<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21123
SRS LABS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 33-0714264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 442-1070
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: as of April 30, 1998,
11,507,629 shares of the issuer's common stock, par value $.001 per share, were
outstanding.
================================================================================
<PAGE> 2
SRS LABS, INC.
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997....................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (unaudited)................... 4
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1998 and 1997 (unaudited)........... 5
Notes to the Interim Unaudited Consolidated Financial
Statements.................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........... 15
Item 6. Exhibits and Reports on Form 8-K.................... 17
SIGNATURES............................................................ 19
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SRS LABS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,371,702 $ 4,446,753
Investments available for sale............................ -- 2,010,775
Accounts receivable....................................... 5,813,967 3,989,927
Inventories............................................... 4,369,032 --
Prepaid expenses and other current assets................. 633,063 578,957
Deferred income taxes..................................... 505,674 170,674
------------ -----------
Total current assets.............................. 18,693,438 11,197,086
INVESTMENTS AVAILABLE FOR SALE.............................. 14,091,967 19,556,262
FURNITURE, FIXTURES & EQUIPMENT -- net...................... 1,365,801 245,779
INTANGIBLE ASSETS -- net.................................... 6,054,663 313,673
DEFERRED INCOME TAXES....................................... 229,223 229,223
------------ -----------
TOTAL ASSETS...................................... $ 40,435,092 $31,542,023
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 6,630,668 $ 202,352
Accrued liabilities....................................... 1,071,245 826,242
Line of Credit............................................ 7,000,000 --
Income taxes payable...................................... 835,101 1,011,426
Current portion of consideration due on asset purchase.... 29,984 81,804
------------ -----------
Total current liabilities......................... 15,566,998 2,121,824
STOCKHOLDERS' EQUITY
Preferred stock -- $.001 par value 2,000,000 shares
authorized; no shares issued and outstanding
Common stock -- $.001 par value 56,000,000 shares
authorized; 11,505,754 (at March 31, 1998) and 9,609,867
(at December 31, 1997) shares issued and outstanding...... 11,506 9,610
Additional paid-in capital.................................. 38,693,116 25,022,437
Deferred stock option compensation.......................... 257,757 231,087
Unrealized gain on investments available for sale........... 123,184 163,600
Retained earnings (deficit)................................. (14,217,469) 3,993,465
------------ -----------
Total Stockholders' equity........................ 24,868,094 29,420,199
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 40,435,092 $31,542,023
============ ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
REVENUES
Chip Design and Licensing Revenue........................... $ 2,881,961 $2,212,100
Product and Component Sales................................. 4,175,435 --
------------ ----------
Total revenues.................................... 7,057,396 2,212,100
COST OF SALES............................................... 4,398,416 39,194
------------ ----------
GROSS MARGIN................................................ 2,658,980 2,172,906
SALES AND MARKETING......................................... 1,188,894 428,662
RESEARCH AND DEVELOPMENT.................................... 399,079 183,592
GENERAL AND ADMINISTRATIVE.................................. 1,252,823 715,160
------------ ----------
OPERATING INCOME/(LOSS) BEFORE WRITE OFF OF ACQUIRED
IN-PROCESS RESEARCH AND DEVELOPMENT....................... (181,816) 845,492
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT... 18,510,378 --
------------ ----------
INCOME/(LOSS) FROM OPERATIONS............................... (18,692,194) 845,492
OTHER INCOME................................................ 77,438 --
INTEREST INCOME, net........................................ 120,054 257,644
------------ ----------
197,492 257,644
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)........... (18,494,702) 1,103,136
INCOME TAX EXPENSE/(BENEFIT)................................ (283,768) 408,161
------------ ----------
NET INCOME/(LOSS)........................................... $(18,210,934) $ 694,975
============ ==========
NET INCOME/(LOSS) PER COMMON SHARE:
BASIC..................................................... $ (1.68) $ 0.07
============ ==========
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION OF NET
INCOME/(LOSS) PER COMMON SHARE:
BASIC..................................................... 10,852,052 9,493,876
============ ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)........................................... $(18,210,934) $ 694,975
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 359,399 77,305
Deferred income taxes..................................... (335,000) --
Write-off of acquired in-process research and
development............................................ 18,510,378 --
Amortization of premium on investments available for
sale................................................... 56,197 27,301
Accretion of consideration due on asset purchase.......... 4,098 5,961
Increase in deferred compensation......................... 26,670 22,941
Changes in operating accounts -- net of effect of
acquisitions:
Decrease (increase) in accounts receivable............. 1,448,496 (591,606)
Decrease in inventories................................ 2,262,754 --
Decrease in prepaid expenses and other current
assets................................................ 398,660 43,030
Decrease in accounts payable........................... (2,123,534) (132,810)
Increase (decrease) in other accrued liabilities....... 153,648 (13,752)
(Decrease) increase in income taxes payable............ (446,163) 318,614
------------ ----------
Net cash provided by operations...................... 2,104,669 451,959
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............. (72,640) (10,341)
Proceeds from sale of investments available for sale...... 7,467,571 --
Cash paid for acquisitions, less cash acquired............ (6,911,216) --
------------ ----------
Net cash provided (used) in investing activities....... 483,715 (10,341)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Line of Credit.............................. 7,000,000 --
Payments on Subsidiary debt............................... (6,755,382) --
Payment of consideration due on asset purchase............ (55,918) (76,761)
Exercise of stock options................................. 147,865 83,580
------------ ----------
Net cash provided by financing activities.............. 336,565 6,819
------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,924,949 448,437
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,446,753 3,455,997
------------ ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 7,371,702 $3,904,434
============ ==========
SUPPLEMENTAL DISCLOSURES ON NON CASH TRANSACTIONS
Additional consideration accrued for asset purchase....... $ -- $ 41,794
Unrealized gain on investments, net....................... $ 40,414 $ 86,245
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITY
<TABLE>
<S> <C>
During the period ended March 31, 1998, the Company issued
1,680,611 shares of common stock in payment of $12,105,778
of the acquisition price of Valence Technologies, Inc.
