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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
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.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 33-0714264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 442-1070
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the issuer's revenue for its most recent year: $10,081,283
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates (based on the closing sale price of such common stock on
the specified date) as of March 26, 1998: $62,174,285. Shares of common stock
held by each officer and director and by each person who owns greater than 10%
of the outstanding shares of common stock have been excluded from this
computation on the basis that such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
State the number of shares of common stock of the issuer outstanding as of
March 26, 1998: 11,505,754
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held in 1998 are incorporated by
reference in Part III of this Form 10-KSB.
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS..................................... 1
Item 2. DESCRIPTION OF PROPERTY..................................... 12
Item 3. LEGAL PROCEEDINGS........................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 14
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION... 16
Item 7. FINANCIAL STATEMENTS........................................ 23
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 39
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.. 39
Item 10. EXECUTIVE COMPENSATION...................................... 39
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K............................ 39
SIGNATURES............................................................... 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SRS Labs, Inc. (the "Company") develops, markets and licenses proprietary
audio technologies for use in four worldwide markets: consumer home audio and
video, computer multimedia, car audio and professional sound. The Company
licenses its flagship technology, SRS (-)(R), the Sound Retrieval System(R)
("SRS"), to leading original equipment manufacturers ("OEMs") including Apple,
Kenwood, Packard Bell/NEC, Pioneer, Sharp, Sony and Thomson Consumer Electronics
("RCA"). SRS creates an immersive 3D sound image from any audio source with as
few as two conventional stereo speakers. The technology is based on the
fundamentals of the human hearing system and recreates the multitude of spatial
cues that are present in a live listening environment but that are lost in
recording and playback. SRS can be easily and inexpensively incorporated by OEMs
into the manufacture of a wide variety of audio-related consumer products such
as TVs, computers, stereo receivers, VCRs, car radios, video games and musical
instruments. The technology can also be encoded onto CDs, cassettes or video
tapes during the recording process and reproduced through a conventional stereo
system, multimedia computer, radio or television broadcast, or the Internet.
SRS was originally developed by Hughes Aircraft Company ("Hughes
Aircraft"), which spent significant resources to develop and patent SRS and
related audio technologies. Since acquiring the SRS technology from Hughes
Aircraft in June 1993, the Company has improved the performance of SRS, reduced
the cost for OEMs to implement the technology and introduced the technology to a
variety of consumer applications. Since June 1993, the Company's licensee base
has grown from two to 170 licensees as of December 31, 1997.
The Company also develops licensing relationships with semiconductor
manufacturers to incorporate SRS and certain of the Company's other technologies
directly into the semiconductors which can then be purchased by the OEMs.
Semiconductor manufacturer licensees of the Company include AKM Semiconductor,
Chromatic Research, Crystal Semiconductor, a subsidiary of Cirrus Logic
("Crystal Semiconductor"), Fujitsu Semiconductor, LSI Logic, New Japan Radio
("NJRC"), Medianix, Mitsubishi, Motorola, Philips, S3, SGS-Thomson and Toshiba
Semiconductor. Through these alliances, the Company believes that it will be
able to expand its OEM licensee and revenue bases as the semiconductor
manufacturers' sales forces promote the easier and more cost-effective
implementation of the Company's technologies. The Company believes this will
further facilitate the implementation of SRS and the Company's other
technologies as standards and further establish the Company as a leader in
providing technology solutions. Audio technology from the Company has been
included in more than 23 million products worldwide.
During the fiscal year ended December 31, 1997 ("Fiscal 1997"), the number
of companies actually shipping products including the Company's technology
increased from 39 to 55. This growth is reflected in the quarter-by-quarter
increase in licensing revenue which is directly associated with the number of
products shipped. See Part II, Item 6. Management's Discussion and Analysis or
Plan of Operation -- Selected Quarterly Operating Results, in this Report. As of
December 31, 1997, there were a total of 35 semiconductor chips containing one
of the Company's technologies. Chromatic Research, Crystal Semiconductor, Intel,
(motherboards only), Mitsubishi, NJRC, Seponix, S3 and SGS-Thomson all shipped
semiconductors which included SRS during Fiscal 1997.
The Company offered a portfolio of six technologies during Fiscal 1997,
SRS, F(-)CUS(TM) ("FOCUS"), TRUSURROUND(TM) ("TRUSURROUND") BASER(R), ORB(R)
(Optimum Reflective Baffle) ("ORB") and AVT(TM) (Acoustic Vector Technology)
("AVT"). See "Description of Business -- The Company's Technologies," herein.
