll in our benefits plan, which
includes medical, dental and vision insurance, as well as life insurance in the
amount of $50,000. Coverage will begin on the first day of the month following
your employment. A copy of the plan will be provided to you during your first
week of employment. You will also earn vacation at the rate of three weeks for
each year of employment.
SRS Labs also offers employees the option to participate in an Employee-only
contributory 401(k) plan. You are eligible to participate in this Plan
according to the standard terms of enrollment. The entry dates of the plan fall
on the first day of the first month of every calendar quarter. A copy of the
plan will be provided to you during your first week of employment.
<PAGE> 2
Mr. Robert A. Veri Page 2
September 6, 1996
Your official starting date will be September 9, 1996. You will be reporting
directly to me.
As General Manager, your compensation package must be approved by the
Compensation Committee of the Board of Directors. Additionally, this offer of
employment will be contingent on the submission of proof of your eligibility to
work in the United States and the signing of the SRS Labs, Inc. At-Will
Employment Agreement and the Confidentiality, Non-Competition, and Compliance
Agreement, copies of which are attached for your reference.
As per our discussions, we also agree that should you be terminated for any
reason other than cause, SRS Labs will continue to pay your salary for 12
months following said termination.
Bob, if this offer meets with your approval, please indicate your acceptance
in the space provided below. We look forward to having you as part of our team
as we establish SRS(--) as the industry standard in 3D sound.
Sincerely,
SRS Labs, Inc.
/s/ STEPHEN V. SEDMAK
- -----------------------------
Stephen V. Sedmak
President
enc.
I Accept /s/ ROBERT A. VERI 9/11/96
-------------------------- ------------------
Robert A. Veri Date
<PAGE> 1
EX-10.14
SRS LABS, INC.
SUPPLEMENTAL EXECUTIVE INCENTIVE BONUS PLAN
THIS SUPPLEMENTAL EXECUTIVE INCENTIVE BONUS PLAN (the "Plan") is entered
into by SRS Labs, Inc. (the "Company"), a Delaware corporation, for the purpose
of providing a performance based incentive for certain of the Company's
executive officers. The terms of the Plan are as follows, effective January 1,
1997:
1. Participants. The participants in this Plan shall be those
executive officers of the Company who have been designated as participants with
respect to a performance period, which may be a year or some shorter period, by
the Board of Directors, or by the Compensation Committee, if the Board of
Directors has delegated administration of the Plan to the Compensation
Committee.
2. Bonus. Bonuses under the Plan are to be based on the excess
of (a) the Company's actual operating profit (revenue less cost of goods sold
and operating expenses) over the performance period over (b) targeted operating
profit (as previously defined) over the same performance period.
3. Payment of Bonus. The bonus shall be paid to all participants
no later than ninety (90) days after the close of the performance period, in
cash. Payment shall be made from the Company's general assets; no trust fund
shall be established for purposes of funding said payments. The bonus may not
be assigned, transferred, mortgaged or hypothecated prior to actual receipt,
except for any assignment to secure a debt to the Company itself, and any such
attempt will be null and void.
4. Termination of Employment Prior to End of Performance Period
or Payment Date. The bonus will not be paid for a participant who voluntarily
terminates employment, or whose employment is terminated by the Company, prior
to the end of the performance period, provided, however, that a pro rata bonus
will nonetheless be paid if termination is a consequence of the participant's
death, disability or retirement.
5. Administration. This Plan shall be administered by the
Company's Board of Directors, or if the Board of Directors has designated a
Compensation Committee, the Board of Directors may delegate such administration
to the Compensation Committee. The Board of Directors or said Committee shall
have the authority to interpret the provisions of this Plan, direct the
calculation and payment of bonuses in accordance with the terms hereof, and
make final decisions with respect to the entitlement of any participant to a
bonus.
6. Payment Upon Death. In the event that the participant dies
before payment of his bonus, said amount shall be paid to his estate.
7. Duration. This Plan shall continue indefinitely; provided,
however, that the Board of Directors of the Company may update, modify or
terminate this Plan at any time.
<PAGE> 2
8. Miscellaneous. This Plan shall be interpreted according to
the laws of the State of Delaware. Any reference herein to the singular shall
be deemed to include the plural where appropriate.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed as
of the day and year first above referenced.
SRS LABS, INC.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of
SRS Labs, Inc.
We consent to the incorporation by reference in the registration
statements (Nos. 333-18981, 333-18983, 333-18985, 333-18987, and 333-18989) on
Form S-8 of SRS Labs, Inc. (the "Company") of our report dated January 31,
1997, appearing in the Company's annual report on Form 10-KSB for the year
ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
March 28, 1997
Costa Mesa, California
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,455,997
<SECURITIES> 20,969,785
<RECEIVABLES> 702,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,829,670
<PP&E> 458,451
<DEPRECIATION> 177,262
<TOTAL-ASSETS> 26,674,099
<CURRENT-LIABILITIES> 1,454,714
<BONDS> 0
0
0
<COMMON> 9,469
<OTHER-SE> 25,141,281
<TOTAL-LIABILITY-AND-EQUITY> 26,674,099
<SALES> 5,392,280
<TOTAL-REVENUES> 5,392,280
<CGS> 95,376
<TOTAL-COSTS> 3,300,539
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (365,583)
<INCOME-PRETAX> 2,361,946
<INCOME-TAX> 500,937
<INCOME-CONTINUING> 1,861,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,861,009
<EPS-PRIMARY> .21
<EPS-DILUTED> 0
</TABLE>