(Note 2)
During the period ended March 31, 1998, the Company issued
125,000 shares of common stock in consideration for
certain noncompetition agreements with the key employees
of Valence. The shares have an ascribed fair value of
$900,400. (Note 2)
During the period ended March 31, 1998, the Company issued
25,000 shares of common stock in conjunction with the
acquisition of VIP. The shares have an ascribed fair value
of $176,575. (Note 2)
During the period ended March 31, 1998, the Company issued
warrants to purchase 100,000 shares of common stock in
conjunction with the acquisition of VIP. The warrants have
an ascribed value of $341,957. (Note 2)
The Company acquired the stock of Valence Technologies, Inc.
during the period ended March 31, 1998 (Note 2).
In conjunction with the acquisition, certain liabilities
were assumed as follows:
Fair value of assets acquired............................. $ 14,076,279
Acquired in-process research and development costs........ 17,471,668
Acquired intangible assets................................ 5,910,400
Total consideration............................... (21,879,033)
------------
Liabilities assumed....................................... $ 15,579,314
============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL/BASIS OF PRESENTATION
SRS Labs, Inc. (the "Company") is known as a leading developer, marketer
and licensor of contemporary audio and voice technologies to the various
consumer product markets including consumer home audio, computer multimedia, car
audio, and professional sound. Through its recent acquisition (see Note 2) of
Valence Technology Inc. ("Valence"), the Company now has added business
operations engaged in technology licensing and the design and sale of
application-specific integrated circuits (ASIC) and other semiconductor
products; the design, manufacture and sale of consumer electronics products; and
the distribution of components and products within mainland China and throughout
Asia.
The accompanying interim unaudited financial statements have been prepared
by the Company in conformity with generally accepted accounting principles for
interim financial information and with the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations.
In the opinion of management, the financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary to present fairly the Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997, the Consolidated Statements of Operations for the three
month periods ended March 31, 1998 and 1997 and the Consolidated Statements of
Cash Flows for the three month periods ended March 31, 1998 and 1997. The
Consolidated Statements of Operations for the three month period ended March 31,
1998 are not necessarily indicative of the Statements of Operations for the
entire fiscal year ending December 31, 1998. The interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 and the Current Report on Form 8-K/A
dated May 18, 1998, scheduled to be filed on May 18, 1998. Current and future
financial statements may not be directly comparable to the Company's historical
financial statements.
2. ACQUISITIONS
On March 2, 1998, the Company acquired (the "Acquisition") 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"). 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
electronics 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.
7
<PAGE> 8
SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
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
===========
Allocation to:
In-process research and development....................... $17,471,668
Intangible assets......................................... 5,910,400
-----------
$23,382,068
===========
</TABLE>
The resulting intangible assets are being amortized on the straight-line
basis over periods ranging from three to eleven years.
Unaudited proforma combined results of operations for the three months
ended March 31, 1998 would have been as follows had the Acquisition occurred on
January 1, 1998:
<TABLE>
<S> <C>
Revenues.................................................... $ 9,395,389
Proforma Net Loss........................................... $(1,240,486)
Proforma Net Loss Per Share................................. $ 0.11
Weighted Average Shares Outstanding......................... 11,453,923
</TABLE>
On February 28, 1998, the Company acquired certain rights to a proprietary
technology, Voice Intelligibility Processor, ("VIP") from a third party. The
aggregate consideration, including acquisition costs, was $1,138,710 and was
comprised of $620,178 in cash, 25,000 shares of the Company's common stock with
a fair value of $176,575 and warrants to purchase 100,000 shares of the
Company's common stock at $9.47 per share with a fair value of $341,957. The
purchase price allocated to in-process research and development was charged to
the Company's operations, resulting in a charge of $1,038,710. The remainder of
the purchase price was allocated to an intangible asset and is being amortized
over 8 years.
3. INVESTMENTS AVAILABLE FOR SALE
The Company has classified its investments as available-for-sale in
accordance with SFAS No. 115. As of March 31, 1998, the Company's
available-for-sale investments had a cost of $13,883,168 and an estimated fair
value of $14,091,967, based on quoted market prices. The unrealized gains on
these investments of $208,781, net of income taxes of $85,597, have been
reported in the Company's Consolidated Balance Sheet as an increase in
stockholders' equity.
4. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires than an entity classify items of other comprehensive
earnings by their nature in an annual financial statement . For example, other
comprehensive earnings may include foreign currency translation adjustments and
unrealized
8
<PAGE> 9
SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
gains and losses on marketable securities classified as available-for-sale.
Annual financial statements for prior periods will be reclassified, as required.
The Company's total comprehensive income/(loss) is as follows:
<TABLE>
<CAPTION>
FOR QUARTER ENDED FOR QUARTER ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------- -----------------
<S> <C> <C>
Net income/(loss)..................................... $(18,210,934) $694,975
Unrealized gain on investments available for sale, net
of tax.............................................. 40,414 20,171
------------ --------
Total comprehensive income (loss)........... $(18,170,520) $715,146
============ ========
</TABLE>
5. NET INCOME/(LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting No. 128, "Earnings per Share" (FAS 128) which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. FAS 128 requires the Company to disclose a basic and
diluted earnings per share (EPS). The Company adopted the provisions of FAS 128
in the fiscal year ending December 31, 1997. The following is an illustration of
the reconciliation of the numerators and the denominators of the basic and
diluted net income/(loss) per common share computations:
<TABLE>
<CAPTION>
FOR QUARTER ENDED MARCH 31, FOR QUARTER ENDED MARCH 31,
1998 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Income/(loss) available to
common stockholders..... (18,210,934) 10,852,052 $(1.68) 694,975 9,493,876 $0.07
====== =====
Effect of Dilutive
Securities:
Stock Options............. N/A 1,073,361
Diluted:
Income available to common
stockholders plus
assumed conversion...... N/A N/A N/A $694,975 10,567,237 $0.07
=========== ========== ====== ======== ========== =====
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
SRS Labs, Inc. (the "Company") is known as a leading developer, marketer
and licensor of contemporary audio and voice technologies to the various
consumer product markets. Through its recent acquisition of Valence Technology
Inc. ("Valence"), the Company has added business operations engaged in
technology licensing and the design and sale of application-specific integrated
circuits (ASIC) and other semiconductor products; the design, manufacture and
sale of consumer electronics products; and the distribution of components and
products within mainland China and throughout Asia. Valence's principal
operations are based in Hong Kong and mainland China.
From the Company's inception in 1993 through February of 1998, the Company
derived substantially all of its revenue from royalties received from technology
licenses. On March 2, 1998, the Company acquired all of the outstanding capital
stock of Valence for an aggregate purchase price, excluding non-compete
agreements and acquisition costs, of $19,500,000 consisting of approximately
$7,400,000 in cash and 1,680,611 shares of the Company's common stock, $.001 par
value per share (the "Common Stock"). The acquisition was accounted for as a
purchase and as having had an effective date of February 1, 1998. The
acquisition of Valence has had, and will have, a material impact on the
Company's financial statements for the reporting period ending March 31, 1998
and for the reporting periods thereafter; accordingly current and future
financial statements may not be directly comparable to the Company's historical
financial statements.
During the first quarter of the fiscal year ending December 31, 1998
("Fiscal 1998"), the Company also acquired all rights to Voice Intelligibility
Processor ("VIP"), which is a patented voice processing technology that improves
the intelligibility of the spoken voice, especially in high ambient noise
environments. Aggregate consideration, including acquisition costs, was
$1,138,710 and was comprised of $620,178 in cash, 25,000 shares of Common Stock
and warrants to purchase 100,000 shares of Common Stock at $9.47 per share.
RESULTS OF OPERATIONS
Revenues
Total revenues for the three months ended March 31, 1998 were $7,057,396
which includes revenues generated by Valence since February 1, 1998. This
contrasts with the first quarter of 1997 where the revenues were $2,212,100 and
were generated strictly from the Company's licensing activities. Chip design and
licensing revenue of $2,881,961 increased 30.3% compared to the same period last
year. Licensing revenue decreased from the same period last year, but was offset
by the custom ASIC chip design and chip sales related to Valence's activities.
Revenue generated from product and component sales is attributable to Valence
and therefore is not comparable to last year.
Gross Margin
Gross Margin for the three month period ended March 31, 1998 decreased to
37.7% from 98.2% for the same period in 1997. This decrease results from the
shift in the Company's revenue base towards product and electronic component
sales which have significantly lower margins from the Company's historic revenue
base. The Company's gross margins in the future will depend on the revenue mix
between product and electronic component sales and from licensing activities.
However, the Company expects product and electronic component sales to make up a
significant portion of revenues in the near term causing lower margins.
Sales and Marketing
Sales and marketing expenses for the first quarter were $1,188,894,
compared to $428,662 for the same quarter last year, an increase of 177.3% which
is primarily attributable to the Valence acquisition. Sales and marketing
expenses as a percentage of total revenue for the three months ended March 31,
1998 decreased slightly to 16.8% from 19.4% for the three months ended March 31,
1997.
10
<PAGE> 11
Research and Development
Research and development expenses for the first quarter were $399,079,
compared to $183,592 for the same quarter last year, an increase of 117.4% which
is primarily attributable to the Valence acquisition. Research and development
expenses as a percentage of total revenue for the three months ended March 31,
1998 decreased slightly to 5.7% from 8.3% for the three months ended March 31,
1997.
