<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 2, 1998
--------------------------------
SRS LABS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-21123 33-0714264
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 442-1070
------------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
The undersigned registrant hereby amends, to the extent set forth
herein, the registrant's Current Report on Form 8-K dated March 12, 1998, and
filed with the Securities and Exchange Commission on March 13, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited consolidated financial statements of Valence
Technology Inc., a British Virgin Islands company
("Valence"), for the ten months ended January 31, 1998 and
for the year ended March 31, 1997, and the related
Independent Auditors' Report, are filed as Exhibit 99.1 to
this Form 8-K/A and are incorporated herein by reference.
(b) Pro Forma Financial Statements.
The unaudited pro forma consolidated condensed financial
statements of SRS Labs, Inc., a Delaware corporation ("SRS
Labs"), for the twelve months ended December 31, 1997 and
the three months ended March 31, 1998 reflecting the
acquisition of Valence are filed as Exhibit 99.2 to this
Form 8-K/A and are incorporated herein by reference.
(c) Exhibits.
99.1 Audited consolidated financial statements of
Valence for the ten months ended January 31,
1998 and for the year ended March 31, 1997, and
the related Independent Auditors' Report.
99.2 Unaudited pro forma consolidated condensed
financial statements of SRS Labs for the twelve
months ended December 31, 1997 and the three
months ended March 31, 1998 reflecting the
acquisition of Valence.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SRS LABS, INC.,
a Delaware corporation
(Registrant)
Date: May 18, 1998 By: /s/ THOMAS C.K. YUEN
------------------------------
Thomas C. K. Yuen
Chairman of the Board and
Chief Executive Officer
-3-
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Audited consolidated financial statements of Valence for the
ten months ended January 31, 1998 and for the year ended March
31, 1997, and the related Independent Auditors' Report.
99.2 Unaudited pro forma consolidated condensed financial statements
of SRS Labs for the twelve months ended December 31, 1997 and
the three months ended March 31, 1998 reflecting the acquisition
of Valence.
-4-
<PAGE> 1
EX. - 99.1
AUDITED FINANCIAL STATEMENTS
OF VALENCE FOR THE
TEN MONTHS ENDED JANUARY 31, 1998
AND FOR THE YEAR ENDED MARCH 31, 1997,
AND THE RELATED INDEPENDENT AUDITORS' REPORT
INDEX TO AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF
VALENCE TECHNOLOGY, INC.:
Independent auditors' report.................................................................F-2
Consolidated statements of operations and deficit for the ten months ended
January 31, 1998 and the year ended March 31, 1997.........................................F-3
Consolidated balance sheets at January 31, 1998
and March 31, 1997.........................................................................F-4
Consolidated statements of cash flows for the ten months ended
January 31, 1998 and the year ended March 31, 1997.........................................F-5
Notes to the consolidated financial statements...............................................F-6
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Valence Technology Inc.
We have audited the accompanying consolidated balance sheets of Valence
Technology Inc. and its subsidiaries as of January 31, 1998 and March 31, 1997
and the related consolidated statements of operations and cash flows for the ten
months ended January 31, 1998 and for year ended March 31, 1997. 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 auditing standards generally accepted
in Hong Kong which do not differ in any material respect from those in the
United States of America. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Valence Technology Inc. and its
subsidiaries at January 31, 1998 and March 31, 1997, and the results of their
operations and their cash flows for the ten months ended January 31, 1998 and
for the year ended March 31, 1997 in conformity with accounting principles
generally accepted in Hong Kong (which do not differ in any material reports
from accounting principles generally accepted in the United States of America -
see note 2).