During the first quarter of the fiscal year ending December 31, 1998
("Fiscal 1998"), the Company consummated two acquisitions that increased the
Company's technology offerings and allow the Company to further expand into the
Pacific Rim market. In January 1998, the Company acquired all rights to VIP(TM),
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. The VIP technology can be used in a wide range
of applications to enhance speech intelligibility, including public address
systems;
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telecommunications products, including cellular phones and speaker phones;
hearing aids; wireless products, such as mobile radios; broadcast equipment;
headphones; and microphones. VIP also complements a wide variety of existing
voice technologies, including noise cancellation, voice recognition and voice
automation to improve the understanding of the spoken word in all languages.
In March 1998, the Company acquired all of the outstanding capital stock of
Valence Technology Inc., a privately held British Virgin Islands 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 two primary areas of business. The first includes the
design, manufacture and marketing of ASIC (application-specific integrated
circuit) and other semiconductor products. The second area of business is the
design, manufacture and marketing of consumer electronics products, including
sub-components and its own Valence brand high-end product line of VCD (video
compact disc) players, amplifiers and electronic games primarily for the China
market. Valence operates five offices, two of which are located in Hong Kong and
three of which are located in China (Chengdu, Shanghai and Shenzhen), with a
total of 130 employees. Valence was a recent recipient of the prestigious
Technology Achievement Award at the Hong Kong Awards for Industry. Unless
otherwise specified herein, all references to the Company in this Report shall
mean SRS Labs, Inc. and shall not include Valence or any of the subsidiaries of
Valence.
The Company was incorporated in the State of California on June 23, 1993
and reincorporated in the State of Delaware on June 28, 1996. The Company
successfully completed its initial public offering in August 1996, raising
approximately $22 million. The Company's executive offices are located at 2909
Daimler Street, Santa Ana, California 92705. Its telephone number is (714)
442-1070 and its address on the World Wide Web is http://www.srslabs.com.
INDUSTRY OVERVIEW
Advanced audio technology is becoming increasingly significant in
televisions, stereo components, multimedia computers, automobiles, video and
arcade games, movie theaters, musical instruments, virtual reality entertainment
centers, and the Internet. The Company believes that increasing demand for
advanced audio technology is being driven by: (i) increased consumer
sophistication and demand for a better listening experience; (ii) competition
among OEMs who constantly seek affordable technologies that differentiate their
products; and (iii) the growth of the multimedia entertainment market through
the convergence of traditionally separate product markets such as televisions
and personal computers. As such, the Company believes that the markets described
above represent a large and expanding worldwide opportunity for its proprietary
audio enhancement technologies.
Mono and stereo have been the audio standards for the past 60 years. Mono
uses a single channel of sound, while stereo uses two channels of sound, each
directed to a separate speaker. Although an improvement over mono, stereo is
limited in providing a realistic listening experience. In order to experience a
true stereo image, the listener must be located in a specific, centrally-located
listening position commonly referred to as the "sweet spot." Additionally, the
stereo image is presented in front of the listener and confined to the area
between the speakers. Moreover, the sound image is discretely identifiable as
emanating from speaker enclosures, which is in contrast to live environments
where the listener experiences an immersive 3D sound image.
Quadraphonic and surround sound technologies were developed in attempts to
overcome some of the limitations of stereo and provide more realistic listening
experiences. Surround sound places speakers strategically around the room in an
attempt to recreate the ambience and sense of space present in a live listening
environment. Surround sound is similar to stereo in that it requires an encoding
process and must be played back through a special decoder that directs sound to
four, five or six speakers. Although an improvement over stereo, surround sound
also has several shortcomings. While sounds can be heard from the front and rear
with proper speaker placement, specific sounds can still be attributed to
individual speakers rather than "immersing" the listener as in a live listening
environment. In addition, surround sound requires two, three or four speakers to
be added to the traditional two-speaker stereo configuration. Accordingly,
implementing surround sound requires additional space for speakers and a
significant upgrade from conven-
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tional stereo equipment. In addition, since surround sound requires special
encoding, the listener's existing audio library does not fully benefit from
surround sound.
Numerous other audio technologies have been developed and introduced.
Dolby(R) and DBX(R) noise reduction, which were developed to reduce the amount
of background "hiss" encountered during recording and playback, have become
standards. Dolby(R), ProLogic(TM), THX(R), DTS(R), SDDS(R), DolbySRD(R) and
AC3(TM) (Dolby Digital) are other examples of audio technologies. Regardless of
the methodology, audio enhancement technologies generally attempt to achieve the
common objective of providing the listener with a more realistic listening
experience.