General and Administrative
General and administrative expenses for the first quarter were $1,252,823,
compared to $715,160 for the same quarter last year, an increase of 75.2% which
is primarily attributable to the Valence acquisition. General and administrative
expenses as a percentage of total revenue for the three months ended March 31,
1998 decreased substantially to 17.8% from 32.3% for the three months ended
March 31, 1997, as the Valence operating expenses are concentrated in sales and
marketing and research and development.
Acquired In-Process Research and Development
Acquired in-process research and development costs of $18,510,378 during
the three months ended March 31, 1998 represented an allocation of a portion of
the purchase price of the acquisition of certain assets associated with the VIP
technology and the acquisition of the outstanding shares of Valence Technology,
Inc. to in-process research and development costs, which, based on management
assumptions, had no future alternative use. (See Note 2 of Interim Unaudited
Consolidated Financial Statements.)
Other Income/Interest Income, net
Net interest and other income resulted in net other income of $197,492, a
decrease from the net interest income amount of $257,644 for the first quarter
of 1997. The decrease is primarily due to lower average cash and investment
balances during the current quarter as compared to the prior year due to the
$7,894,222 paid in conjunction with the acquisitions of Valence and VIP.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity at March 31, 1998 consisted of
cash, cash equivalents and long term investments of $21.5 million. At March 31,
1997, the Company had cash, cash equivalents and long term investments of
approximately $24.7 million.
The Company has historically financed its operations through the cash
provided by its operations and proceeds from its initial public offering of its
Common Stock in August 1996. The Company's operating activities provided
$2,104,669 in cash for the three months ended March 31, 1998 and $451,959 for
the three months ended March 31, 1997. The $1,652,718 increase in cash provided
by operations was primarily due to decreases in accounts receivable and
inventory which were partially offset by the increase in accounts payable.
As referenced above, during the first quarter of Fiscal 1998, the Company
acquired Valence and VIP. (See Note 2 of Interim Unaudited Consolidated
Financial Statements)
On March 4, 1998, the Company obtained a revolving line of credit with a
bank which expires on June 1, 2000, and is secured by certain of the Company's
investments. The total availability under the line of credit is the lesser of
$10 million or a percentage of the fair market value of the collateral. The line
of credit bears interest at the bank's prime rate or LIBOR plus 0.75%. The
Company had $7.0 million outstanding under the line of credit as of March 31,
1998. As a result of the acquisition of Valence, the Company provided Valence
$7,000,000 to pay off its short-term debt and other obligations. These funds
were drawn by the Company under the above-referenced line of credit.
The Company anticipates that its primary uses of working capital in future
periods will be for the acquisition of new technologies, to provide Valence with
additional working capital and increased sales personnel and marketing
expenditures associated with the introduction of new technologies and products
into the market. The Company also anticipates making additional capital
expenditures for the improvement of its
11
<PAGE> 12
operating system infrastructure and management reporting systems in the United
States and Hong Kong operations. Management currently estimates these capital
expenditures could aggregate $1,500,000.
Based on current plans, and business conditions, the Company believes that
its cash, cash equivalents, investments and/or available borrowings under its
line of credit, together with any amounts generated from operations, will be
sufficient to meet the Company's operating and capital requirements for the
foreseeable future. However, there can be no assurance that the Company will not
be required to seek other financing sooner or that such financing, if required,
will be available on terms satisfactory to the Company.
FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
Included in this Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, are a number of forward-looking statements
that are subject to certain risks and uncertainties that could cause the
Company's actual results and financial position to be affected negatively as
events unfold in the markets for the Company's products. These events include,
but are not limited to, the risks involved in the expansion of the Company's
business through acquisitions of new companies like Valence or new technologies
like VIP, as well as the risks discussed below. The Company assumes no
obligation to update the forward-looking information or the factors listed below
to reflect actual results or changes in the factors affecting such
forward-looking information.
Quarterly Fluctuations
The Company's operating results may fluctuate from those in prior quarters
and will continue to be subject to quarterly and other fluctuations due to a
variety of factors, including the extent to which the Company's licensees
incorporate SRS or the Company's other technologies into their products, the
gain or loss of significant customers, competitive pressures on selling prices,
the acceptance of new or enhanced versions of the Company's technologies, the
rate that the Company's semiconductor licensees manufacture and distribute chips
to OEMs, the ability of the Company to secure one-time license fees for its
technologies from new and existing licensees and general business economic
conditions, particularly those effecting the consumer electronics market. Due to
the Company's dependence on the consumer electronic market, the substantial
seasonality of sales in the market could impact the Company's revenues and net
income. In particular, the Company believes that there is seasonality relating
to the Christmas season as well as the Chinese New Year within the Asia-Pacific
region, which fall into the fourth and first quarters respectively.