/s/ Deloitte Touche Tohmatsu
Hong Kong
April 23, 1998
F-2
<PAGE> 3
VALENCE TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
<TABLE>
<CAPTION>
Ten months ended Year ended
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
Sales ................................................ 248,252,006 148,473,770
Cost of sales ........................................ 196,581,758 124,001,023
------------ ------------
Gross profit ......................................... 51,670,248 24,472,747
Selling, general and administrative expenses ......... 51,353,821 25,928,040
------------ ------------
Operating profit (loss) .............................. 316,427 (1,455,293)
Interest expense ..................................... (4,169,277) (2,946,233)
Interest income ...................................... 86,522 41,461
Foreign exchange gain (loss), net .................... 380,461 (309,503)
Other income ......................................... 52,340 43,835
------------ ------------
Loss before income taxes ............................. (3,333,527) (4,625,733)
Income taxes (Note 4) ................................ (1,400,000) (616)
------------ ------------
Net loss for the period .............................. (4,733,527) (4,626,349)
Deficit, beginning of period ......................... (14,463,720) (9,837,371)
------------ ------------
Deficit, end of period ............................... (19,197,247) (14,463,720)
------------ ------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 4
VALENCE TECHNOLOGY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... 17,669,109 1,831,604
Accounts receivable, net of allowance for doubtful
accounts of HK$5,018,895 at January 31, 1998 and
HK$1,856,427 at March 31, 1997 .................... 27,702,150 23,933,633
Prepaid expenses and other current assets ........... 3,508,928 2,732,925
Amounts due from a related company (Note 7) ......... -- 111,543
Inventories (Note 5) ................................ 51,396,345 39,699,504
------------ ------------
Total current assets ...................... 100,276,532 68,309,209
Property and equipment, net (Note 6) .................. 8,814,627 7,819,146
License right, at cost less accumulated amortization
at January 31, 1998 of HK$48,750 (Note 7) ........... 2,291,250 --
------------ ------------
Total assets .............................. 111,382,409 76,128,355
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Short-term bank borrowings .......................... 105,280 30,379,977
Accounts payable and accrued expenses ............... 66,171,549 35,480,079
Amounts due to related companies (Note 7) ........... 55,402,211 17,081,403
Income taxes payable ................................ 1,400,616 616
------------ ------------
Total current liabilities ................. 123,079,656 82,942,075
Minority interests .................................... -- 150,000
Shareholders' deficit:
Share capital
Authorized, 20,000,000 (1997: 17,500,000) shares
of US$0.13 each (1997: HK$1 each);
Issued and outstanding, 7,500,000 shares
(1997: 7,500,000 shares) ......................... 7,500,000 7,500,000
Deficit ............................................... (19,197,247) (14,463,720)
------------ ------------
Total shareholders' deficit ........................... (11,697,247) (6,963,720)
------------ ------------
Total liabilities and shareholders' deficit 111,382,409 76,128,355
------------ ------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 5
VALENCE TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten months ended Year ended
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
Operating activities:
Net loss ................................................ (4,733,527) (4,626,349)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ............................................ 2,195,602 2,139,502
Provision for doubtful accounts ......................... 3,457,308 1,856,428
Loss on disposals of property and equipment ............. 14,387 --
Amortization of license right ........................... 48,750 --
Changes in operating assets and liabilities:
Inventories ........................................... (11,696,841) (26,699,682)
Accounts receivable ................................... (7,225,825) (19,069,241)
Prepaid expenses and other current assets ............. (776,003) (1,867,760)
Amounts due from a related company .................... 111,543 (111,543)
Accounts payable and accrued expenses ................. 30,691,470 27,085,322
Income taxes payable .................................. 1,400,000 616
----------- -----------
Net cash provided by (used in) operating activities ..... 13,486,864 (21,292,707)
----------- -----------
Investing activities:
Purchase of property and equipment ...................... (3,205,470) (1,508,418)
Purchase of minority interests .......................... (150,000) --
----------- -----------
Net cash used in investing activities ..................... (3,355,470) (1,508,418)
----------- -----------
Financing activities:
Advance from a shareholder .............................. 29,625,000 --
Advance from a related company .......................... 15,025,656 --
Repayment of advance from a former shareholder .......... (4,669,848) (916,765)
Repayment of advance from a related company ............. (4,000,000) --