THE SRS SOLUTION
The Company's flagship audio technology, SRS, produces a realistic,
natural, 3D sound image from any audio source using as few as two conventional
stereo speakers. The technology is based on research into the fundamentals of
the human hearing system, and recreates the multitude of spacial cues that are
present in a live listening environment but that are lost in recording and
playback. SRS eliminates the "sweet spot" associated with traditional stereo,
thus SRS does not require the listener to be positioned in a specific location
to experience the immersive 3D sound image. The technology enhances any stereo
or surround sound system and is relatively inexpensive to implement. Finally,
SRS enhances any prerecorded audio material and does not require special
encoding. With the capability to enhance any audio media, SRS has a larger
sphere of application and market potential than many other audio enhancement
technologies which require special encoding at the time of recording.
SRS can be easily and inexpensively incorporated by OEMs into the
manufacture of a wide variety of audio-related consumer products such as TVs,
computers, stereo receivers, VCRs, car radios, video games, and musical
instruments. The markets for these consumer electronics products are highly
competitive and generally dominated by large manufacturers. The Company licenses
its technology to manufacturers who differentiate their products by continually
adding new features and increasing product performance. The Company has a number
of additional technologies, and the SRS licensing relationship provides OEMs
with access to the Company's current and future audio technologies.
The Company licenses its technologies to OEMs in four primary markets:
consumer home audio, multimedia personal computers, automobile sound systems and
professional audio equipment (such as movie theaters and musical instruments).
The Company believes that, as the multimedia entertainment industry expands and
brings together such related technologies as home theaters, computers, stereos,
DVD players, cable TV, telephone lines, cellular and satellite systems, and the
Internet, the broad application of the Company's technologies allow it to be
well-positioned to provide unique audio solutions to a wide variety of
manufacturers and consumers.
COMPANY STRATEGY
The Company's objective is to become a worldwide leader in developing,
marketing and licensing proprietary entertainment enhancement technologies that
address large and expanding markets. The Company's stated strategy is
"Penetrate," "Expand" and "Provide a continuous stream of technologies."
"Penetrate" means to add new customers, new chip partners, and new geographies.
"Expand" means to migrate the Company's technologies into multiple product lines
within each customer. "Provide a continuous stream of technologies" means to
continuously increase the number of technologies available for license. Key
elements of the Company's strategy include:
Enhance Position as a Technology Innovator. The Company seeks to
identify specific limitations and opportunities in the audio, multimedia,
voice processing, entertainment and convergence markets and to develop or
acquire proprietary technology that can be commercialized in a manner
similar to SRS, and offered as a solution or innovation to new and existing
OEM customers and chip partners. For example, TRUSURROUND was developed
internally for the multi-channel audio market and has been successfully
introduced in computers, televisions and audio receivers. FOCUS, BASER, AVT
and SRS Headphone are additional new technologies that were developed
in-house and are in the process of being
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commercialized. During the first quarter of Fiscal 1998, the Company
acquired all rights to VIP, a patented voice processing technology that
re-establishes the intelligibility cues for the spoken voice that become
masked in the presence of conflicting and high ambient noise in the
listening environment. The acquisition of VIP is strategically significant
because it opens new markets for the Company such as the
telecommunications, cellular telephone and hearing aid markets and provides
additional technology licensing opportunities with existing customers. The
internal development program and the acquisition of VIP clearly demonstrate
the Company's business strategy to maintain a continuous stream of
technologies to attract new licensing customers and to enhance the
relationships with existing customers. The Valence acquisition also is
strategically important to enhance the Company's position as a technology
innovator. A large measure of the current and future success of the SRS
technology is its implementation in silicon chips. While successful, the
current chip strategy relies solely on chip partners to bring new chip
solutions to the market. The award-winning Valence engineering team should
allow the Company to create and market new chip and component designs, as
well as bring new and/or more cost-effective chips to the market more
expeditiously. Management believes that the improved capability and shorter
time to market will increase the visibility of the Company's technologies
which, in turn, will help drive demand and create additional opportunities
in the market place.