Changes to Business Model/Integration of Valence/Refinement of Asian Strategy
From the Company's inception in 1993 through 1997, the Company derived
substantially all of its revenues from licensing activities. As a result of the
acquisition of Valence, the Company has added business operations engaged in the
design and sale of application-specific integrated circuits (ASIC) and other
semiconductor products; the design, manufacture and sale of consumer electronics
products; and the distribution of components and products within mainland China
and throughout Asia. These operations differ substantially from the Company's
previous business model, and future operating results could be affected by a
variety of factors including the timing of customer orders, the timing of
development revenue, changes in the mix of products distributed and the mix of
distribution channels employed, the emergence of new industry standards, product
obsolescence and changes in pricing policies by the Company, its competitors or
its suppliers.
The Company's future success will depend in a large part on its ability to
successfully integrate the operations of Valence with the Company. The degree to
which the Company can successfully integrate such operations will depend on a
number of factors, including the Company's ability to expand the scope of its
operations beyond technology licensing into the new business of manufacturing
electronic and semiconductor products and the Company's ability to increase its
market penetration in China. The integration of certain operations following the
acquisition will require the dedication of management and other personnel
resources which may temporarily distract from the day-to-day business of the
combined company. The geographic separation of these operations is likely to
place additional strain on the Company's resources. In addition, the Company's
significant operations in China and Asia may require refinement to adapt to the
changing and
12
<PAGE> 13
expanding market conditions in that region. This refinement may impact certain
of the Company's current business directions, including Valence, as the Company
attempts to position itself to maximize penetration of these rapidly developing
markets. The Company's operations in Asia, and internationally in general, also
are subject to risks of unexpected changes in, or impositions of, legislative or
regulatory requirements.
The acquisition of Valence has added significant diversity to the Company's
overall business structure and the Company's opportunities. The Company
recognizes that in the presence of such corporate diversity, and in particular
with regard to the semiconductor industry, there will always exist a potential
for a conflict among sales channels between the Company and certain of the
Company's technology licensees. Although the operations of the Company's
licensing business and those of Valence are generally complementary. there can
be no assurances that sales-channel conflicts will not arise. If such potential
conflicts do materialize, the Company may or may not be able to mitigate the
effect of such perceived conflicts which, if not resolved, may impact the
results of operations.
Currency Risk/Stability of Asian Markets
The Company expects that international sales will continue to represent a
significant portion of total revenues. To date, all of the Company's revenues
have been denominated in U.S. dollars and most costs have been incurred in U.S.
dollars. It is the Company's expectation that licensing revenues will continue
to be denominated in U.S. dollars for the foreseeable future. With its
acquisition of Valence and the Company's anticipated expansion of its business
in China and other parts of Asia, the Company's consolidated operations and
financial results could be significantly affected by risks associated with
international activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes
in the value of the U.S. dollar versus the local currency in which the products
are sold. In addition, the Company's valuation of assets recorded as a result of
the Valence acquisition also may be adversely impacted by the currency
fluctuations relative to the U.S. dollar. The Company intends to actively
monitor its foreign exchange exposure and to implement strategies to reduce its
foreign exchange risk at such time that the Company determines the benefits of
such strategies outweigh the associated costs. However, there is no guarantee
that the Company will take steps to insure against such risks and should such
risks occur, there is no guarantee that the Company will not be significantly
impacted therefrom. Countries in the Asia Pacific region have recently
experienced weakness in their currency, banking and equity markets. These
weaknesses could adversely affect consumer demand for Valence's products, the
U.S. dollar value of the Company's and its subsidiaries' foreign currency
denominated sales, the availability and supply of product components to Valence
and ultimately the Company's consolidated results of operations.
Competitive Pressures
The Company's existing and potential competitors include both large and
emerging domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources. Competitors of the Company may also include a number of smaller
companies which may have greater flexibility to address specific market needs.
In addition, the markets in which the Company competes are intensely competitive
and are characterized by rapid technological change, declining average sales
prices and rapid product obsolescence.
Importance of Intellectual Property
The Company's ability to compete may be affected by its ability to protect
its proprietary information. The Company has filed several United States and
foreign patent applications and to date has a number of issued United States and
foreign patents covering various aspects of its technologies. There can be no
assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. In addition,
the laws of certain foreign countries may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. The
semiconductor industry is characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. The Company
is not a party to any claims of
13
<PAGE> 14
this nature. There can be no assurance that third parties will not assert
additional claims or initiate litigation against the Company, or its customers
with respect to existing or future products. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to determine the scope and validity of the
proprietary rights of the Company or others.
Management of Growth; Dependence on Key Personnel
The Company has recently experienced rapid growth and expansion with the
acquisition of Valence. This acquisition has placed, and will continue to place,
a significant strain on its administrative, operation and financial resources,
and has resulted, and will continue to result, in a continuing increase in the
level of responsibility for both existing and new management personnel. The
Company's future success depends in part on the continued service of its key
engineering, sales, marketing and executive personnel, including highly skilled
semiconductor design personnel. The Company anticipates that future growth, if
any, will require it to recruit and hire a number of new personnel in
engineering, operations, finance, sales and marketing. Competition for such
personnel is intense and there can be no assurance that the Company can retain
and recruit necessary personnel to operate its business and support future
growth. The Company's ability to manage its growth successfully also will
require the Company to continue to expand and improve its administrative,
operational, management and financial systems and controls.