(Decrease) increase in short-term bank borrowings ....... (30,274,697) 25,175,625
----------- -----------
Net cash provided by financing activities ................. 5,706,111 24,258,860
----------- -----------
Net increase in cash and cash equivalents ................. 15,837,505 1,457,735
Cash and cash equivalents at beginning of period .......... 1,831,604 373,869
----------- -----------
Cash and cash equivalents at end of period ................ 17,669,109 1,831,604
----------- -----------
Cash paid during the period for:
Interest ................................................ 4,169,277 2,946,233
Income taxes ............................................ -- --
----------- -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CORPORATE AFFILIATION
Valence Technology Inc. ("the Company") is a private limited company
incorporated in British Virgin Islands. At January 31, 1998, the
Company had the following subsidiaries, all of which are
wholly-owned:
<TABLE>
<CAPTION>
Name of subsidiary Place of incorporation
<S> <C>
ASP Microelectronics Limited ("ASP") Hong Kong
LEC Electronics Limited Hong Kong
LEC Electronic Components Limited ("LEC") Hong Kong
LEC Microelectronics Limited Hong Kong
Valence Semiconductor Design Limited ("VSD") Hong Kong
VSD Electronics (Huiyang) Limited Other region of the
People's Republic of
China ("PRC")
VSD Electronics Limited Hong Kong
</TABLE>
On May 22, 1997, the Company acquired for cash of HK$150,000 the 10%
interest in LEC held by the minority shareholders. No goodwill arose
on the acquisition.
The Company is positioning itself to become a leading supplier of
multimedia and consumer electronic components and finished products
in Asia, in particular the PRC. The Company's business activities
are carried out principally by three entities namely:
O VSD, which develops, manufactures (through outsourcing)
and markets application specific integrated circuits for
ASP and other consumer electronic product manufacturers;
O ASP, which develops and markets its own brand of
consumer and multimedia electronic components (e.g.
VCD-related products) by using VSD's design libraries;
and
O LEC, which markets and distributes international brand
multimedia and electronic components.
The Company has offices in Hong Kong, Shenzhen, Shanghai and
Chengdu, in the PRC. All administrative functions and research and
development are performed in the Hong Kong and Shenzhen offices. The
Company also leases warehousing facilities in Hong Kong, Wuhan,
Shanghai, Huiyang and Changchun.
In March 1997, North 22 Capital Partners 2 Inc., a company
incorporated in British Virgin Islands acquired a 70% stake in the
Company from Legend Holdings Limited, a company incorporated in Hong
Kong and sold 15% to management reducing its interest to 55%. On
March 2, 1998, SRS Labs, Inc., a United States corporation,
completed the acquisition of all of the Company's outstanding
shares.
F-6
<PAGE> 7
VALENCE TECHNOLOGY INC.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
accounting principles generally accepted in Hong Kong ("HK GAAP").
The financial statements include certain additional disclosures
required under accounting principles generally accepted in the
United States of America ("US GAAP"). For the year ended March 31,
1997 and for the ten months ended January 31, 1998, there were no
significant differences between the net assets and results of the
Company in the financial statements prepared under US GAAP and HK
GAAP.
The Company and its subsidiaries have been operating at a loss since
incorporation and currently principally rely on advances and loans
provided by its existing and former shareholders. The Company's new
owner, SRS Lab Inc, has given an undertaking to provide adequate
funds for the Company and its subsidiaries to meet their liabilities
as they fall due.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies which have been adopted in
preparing these financial statements and which conform with
accounting principles generally accepted in Hong Kong are as
follows:
Basis of consolidation - The consolidated financial statements
incorporate the financial statements of the Company and all its
subsidiaries. All significant intercompany transactions and balances
have been eliminated on consolidation.
Revenue recognition - The Company and its subsidiaries recognize
revenue from the sales of products at the time products are shipped
and title has passed. Income from the provision of design services
is recognized when services are provided.
Property and equipment - Property and equipment are stated at cost
less depreciation. The cost of an asset comprises its purchase price
and any directly attributable costs of bringing the asset to its
present working condition and location for its intended use.
Expenditure incurred after the property has been put into operation,
such as repairs and maintenance and overhaul costs, is normally
charged to the statement of operations in the period in which it is
incurred. In situations where it can be clearly demonstrated that
the expenditure has resulted in an increase in the future economic
benefits expected to be obtained from the use of the property, the
expenditure is capitalized as an additional cost of the property.