Target Global Industry Leaders and Markets. To facilitate broad and
rapid adoption of its technologies, the Company targets brand name leaders
in the OEM market, leading semiconductor manufacturers and emerging
geographic markets. The Company has grown its OEM licensing customer base
from two in June 1993 to over 170 as of December 31, 1997. OEM Licensees
include Apple, Compaq, Hitachi, IBM, Kenwood, Mitsubishi, Packard Bell/NEC,
Pioneer, RCA, Sharp, Sony and Toshiba. The Company also has 15
semiconductor licensees as of December 31, 1997, which include AKM
Semiconductor, Chromatic Research, Crystal Semiconductor, Fujitsu
Semiconductor, LSI Logic, Medianix, Mitsubishi, Motorola, Philips,
SGS-Thomson and Toshiba Semiconductor. The Company has had good success
licensing OEMs in the U.S., Japan and Korea where the SRS technology has
become the market share leader in 3D audio. During Fiscal 1997 and the
first Quarter of Fiscal 1998, the Company added dedicated marketing
resources to focus on Europe and China. The Company's chip strategy,
working through licensed semiconductor partners to gain new OEM customers
and open new markets, has started showing significant success. The Company
attributes 50 new OEM customers during the third and fourth quarters of
Fiscal 1997 to the Company's chip strategy and the added support of the new
dedicated marketing resources. Additionally, the Company has penetrated
Europe, South America and China, all significant new geographic markets for
the Company. China, India and the rest of Southeast Asia is of particular
interest to the Company because approximately one half of the world's
population is located in those regions. The economies in such regions are
beginning to grow and consumers are beginning to spend money on products
that include the Company's technologies. This highlights another strategic
benefit of the Valence acquisition. Because Valence is Hong Kong-based with
three existing offices in mainland China, Valence will become the
cornerstone for the Company's China/ Southeast Asia strategy. As a
licensing company, doing business in North America and Europe has been well
established. However, the China/Southeast Asia market is not as mature and
does not have a well-defined licensing business protocol; therefore, doing
business there requires a different business strategy. Valence will allow
the Company to do business in China and Southeast Asia with a strong
understanding of "local" business customs and protocols. Management
believes that Valence will significantly assist the Company in quickly and
safely growing the business in this rapidly emerging new market.
Provide Superior Licensee Support. The Company believes that consumer
acceptance of SRS and the Company's other technologies is best realized by
the joint efforts of the Company and its licensees. Consequently, the
Company dedicates significant resources to its OEM and semiconductor
licensee relationships in the areas of product development, product launch,
training of licensee employees, and ongoing promotional programs designed
to differentiate the licensee's products and highlight the SRS solution.
The Company believes that its independent status as a licensor facilitates
the acceptance of its technologies because the Company does not compete
with its licensees and can encourage multiple parties within the same
industry to adopt and promote its technologies. The acquisition of Valence
will significantly increase the support services available from the Company
to the Asian market.
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Leverage Relationships and Technologies. The Company believes that its
licensing relationships and technologies provide a solid foundation from
which to create new business opportunities. The Company continually works
with licensees to improve the performance of SRS and expand the use of SRS
and the Company's other technologies within the licensees' product lines.
For example, RCA and Sony, which have historically used SRS only in their
television sets, have introduced new lines of other consumer home audio
products featuring SRS. Pioneer and Sony have also introduced new products
incorporating TRUSURROUND. In addition, the Company has established
relationships with semiconductor manufacturers to incorporate the Company's
technologies into analog semiconductors and digital signal processors. The
Company believes that these alliances will allow the Company to expand its
licensee and revenue bases by utilizing the sales forces of the
semiconductor manufacturers and by providing OEMs with an easier and more
cost-effective implementation of the Company's technologies, as well as
facilitating the establishment of SRS as a standard.
Build Brand Name Awareness. The Company seeks to establish SRS and its
other proprietary technologies as industry standards and significant
product differentiators for its licensees, with the objective of making SRS
part of the consumer buying decision. In order to accomplish this
objective, the Company actively promotes the use of Company trademarks and
directs licensees to prominently display the SRS logo on products,
packaging and in advertising. In the cinema market, theaters utilizing SRS
feature a 30-second movie trailer (similar to Dolby(R) and THX(R)) at the
beginning of each show with the phrase, "SRS(-) . . . everything else is
only stereo." Additionally, the Company uses advertising, public relations,
direct mail, newsletters and its World Wide Web page on the Internet to
build brand name awareness. With 170 licensees as of December 31, 1997 and
SRS-based products now available in every major industrial country in the
world, the Company believes that the SRS logos are associated with
leading-edge multimedia technology, quality audio and an optimum listening
experience.