Volatility of Stock Price
The trading price of the Common Stock has been, and will likely continue to
be, subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the markets in which the Company does
business, or relating to the Company specifically, have in the past resulted and
could in the future result in an immediate and adverse effect on the market
price of the Common Stock.
Year 2000 Compliance
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which the Company
operates. Additionally, companies must coordinate with other entities with which
they electronically interact, such as customers and creditors.
The Company and its subsidiaries have evaluated all significant internal
operating systems and have determined that their Year 2000 compliance efforts
will not be material.
In addition, the Company and its subsidiaries are actively working with all
of its major suppliers and customers to assess their Year 2000 compliance
efforts and the Company's exposure to them. At this time, it is not possible to
quantify the aggregate cost to the Company and its subsidiaries related to the
Year 2000 compliance issues facing the Company's major suppliers and customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
During the first quarter of Fiscal 1998, the Company acquired certain
assets, including the VIP technology, of R.G.A. & Associates, Ltd., d/b/a
ToteVision and VIP Labs ("R.G.A."), pursuant to an Asset Purchase Agreement
dated January 28, 1998 (the "VIP Acquisition"). The approximate aggregate
purchase price of such assets was $1,000,000. In connection with the VIP
Acquisition, on January 28, 1998, the Company (i) issued to R.G.A. 25,000 shares
of Common Stock; (ii) granted to R.G.A. a four-year warrant (the "VIP Warrant"),
whereby R.G.A., or its registered assigns, may purchase up to 100,000 shares of
Common Stock for $9.467 per share (subject to adjustment) and (iii) paid R.G.A.
$500,000 in cash. In addition, the Company agreed to pay to R.G.A. for four
years' royalties based upon certain percentages from 10% to 15% of licensing
royalties generated from use of the VIP patents. Subsequent to the closing of
the VIP Acquisition and pursuant to the terms of the VIP Warrant, on February
20, 1998, R.G.A. nominated three persons who performed services for R.G.A. in
connection with the VIP Acquisition to receive a portion of the VIP Warrant. On
February 27, 1998, such three persons acknowledge receipt of warrants dated
February 26, 1998 to purchase 2,500, 2,500 and 1,000 shares of Common Stock,
respectively, with R.G.A. acknowledging on February 27, 1998 receipt of the
balance of the VIP Warrant dated February 26, 1998 (i.e., to purchase 94,000
shares of Common Stock).
In addition, during the first quarter of Fiscal 1998, the Company acquired
all of the outstanding stock of Valence in two separate, but related,
transactions with Valence's five shareholders (the "Valence Acquisition"),
pursuant to two Stock Purchase Agreements dated as of February 24, 1998.
Pursuant to one of the Stock Purchase Agreements, the Company acquired 45% of
the outstanding shares of capital stock of Valence from four British Virgin
Islands corporations, in each case, the sole shareholder of which was a key
employee of Valence or one of Valence's subsidiaries (the "Management
Shareholders"). The aggregate purchase price paid by the Company to the
Management Shareholders was $13,500,000, payable $1,394,222 in cash and
$12,105,778 in shares of Common Stock valued at $7.2032 per share, or 1,680,611
shares, pursuant to a formula set forth in the Stock Purchase Agreement. Such
shares of Common Stock were issued to three of the four Management Shareholders.
Pursuant to the second Stock Purchase Agreement, the Company acquired 55% of the
outstanding shares of capital stock of Valence from the remaining shareholder of
Valence for $6,000,000 in cash.
In connection with the Valence Acquisition, three of the four Management
Shareholders (the same three that acquired the shares of Common Stock,
referenced above) and their respective sole shareholders entered into
noncompetition agreement 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 Common Stock to such
Management Shareholders.
The above-referenced securities were issued in reliance on the private
offering exemption set forth in Section 4(2) of the Securities Act of 1933, as
amended, on the basis that they were issued under circumstances not involving a
public offering.
15
<PAGE> 16
USE OF PROCEEDS
The effective date of the Company's initial public offering of its Common
Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). During the first
quarter of Fiscal 1998, the Company utilized $7,894,222 of the $22,052,955 net
offering proceeds as follows:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS, OFFICERS, GENERAL
PARTNERS OF THE ISSUER OR THEIR
ASSOCIATES TO PERSONS OWNING TEN
PERCENT OR MORE OF ANY CLASS OF
EQUITY SECURITIES OF THE ISSUER, DIRECT OR INDIRECT
AND TO AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS
-------------------------------- ------------------
<S> <C> <C>
Construction of plant, building and
facilities.............................. -- --
Purchase and installation of machinery and
equipment............................... -- --
Purchase of real estate................... -- --
Acquisition of other business(es)......... -- $ 7,894,222(1)
Repayment of indebtedness................. -- --
Working capital........................... -- --
Temporary investment (cash and municipal
bonds).................................. -- $14,158,733(2)
</TABLE>
- ---------------
(1) In connection with the VIP Acquisition, the Company utilized $500,000 of the
proceeds as part of the consideration to purchase the VIP technology. In
connection with the Valence Acquisition, the Company utilized an aggregate
of $7,394,222 of the net proceeds, $1,394,222 in partial payment for 45% of
the outstanding shares of Valence common stock held by four of the five
shareholders of Valence, and $6,000,000 in payment for 55% of the
outstanding shares of Valence common stock held by the remaining shareholder
of Valence.