When assets are sold or retired, their cost and accumulated
depreciation are eliminated from the financial statements and any
gain or loss resulting from their disposal is included in the
statement of operations.
Depreciation is provided to write off the cost of property and
equipment over their estimated useful lives using the straight line
method, at 20% per annum.
F-7
<PAGE> 8
VALENCE TECHNOLOGY INC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Inventories - Inventories are stated at the lower of cost and net
realizable value. Cost, which comprises material costs and, where
applicable, subcontracting costs and these overheads that have been
incurred in bringing the inventories to their present location and
condition, is calculated using the weighted average method. Net
realizable value represents the estimated selling price less all
further costs to completion and costs to be incurred in selling and
distribution.
Operating leases - Rentals payable under operating leases are
charged to the statement of operations on a straight line basis over
the lease terms.
Foreign currency transactions - Transactions in foreign currencies
are translated at the rates ruling on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are re-translated at the rates ruling on the balance sheet date.
Gains and losses arising on exchange are recognized in the
statements of operations.
Income taxes - The charge for taxation is based on the results for
the period as adjusted for items which are non-assessable or
disallowed. Deferred income taxes include effects of temporary
differences arising from the recognition for tax purposes of certain
items of income and expense in a different accounting period from
that in which they are recognized in the financial statements.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses. Actual
results could differ from these estimates.
4. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate. The Company is not taxed in
the British Virgin Islands where it is incorporated. The Company and
its subsidiaries are each taxed separately.
The provision for income taxes represents Hong Kong profits tax
calculated at the Hong Kong statutory rate of 16.5% of the estimated
assessable profit of a subsidiary.
Certain subsidiaries have operating loss carry forwards for income
tax purposes which may be available to reduce future taxable income
earned by the same legal entity. At January 31, 1998, the Company
and its subsidiaries had loss carry forwards in Hong Kong amounting
to approximately HK$30,076,000 which are available for carry forward
indefinitely. The Company has established a valuation allowance for
the full amount of these tax losses.
F-8
<PAGE> 9
VALENCE TECHNOLOGY INC.
5. INVENTORIES
<TABLE>
<CAPTION>
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
Raw materials ............ 1,746,255 --
Work in progress ......... 1,692,360 --
Finished goods ........... 47,957,730 39,699,505
---------- ----------
51,396,345 39,699,505
---------- ----------
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
At cost:
Leasehold improvements ....... 1,783,148 1,690,351
Office equipment ............. 1,305,076 596,809
Computer equipment ........... 10,214,840 8,469,631
Furniture and fixtures ....... 627,973 364,354
Motor vehicles ............... 720,078 350,702
----------- -----------
Total ........................ 14,651,115 11,471,847
Less: Accumulated depreciation (5,836,488) (3,652,701)
----------- -----------
Net book value ............... 8,814,627 7,819,146
----------- -----------
</TABLE>
F-9
<PAGE> 10
VALENCE TECHNOLOGY INC.
7. RELATED PARTY TRANSACTIONS AND BALANCES
The Company had the following significant transactions with related
parties during the period:
<TABLE>
<CAPTION>
Ten months Year ended
ended January 31 March 31,
1998 1997
--------- ---------
HK$ HK$
<S> <C> <C>
Interest expense on advances from Legend Holdings
Limited, former shareholder ...................................... 1,559,697 1,747,286
Interest expense on loan from North 22 Capital
Partners 2 Inc., shareholder ..................................... 983,958 --
Interest expense on loan from North 22 Nominees Limited,
an affiliated company of North 22 Capital Partners 2 Inc. ........ 331,797 --
</TABLE>
In the ten-month period ended January 31, 1998, Creative
Technologies Limited, a former subsidiary of North 22 Capital
Partners 2 Inc., made available to the Company trade finance banking
facilities to finance purchases of raw materials and components. The
Company was charged a handling fee amounting to HK$138,735.