THE COMPANY'S TECHNOLOGIES
The Company's technology strategy is to provide a continuing stream of
technologies to attract new licensees, enhance relationships with existing
licensees and to strengthen the Company's position as a leader in audio
enhancement technology. The Company's flagship technology, SRS, is a patented
audio technology that creates an immersive 3D sound image from any audio source
using as few as two conventional stereo speakers. SRS compensates for the
difference between the way microphones record and the way that humans hear. The
result is that SRS eliminates the "sweet spot," the centrally-located position
required for a listener to experience the stereo effect of a typical stereo
system. SRS differs from many other technologies in that it works with any
existing recorded material and thus can be used with a listener's existing audio
library. SRS may be implemented through discrete analog components, analog
semiconductors and digital signal processors. These methodologies offer
licensees significant flexibility with respect to the manner in which SRS is
implemented.
The Company has developed complementary technologies called FOCUS,
TRUSURROUND and BASER for which patents are pending. FOCUS repositions sound and
creates a proper stereo image in environments where speaker location is not
optimal. Thus, the listener will experience a true stereo image as if the
speakers were properly placed in front of the listener, even if the speakers are
on the floor, behind furniture or facing each other. FOCUS is particularly well
suited for use in automobiles where front speakers are located more often in the
doors or under the dashboard. FOCUS is licensed together with SRS. TRUSURROUND
was designed to enhance multi-channel audio systems such as Dolby Digital AC3,
the new standard for DVD. TRUSURROUND renders six channels of audio through two
speakers plus a subwoofer, without any loss of audio material, providing the
listener with a listening experience very similar to a full six-speaker system.
TRUSURROUND has been implemented in chips from Zoran, Chromatic, AKM, NJRC and
Toshiba. Other chip companies are in the process of completing their designs.
BASER has been developed to provide a "second generation" bass enhancement.
BASER can be implemented to provide sub-woofer bass response when no sub-woofer
is present, or can be utilized in conjunction with a sub-woofer to provide
enhanced bass response. VIP restores voice intelligibility cues that become
masked in the presence of conflicting and high ambient noise in the listening
environment. Paging
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systems, cellular telephones and hearing aids are three common products that
could benefit from VIP which improves the ability to hear and understand
electronically transmitted spoken voice in noisy environments.
The Company also has commercialized speaker technologies. One such
technology, ORB, provides a unique approach to the physical design of speakers
by incorporating a baffle that creates a 180 degree dispersion of sound. Another
speaker technology, AVT, projects the listening material so that the human ear
can more easily identify the direction of ambient sounds.
The Company's flagship technology, SRS, is the subject of numerous license
agreements and continues to be actively marketed by the Company. The
TRUSURROUND, FOCUS and ORB technologies also have been licensed by the Company
and continue to be actively marketed by the Company. The BASER, VIP and AVT
technologies have not yet been licensed but are actively being marketed by the
Company. Licensing royalties and technology transfer fees associated with SRS,
TRUSURROUND, FOCUS and ORB have accounted for virtually all of the Company's
revenues through December 31, 1997.
MARKETS AND OEM PRODUCTS
The Company licenses its patented technologies in four worldwide target
markets: consumer home audio, computer multimedia, car audio and professional
sound. Consumer purchases of new products in these markets represent
multi-billion dollar annual spending. There is also a large installed base of
non-SRS audio products and SRS can be used to upgrade most of these existing
audio products through the use of stand-alone SRS processor units manufactured
by several OEMs.
Consumer Home Audio
The Company believes that the consumer home audio market currently
represents the largest potential market for licensing its technologies. Audio
enhancement technology is becoming increasingly significant in televisions,
stereo components, home theater and other home entertainment products. The
markets for these consumer electronics products are highly competitive and OEMs
are constantly seeking new technologies to differentiate their products.
Television sets were the first products to incorporate SRS. Since
television speakers are typically small and relatively close together, it is
especially difficult to reproduce a true-to-life sound image. Anam, Hitachi, LG
Electronics, Pioneer, RCA, Samsung, Sharp and Sony feature SRS, and, in some
cases, TRUSURROUND, in their premium and core lines of television sets.
Other consumer home audio products such as stereo receivers and tuners,
powered speakers, compact disc players, VCRs, VCDs, DVDs, laser disc players,
mini component systems, boom boxes, camcorders and TV cable set top units can
all be enhanced through the use of SRS or TRUSURROUND. Hyundai, Kenwood, LG
Electronics, RCA, Sanyo, Samsung, Sharp and Sony all market consumer home audio
products featuring SRS or TRUSURROUND.
One of the Company's key strategies is to expand the use of SRS into the
various product lines of each OEM. Based on RCA's success with SRS in
televisions, RCA has introduced the RCA High Performance Audio line of home
stereo products featuring SRS. Hyundai, Kenwood, Pioneer, Samsung, Sharp, Sony
and other OEMs have also introduced SRS into multiple product lines.