(2) The remaining funds are temporarily invested in cash and municipal bonds
pending application.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated as of February 24, 1998, by
and among the Company, Valence Technology Inc., Thomrose
Holdings (BVI) Limited, Rayfa (BVI) Limited, Cape Spencer
International Limited, and Anki (BVI) Limited, previously
filed with the Commission as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on
March 13, 1998 (the "Form 8-K"), which is incorporated
herein by reference.
2.2 Stock Purchase Agreement dated as of February 24, 1998, by
and between the Company and North 22 Capital Partners 2,
Inc., previously filed with the Commission as Exhibit 2.2 to
the Form 8-K, which is incorporated herein by reference.
2.3 Asset Purchase Agreement dated as of January 28, 1998,
between the Company and R.G.A. & Associates, Ltd. d/b/a
ToteVision and VIP Labs(R), previously filed with the
Commission as Exhibit 2.3 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997,
filed with the Commission on March 31, 1998 (the "1997
Annual Report"), which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans
or Arrangements
10.1 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Technology Inc. and Thomas Wah Tong
Wan, previously filed with the Commission as Exhibit 10.16
to the 1997 Annual Report, which is incorporated herein by
reference.
10.2 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Semiconductor Design Limited, and Choi
Yat Ming, previously filed with the Commission as Exhibit
10.17 to the 1997 Annual Report, which is incorporated
herein by reference.
10.3 Employment Agreement dated as of March 2, 1998, by and among
the Company, LEC Electronic Components Limited, and Wong Yin
Bun, previously filed with the Commission as Exhibit 10.18
to the 1997 Annual Report, which is incorporated herein by
reference.
10.4 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Thomrose Holdings (BVI) Limited, and
Thomas Wah Tong Wan, previously filed with the Commission as
Exhibit 2.5 to the Form 8-K, which is incorporated herein by
reference.
10.5 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Cape Spencer International Limited and
Wong Yin Bun, previously filed with the Commission as
Exhibit 2.6 to the Form 8-K, which is incorporated herein by
reference.
10.6 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Rayfa (BVI) Limited and Choi Yat Ming,
previously filed with the Commission as Exhibit 2.7 to the
Form 8-K, which is incorporated herein by reference.
Other Material Contracts
10.7 Tenancy Agreement commencing January 1, 1998, by and between
Jugada Company Limited and Valence Semiconductor Design
Limited relating to the premises located at Workshops Nos.
1, 2, 3, 4, 5, 6, 7 and 8 on the 19th Floor of APEC Plaza,
No. 49 Hoi Yuen Road, Kwun Tong, Hong Kong, previously filed
with the Commission as Exhibit 10.34 to the 1997 Annual
Report, which is incorporated herein by reference.
10.8 Registration Rights Agreement dated as of January 28, 1998,
by and between the Company and R.G.A. & Associates, Ltd.,
d/b/a ToteVision and VIP Labs(R) and William S. Taraday,
previously filed with the Commission as Exhibit 10.37 to the
1997 Annual Report, which is incorporated herein by
reference.
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.9 Warrant to Purchase 94,000 Shares of Common Stock of the
Company dated February 26, 1998, held by R.G.A. &
Associates, Ltd., d/b/a ToteVision and VIP Labs(R),
previously filed with the Commission as Exhibit 10.38 to the
1997 Annual Report, which is incorporated herein by
reference.
10.10 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Herbert H. Wax,
previously filed with the Commission as Exhibit 10.39 to the
1997 Annual Report, which is incorporated herein by
reference.
10.11 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Steven E. Loyd,
previously filed with the Commission as Exhibit 10.40 to the
1997 Annual Report, which is incorporated herein by
reference.
10.12 Warrant to Purchase 1,000 Shares of Common Stock of the
Company dated February 26, 1998, held by the Van Valkenberg
Furber Law Group, P.L.L.C., previously filed with the
Commission as Exhibit 10.41 to the 1997 Annual Report, which
is incorporated herein by reference.
10.13 Business Loan Agreement dated March 4, 1998, between the
Company and Bank of America National Trust and Savings
Association, previously filed with the Commission as Exhibit
10.42 to the 1997 Annual Report, which is incorporated
herein by reference.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the three month period ended March 31, 1998, the Company filed one
Current Report on Form 8-K dated March 12, 1998 with the Commission on March 13,
1998, reporting under Item 2 therein, the acquisition of Valence. Pursuant to
Instruction (a) (4) to Item 7 of Form 8-K, the Company undertook to file the
financial information required by Items 7 (a) and 7 (b) by amendment no later
than May 18, 1998.
18
<PAGE> 19
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 thereunto duly authorized.