The amounts due to and from related companies at the end of each
period were as follows:
<TABLE>
<CAPTION>
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
Amounts due from:
Legend Holdings Limited ............................... -- 111,543
---------- ----------
Amounts due to:
North 22 Nominees Limited, loan bearing interest at
4% over prime lending rate .......................... 11,625,000 --
North 22 Capital Partners 2 Inc., loan bearing interest
at prime lending rate ............................... 18,000,000 --
Creative Technologies Limited ......................... 11,025,656 --
Legend Holdings Limited, bearing interest at 0.5%
over prime lending rate ............................. 12,411,555 17,081,403
SRS Labs, Inc. (see note 1), non-interest bearing ..... 2,340,000 --
---------- ----------
55,402,211 17,081,403
---------- ----------
</TABLE>
The above amounts are unsecured and are repayable on demand.
On December 31, 1997, a subsidiary of the Company entered into an
agreement with SRS Labs, Inc. to license the use of patents and
trademarks owned by SRS Labs, Inc. for a period of four years from
December 31, 1997, subject to extension for additional one year
periods. The subsidiary paid a license fee of US$300,000
(HK$2,340,000) and is required to pay royalties at the rate of 20%
of the gross profits, as defined, from the sale of licensed chips to
non-related parties and a royalty of US$0.50, or the prevailing
market rate as agreed by the parties, for each licensed chip sold to
parties related to SRS Labs, Inc. through common ownership
interests.
F-10
<PAGE> 11
VALENCE TECHNOLOGY INC.
8. CAPITAL AND STOCK OPTIONS
Capital:
On November 5, 1997, the authorized share capital of the Company was
increased to HK$17,500,000 divided into 17,500,000 ordinary shares
of HK$1 each and on December 4, 1997, the authorized share capital
of the Company was changed to US$2,600,000 divided into 20,000,000
ordinary shares of US$0.13 each.
Stock options:
On October 17, 1997, the Company granted options to North 22
Nominees Limited as a condition for that company granting a loan of
HK$11,625,000 to the Company. Under the agreement the Company
granted North 22 Nominees Limited options to purchase a total of
450,000 common shares, par value HK$1 each, of the Company at an
initial exercise price of HK$25.80 per share, subject to adjustment
in defined circumstances. The options may be exercised in part or in
total at any time from October 17, 1997 until October 17, 1999. On
March 2, 1998, such option arrangements were canceled by both
parties.
9. COMMITMENTS AND CONTINGENCIES
(a) Operating leases:
At the balance sheet dates, the Group had commitments
payable within the next year under noncancelable
operating leases in respect of rented facilities as
follows:
<TABLE>
<CAPTION>
January 31, 1998 March 31, 1997
---------------- --------------
HK$ HK$
<S> <C> <C>
Operating leases which expire:
Within one year ..................... 1,677,150 625,832
In the second to fifth year inclusive 1,758,602 2,768,532
Over five years ..................... -- 82,312
--------- ---------
3,435,752 3,476,676
--------- ---------
</TABLE>
At January 31, 1998, the Company and its subsidiaries
were obligated under operating leases requiring minimum
rentals as follows:
<TABLE>
<CAPTION>
Year ending January 31 HK$
<S> <C>
1999 ...................................... 3,435,752
2000 ...................................... 1,758,600
2001 ...................................... 1,478,360
2002 ...................................... 89,616
</TABLE>
F-11
<PAGE> 12
VALENCE TECHNOLOGY INC.
9. COMMITMENTS AND CONTINGENCIES - continued
(b) Capital expenditure:
At January 31, 1998, the Company was obligated to
contribute capital of HK$3 million to its subsidiary
incorporated in the People's Republic of China.
(c) Long service payments:
At January 31, 1998, the Group was contingently
obligated to compensate its employees who have completed
the required number of years of service under the Hong
Kong Employment Ordinance to be eligible for long
service payments on termination of their employment. The
aggregate amount, if payable in full on termination of
services with all such eligible employees, is estimated
to be HK$1,090,000. The Company does not expect that
such a payment will be paid.