A number of semiconductor manufacturers have licensed SRS for
implementation into semiconductors designed for consumer home audio products.
AKM, Mitsubishi, NJRC, Seponix, SGS-Thompson and Toshiba are currently shipping
semiconductors for use in consumer home audio products.
Computer Multimedia
Consumers are increasingly purchasing multimedia personal computers
incorporating a CD-ROM drive and speakers and typically supporting higher
resolution graphics and sound and, in certain cases, additional capabilities
such as digital video and data and/or voice communications. The demand for these
capabilities has been driven by the proliferation of multimedia-based
entertainment and education applications and video
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games, as well as the widespread use of the Internet. The personal computer and
peripherals market is characterized by intense competition and short product
lifecycles. As a result, the Company believes PC and peripheral OEMs are more
likely to quickly implement new technologies such as SRS. Packard Bell, a leader
in the consumer PC market, established a strategic relationship with the Company
in January 1995, whereby Packard Bell licensed SRS for inclusion in all of its
personal computers. Each one of the top ten U.S. computer manufacturers ships at
least one computer product with either SRS or TRUSURROUND. In addition, non-U.S.
companies like Aztech, Daewoo, Nakamichi, Olivetti, Samsung, Sony and Trigem
also ship SRS-enhanced computer products.
The new generation of multimedia systems are focused on higher quality
audio. A number of semiconductor manufacturers have licensed SRS and/or
TRUSURROUND for implementation into semiconductors designed for computer
multimedia products. Crystal Semiconductor, NJRC, Chromatic Research, Seponix
and S3 are currently shipping such semiconductors.
Car Audio
The Company believes the unique listening environment inherent in cars
represents a significant market for SRS, FOCUS and BASER. The compartment of the
automobile creates distinct audio challenges that are significantly different
from more traditional listening environments. The location of front speakers in
doors as opposed to the dashboard in front of the driver, the construction of
the automobile and the non-optimal listener positions make it difficult to
provide quality audio in an automobile. Many auto manufacturers are featuring
improved sound systems as a differentiator and marketing advantage. The use of
SRS, FOCUS and BASER inexpensively addresses these difficult challenges in the
automobile environment. In January 1997, the Company formally introduced FOCUS
at the Winter Consumer Electronics Show.
Professional Sound
The Company defines the professional sound market as including cinemas,
musical instruments, professional recording equipment and karaoke systems. The
Company believes that implementation of SRS into movie theaters is an
inexpensive alternative to or enhancement of current audio technologies for the
cinema such as DolbySRD(R), DTS(R) and SDDS(R), and provides an important avenue
to increase consumer awareness of SRS. Over 1,500 theaters worldwide have
implemented SRS 3D Cinema Sound(TM). The Company does not anticipate that the
professional sound market will be a significant source of revenues in the
foreseeable future, but it believes it is an important avenue to increase
consumer awareness of the Company's technologies.
LICENSEE PROGRAM
As a technology development and licensing company, in Fiscal 1997, the
Company's primary focus was to create economic and inventive ways for licensees
to implement the Company's technologies. The Company has two general types of
licensees: OEM licensees that build SRS and the Company's other technologies
into consumer products; and semiconductor licensees that build SRS and the
Company's other technologies into semiconductors for use by the OEM licensees.
The number of the Company's licensees has grown from two in June 1993 to 170
licensees as of December 31, 1997, and SRS has been implemented into an
estimated twenty-three million products in numerous product lines. In Fiscal
1998, the Company will continue as a technology development and licensing
company while at the same time developing Valence's business of designing,
manufacturing and marketing semiconductors and consumer electronic products.
7
<PAGE> 10
OEM LICENSEES
The following table identifies many of the Company's OEM licensees and the
market or markets in which such licensees are participating or are planning to
participate, as of December 31, 1997:
OEM LICENSEES
COMPUTER MULTIMEDIA
<TABLE>
<S> <C>
Acer Peripherals Ltd. Lian Sheng Electron Technology Co.
Advanced Digital Systems Liu Fang Digital System Co. Ltd.
Alpha Systems Labs Mediatrix Peripherals Inc.
Atlantis Computers, Inc. ("NuReality") Megaworld
Apple Computer, Inc. MICS Computers, Inc.
ATP Corporation Midiland
Aura Systems, Inc. Nakamichi Corporation
Aztech Systems Ltd. Ning Bo Moifang Electric Co.
Boca Research, Inc. NMB Technologies
Chareon Somboon Packard Bell/NEC
Chicony Corporation Palnet Company Ltd.