SRS LABS, INC.,
a Delaware Corporation
Date: May 14, 1998 By: /s/ JANET M. BISKI
------------------------------------
Janet M. Biski
Vice President, Chief Financial
Officer and
Secretary (Principal Financial and
Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated as of February 24, 1998, by
and among the Company, Valence Technology Inc., Thomrose
Holdings (BVI) Limited, Rayfa (BVI) Limited, Cape Spencer
International Limited, and Anki (BVI) Limited, previously
filed with the Commission as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on
March 13, 1998 (the "Form 8-K"), which is incorporated
herein by reference.
2.2 Stock Purchase Agreement dated as of February 24, 1998, by
and between the Company and North 22 Capital Partners 2,
Inc., previously filed with the Commission as Exhibit 2.2 to
the Form 8-K, which is incorporated herein by reference.
2.3 Asset Purchase Agreement dated as of January 28, 1998,
between the Company and R.G.A. & Associates, Ltd. d/b/a
ToteVision and VIP Labs(R), previously filed with the
Commission as Exhibit 2.3 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997,
filed with the Commission on March 31, 1998 (the "1997
Annual Report"), which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans
or Arrangements
10.1 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Technology Inc. and Thomas Wah Tong
Wan, previously filed with the Commission as Exhibit 10.16
to the 1997 Annual Report, which is incorporated herein by
reference.
10.2 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Semiconductor Design Limited, and Choi
Yat Ming, previously filed with the Commission as Exhibit
10.17 to the 1997 Annual Report, which is incorporated
herein by reference.
10.3 Employment Agreement dated as of March 2, 1998, by and among
the Company, LEC Electronic Components Limited, and Wong Yin
Bun, previously filed with the Commission as Exhibit 10.18
to the 1997 Annual Report, which is incorporated herein by
reference.
10.4 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Thomrose Holdings (BVI) Limited, and
Thomas Wah Tong Wan, previously filed with the Commission as
Exhibit 2.5 to the Form 8-K, which is incorporated herein by
reference.
10.5 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Cape Spencer International Limited and
Wong Yin Bun, previously filed with the Commission as
Exhibit 2.6 to the Form 8-K, which is incorporated herein by
reference.
10.6 Noncompetition Agreement dated as of March 2, 1998, by and
among the Company, Rayfa (BVI) Limited and Choi Yat Ming,
previously filed with the Commission as Exhibit 2.7 to the
Form 8-K, which is incorporated herein by reference.
Other Material Contracts
10.7 Tenancy Agreement commencing January 1, 1998, by and between
Jugada Company Limited and Valence Semiconductor Design
Limited relating to the premises located at Workshops Nos.
1, 2, 3, 4, 5, 6, 7 and 8 on the 19th Floor of APEC Plaza,
No. 49 Hoi Yuen Road, Kwun Tong, Hong Kong, previously filed
with the Commission as Exhibit 10.34 to the 1997 Annual
Report, which is incorporated herein by reference.
10.8 Registration Rights Agreement dated as of January 28, 1998,
by and between the Company and R.G.A. & Associates, Ltd.,
d/b/a ToteVision and VIP Labs(R) and William S. Taraday,
previously filed with the Commission as Exhibit 10.37 to the
1997 Annual Report, which is incorporated herein by
reference.
10.9 Warrant to Purchase 94,000 Shares of Common Stock of the
Company dated February 26, 1998, held by R.G.A. &
Associates, Ltd., d/b/a ToteVision and VIP Labs(R),
previously filed with the Commission as Exhibit 10.38 to the
1997 Annual Report, which is incorporated herein by
reference.
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.10 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Herbert H. Wax,
previously filed with the Commission as Exhibit 10.39 to the
1997 Annual Report, which is incorporated herein by
reference.
10.11 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Steven E. Loyd,
previously filed with the Commission as Exhibit 10.40 to the
1997 Annual Report, which is incorporated herein by
reference.
10.12 Warrant to Purchase 1,000 Shares of Common Stock of the
Company dated February 26, 1998, held by the Van Valkenberg
Furber Law Group, P.L.L.C., previously filed with the
Commission as Exhibit 10.41 to the 1997 Annual Report, which
is incorporated herein by reference.
10.13 Business Loan Agreement dated March 4, 1998, between the
Company and Bank of America National Trust and Savings
Association, previously filed with the Commission as Exhibit
10.42 to the 1997 Annual Report, which is incorporated
herein by reference.
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,371,702
<SECURITIES> 14,091,967
<RECEIVABLES> 5,813,967
<ALLOWANCES> 693,935
<INVENTORY> 4,369,032
<CURRENT-ASSETS> 18,693,438
<PP&E> 2,487,618
<DEPRECIATION> 1,121,817
<TOTAL-ASSETS> 40,435,092
<CURRENT-LIABILITIES> 15,566,998
<BONDS> 0
0
0
<COMMON> 11,506
<OTHER-SE> 24,856,588
<TOTAL-LIABILITY-AND-EQUITY> 40,435,092
<SALES> 7,057,396
<TOTAL-REVENUES> 7,057,396
<CGS> 4,398,416
<TOTAL-COSTS> 7,239,212
<OTHER-EXPENSES> 18,312,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,797
<INCOME-PRETAX> (18,494,702)
<INCOME-TAX> (283,768)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,210,934)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> (1.68)
</TABLE>