- --------------------------------------------------------------------------------
F-12
<PAGE> 1
EX. - 99.2
UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
OF SRS LABS FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998
REFLECTING THE ACQUISITION OF VALENCE
INDEX TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF SRS LABS, INC. (UNAUDITED):
Pro forma consolidated condensed statement of operations for the
twelve months ended December 31, 1997 (Unaudited)........................... PF-2
Pro forma consolidated condensed statement of operations for the
three months ended March 31, 1998 (Unaudited)............................... PF-3
Notes to pro forma consolidated condensed financial statements (Unaudited).... PF-4
</TABLE>
PF-1
<PAGE> 2
SRS LABS, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SRS VTI
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31, PRO FORMA PRO FORMA
1997 1998 ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
REVENUES $ 10,081,283 $ 37,595,737 $ (300,000)(d) $ 47,377,020
COST OF SALES 210,348 29,473,639 29,683,987
------------ ------------ ------------
GROSS MARGIN 9,870,935 8,122,098 (300,000) 17,693,033
OPERATING EXPENSES 5,323,234 7,667,707 1,205,989 (a) 14,196,930
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,547,701 454,391 (1,505,989) 3,496,103
INTEREST INCOME 1,088,718 (399,898)(b) 688,820
INTEREST EXPENSE 924,447 (451,947)(b) 472,500
OTHER INCOME (239,217) (239,217)
------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 5,636,419 (230,839) (1,453,940) 3,951,640
PROVISION FOR INCOME TAXES 1,863,200 180,645 (100,000)(c) 1,943,845
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,773,219 $ (411,484) $ (1,353,940) $ 2,007,795
============ ============ ============ ============
NET INCOME PER SHARE - Basic $ 0.39 $ 0.18
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,556,015 1,805,611 11,361,626
============ ============ ============
NET INCOME PER SHARE - Diluted $ 0.35 $ 0.16
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 10,852,281 1,805,611 12,657,892
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
PF-2
<PAGE> 3
SRS LABS, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SRS VTI
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,439,007 $ 7,956,382 $ - $ 9,395,389
COST OF SALES 26,932 7,014,285 7,041,217
------------ ------------ ------------
GROSS MARGIN 1,412,075 942,097 2,354,172
OPERATING EXPENSES 2,938,732 1,789,995 938,211 (a)(e) 3,790,516
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,526,657) (847,898) 938,211 (1,436,344)
INTEREST INCOME 265,851 (66,647) (b) 199,204
INTEREST EXPENSE (37,797) (183,899) (105,152) (b) (116,544)
OTHER INCOME 76,277 2,443 78,720
------------ ------------ ------------
LOSS BEFORE INCOME TAX
BENEFIT (1,222,326) (1,029,354) 976,716 (1,274,964)
INCOME TAX BENEFIT 283,768 (249,290) (c) 34,478
------------ ------------ ------------
NET LOSS $ (938,558) $ (1,029,354) $ 727,426 $ (1,240,486)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.09) $ (0.11)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 10,852,052 601,871 11,453,923
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
PF-3
<PAGE> 4
SRS LABS, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On March 2, 1998, SRS Labs, Inc. ("SRS" or the "Company") acquired all
of the outstanding shares of capital stock of Valence Technology
Inc., a British Virgin Islands holding company with its principal
business operations in Hong Kong and China ("Valence" or "VTI").
Valence, which conducts its business through its subsidiaries based in
Hong Kong and China, is engaged in three primary areas of business;
namely, the design and sale of application-specific integrated
circuits (ASIC) and other semiconductor products, the design,
manufacture and sale of consumer electronic products, and the
distribution of components and products within mainland China and
throughout Asia. The aggregate purchase price of $19,500,000 consisted
of approximately $7,400,000 in cash and 1,680,611 shares of the
Company's common stock. The acquisition was accounted for as a
purchase and as having an effective date of February 1, 1998. In
connection with such acquisition, three of the four management
shareholders and their respective sole shareholders, each of whom was
a key employee of Valence or one of its subsidiaries, entered into
noncompetition agreements with the Company. In consideration for these
agreements and for a nominal cash payment equal to the par value of
the shares, the Company issued an aggregate of an additional 125,000
shares of its common stock to such three shareholders.