Core Dynamics, Inc. Peony Electronic Products
Daewoo Telecom Ltd. Pioneer Electronic Corporation
Detector Co., Ltd. Reveal Computer Products, Inc.
Diamond Multimedia Systems, Inc. Samsung Electronics Co., Ltd.
Diotech SMT Products SC & T2 International, Inc.
Dual Technology Corporation Seohan Electronics, Inc.
En K Telecom Co., Ltd. Shanling Electronics Co., Ltd.
Ever Prosperity Sharp Electronics, Inc.
Formosa Industrial Computing, Inc. Sony Corporation
Golden Reagent Investment Ltd. Sugiyama Electronics
Goldtron Multimedia Limited TeleVideo Systems, Inc.
Green-Tech Corporation, Ltd. Toshiba Corporation
GVC Corporation Trigem
Intel Corporation Umax Computer Corporation
Kenwood Corporation Yuan Zhi Electronical
KDS Co., Ltd. Zhong Shan Subor
Leadtek Research, Inc.
</TABLE>
8
<PAGE> 11
<TABLE>
<S> <C>
CONSUMER HOME AUDIO CAR AUDIO
Anam Electronics Co., Ltd. Hatai Electronics Co.
Brother Hyundai Electronics Industries Co., Ltd.
Daewoo Telecom Ltd. Kenwood Corporation
Digital Video Systems Nakamichi Corporation
Dooin Electronics Pioneer Electronic Corporation
Family TSI Company Roadmaster U.S.A.
Foshan Ruixing Sahdow (Ruixing Video)
Fujian Start Corp. PROFESSIONAL SOUND
Guang Dong Idall Electrical Appliance Co., ASSA
Ltd. Elf Systems Co., Ltd.
Hatai Electronics Co. Kawai Musical Instruments Mfg. Co., Ltd.
Hitachi Ltd. Peavy Electronics
Hyundai Electronics Industries Co., Ltd. Smart Devices, Inc.
Jazz Hipster St. Louis Music
Kenwood Corporation Star Entertainment Co., Ltd.
King Top Young Chang America, Inc. ("Kurzweil")
LG Electronics, Inc.
Nakamichi Corporation
Nanjing Panda Electronics, Ltd.
NuReality
Pioneer Electronic Corporation
Samsung Electronics Co., Ltd.
Sharp Electronics Corporation
Shenzen
Shen Zhen Solive
Sony Corporation
Sun Young Electronics, Inc.
Tai Kwang Industrial Co., Ltd.
Thomson Consumer Electronics S.A. ("RCA")
Thomson Consumer Electronics, Inc. ("RCA")
</TABLE>
License agreements with OEMs have terms which typically range from one to
ten years and require per unit royalty payments for all products implementing
the Company's technologies. Certain agreements provide for a fixed annual or
quarterly royalty payment. License agreements also specify the use of the
Company's trademarks and logos and provide for product review and approval by
the Company. The agreements do not have volume requirements and may be
terminated by the OEM or the Company without substantial financial penalty.
The Company has experienced significant concentration and fluctuations in
the use of the Company's technologies by certain licensees. For the year ended
December 31, 1995 ("Fiscal 1995"), RCA and Reveal Computer accounted for 38% and
24%, respectively, of the Company's license revenues. For the year ended
December 31, 1996 ("Fiscal 1996"), Packard Bell and NEC accounted for 28% and
10%, respectively, of the Company's license revenues. In June 1997, Packard Bell
and NEC merged to form Packard Bell/NEC. For Fiscal 1997, Packard Bell/NEC and
Crystal Semiconductor accounted for 25% and 14%, respectively, of the Company's
license revenues.
SEMICONDUCTOR LICENSEES
In order to reduce the cost of implementation of its technologies and
increase market penetration, the Company has developed a strategy to work more
closely with semiconductor manufacturers. The Company's semiconductor strategy
is to establish relationships with leading semiconductor manufacturers who will
incorporate certain of the Company's technologies into analog semiconductors and
digital signal processors.
The acquisition of Valence by the Company is anticipated to positively
effect the relationships with semiconductor manufacturers. Valence's chip design
capabilities will help shorten time to market for new chips and, when necessary,
Valence can produce a chip which can be used to "seed" a market, thereby
reducing potential risk for semiconductor partners.
9
<PAGE> 12
The following table identifies the semiconductor manufacturers who have
entered into licensing agreements with the Company as of December 31, 1997:
SEMICONDUCTOR LICENSEES
<TABLE>
<S> <C>
AKM Semiconductor New Japan Radio Co., Ltd.