The unaudited pro forma consolidated condensed statement of
operations, which are presented in U.S. dollars, give effect on a
purchase accounting basis to the acquisition of Valence. The pro forma
consolidated condensed statement of operations for the twelve months
ended December 31, 1997 has been prepared by combining the statement
of operations of SRS for the twelve months ended December 31, 1997
with the consolidated statement of operations of Valence for the
twelve months ended March 31, 1998. The pro forma consolidated
condensed statement of operations for the three months ended March 31,
1998 have been prepared by combining the statements of operations of
SRS and Valence for the three months ended March 31, 1998.
The unaudited pro forma consolidated condensed statements of
operations for the twelve months ended December 31, 1997 and the three
months ended March 31, 1998 assume that the acquisition occurred on
January 1, 1997 and 1998, respectively. The unaudited pro forma
consolidated condensed statements of operations do not purport to
represent the results of operations of SRS had the transaction and
events assumed therein occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be
achieved in the future. The pro forma adjustments are based on
management's preliminary assumptions regarding purchase accounting
adjustments. The actual allocation of the purchase price will be
adjusted to the extent that actual amounts differ from management's
estimates in accordance with Statement of Financial Accounting
Standards (SFAS) No. 38, Accounting for Preacquisition Contingencies
of Purchased Enterprises.
The pro forma consolidated financial information is based upon certain
assumptions and adjustments described in the notes to the pro forma
consolidated financial statements. The pro forma consolidated
financial information should be read in conjunction with (a) the
historical financial statements, and related notes, of SRS contained
in SRS' quarterly report on Form 10-Q for the quarter ended March 31,
1998 and in the Annual Report on Form 10-KSB for the year ended
December 31, 1997 and (b) Valence's historical financial statements
referenced on page F-1 of this report.
PF-4
<PAGE> 5
SRS LABS, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
2. PRO FORMA ADJUSTMENTS
The following summarizes the consideration granted for the acquisition
of Valence and non-compete agreements, the allocation of the purchase
price and other purchase accounting adjustments:
<TABLE>
<S> <C>
Cash $ 7,394,222
Common stock 13,006,178
-----------
Total purchase price 20,400,400
Deficiency in net assets acquired 1,503,035
Estimated acquisition costs 1,478,633
-----------
Excess of purchase price over net assets $23,382,068
===========
Allocated to:
In-process research and development $17,471,668
Intangible assets 5,910,400
-----------
$23,382,068
===========
</TABLE>
The following items describe the pro forma adjustments made to reflect
the acquisition of Valence:
(a) To record amortization related to the intangible assets based on the
straight-line method over three to eleven years.
(b) To record the reduction in interest income and the net decrease in
interest expense due to the use of previously invested cash for the
acquisition of Valence and borrowings aggregating $7,000,000 incurred
to repay certain higher interest rate Valence indebtedness upon the
acquisition.
(c) To record the tax effect of the pro forma adjustments.
(d) Represents the elimination of certain revenue derived from Valence by
SRS during the twelve months ended December 31, 1997.
(e) In accordance with the Financial Accounting Standards Board (FASB)
Interpretation No. 4, SRS is required to write-off $1,038,710
in-process research and development acquired by SRS in a separate and
unrelated transaction during the three months ended March 31, 1998.
The amount is reflected as a component of the pro forma adjustments to
operating expenses in the pro forma condensed consolidated statements
of operations because it is a one-time nonrecurring charge.
PF-5
<PAGE> 6
SRS LABS, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
In accordance with FASB Interpretation No. 4, SRS is required to
write-off the $17,471,668 in-process research and development acquired
in the acquisition. This write-off was reflected in the quarter ending
March 31, 1998 and has not been reflected in the pro forma condensed
consolidated statements of operations because it is a one-time
nonrecurring charge.
3. PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
Pro forma weighted average shares outstanding assumes as outstanding
the 1,805,611 new shares issued by SRS required to consummate the
acquisition of Valence.
PF-6