Chromatic Research, Inc. Nippon Precision Circuits Inc./Seiko Group ("Seiko")
Crystal Semiconductor Philips Semiconductors
Fujitsu Semiconductor Corporation S3 Inc.
Industrial Technology Research Institute Seponix Corporation
LSI Logic Corp. Toshiba Semiconductor Corporation
Medianix Semiconductor, Inc. SGS-Thomson Microelectronics
Mitsubishi Electric Corporation Valence Technology Inc.
Motorola Incorporated Yamaha Corporation
</TABLE>
The Company has primarily followed the Dolby licensing model, whereby
licensees are free to choose a semiconductor solution from a number of choices
and, regardless of the semiconductor choice, the licensee pays a royalty
directly to the Company. In certain markets such as the computer multimedia
market, the Company has implemented a different model whereby the royalty is
"bundled" into the cost of the semiconductor. This provides the OEM with an
easier business decision and simplifies the process for the semiconductor
manufacturer. In this model, the royalty is collected directly from the
semiconductor company after the chip has been sold to the OEM. This "bundled"
licensing model will also be used in geographic markets, like China, where
intellectual property and royalties are not well established in business
practice.
The Company believes that the business relationships based on SRS, as well
as those based on technologies such as FOCUS, TRUSURROUND, BASER and VIP, will
increase the Company's channels of distribution by leveraging the sales forces
of the semiconductor manufacturers. These relationships also will provide OEMs
with an easier and more cost-effective implementation of the Company's
technologies. The Company believes it will develop additional revenue streams
from new technologies implemented and marketed through licensed semiconductor
manufacturers.
LICENSEE SUPPORT
The Company seeks to work closely with its licensees to enhance their
success in selling products and semiconductors that incorporate the Company's
technologies through a variety of targeted licensee support programs. The
Company's licensee support programs include customized audio-CDs to showcase the
OEM products and semiconductors and the Company's technology, sales training,
press tours and targeted mailings.
The Company's corporate communications program includes press releases,
monthly technical updates, quarterly newsletters and sales informational
mailings. The Company also produces and distributes audio CD/CD ROMs that
demonstrate SRS and TRUSURROUND and provides technical assistance and general
consumer-related information on the World Wide Web. The Company conducts tours
and presentations for the press and other media outlets to promote the Company's
technologies and licensee products.
The Company regularly participates in trade shows to increase awareness of
its technologies, to support its licensees and to generate new licensee
relationships with existing and potential customers. The Company also has
initiated a development program with its OEM and semiconductor licensees to
actively explore other opportunities to utilize the Company's technologies in
new products and/or markets. The Company has also retained the services of an
outside public relations firm to supplement these communications efforts
produced by the Company's internal marketing department.
RESEARCH AND DEVELOPMENT
The Company has spent approximately 15.8%, 15.8% and 11.2% of total
operating expenses on research and development in Fiscal 1995, 1996 and 1997,
respectively. The Company's research and development
10
<PAGE> 13
efforts have been primarily targeted at developing new technologies, improving
the performance of its existing technologies and reducing the cost for OEMs to
implement its technologies. Research and development efforts are also focused on
responding to licensees' requirements with respect to implementing the Company's
technologies, expanding applications for the Company's technologies in the
Company's four target markets and exploring implementation of the Company's
technologies in new markets. The acquisition of Valence is anticipated to expand
the resources available to develop new and enhanced technologies and improve
implementations of the Company's existing technologies.
The market for the Company's technologies is subject to rapid and
significant changes and frequent new technology and product introductions. The
Company believes that its future success will depend on its ability to continue
to enhance its existing technologies and to introduce or acquire new
technologies on a competitive basis. There can be no assurance, however, that
the Company will be able to successfully enhance existing technologies or
introduce or acquire new technologies.
MARKETING AND ADVERTISING
In addition to its licensee support programs, the Company markets its
business on a worldwide basis. As part of the Company's global strategy, its
sales and marketing efforts are organized into new business development and
licensee relationship management functions. The Company develops new business
opportunities through a combination of its dedicated sales force, independent
sales agents and semiconductor licensees which identify potential licensees and
pursue interactive product development with these licensees. An integral part of
the Company's sales and marketing worldwide is conducted by its independent
sales agents. The Company actively promotes the use of Company trademarks, and
directs licensees to prominently display the SRS logo on products, packaging and
in advertising. In the cinema market, theaters utilizing SRS feature a 30-second
movie trailer (similar to Dolby(R) and THX(R)) at the beginning of each show
with the phrase, "SRS(-) . . . everything else is only stereo." Additionally,
the Company uses public relations, direct mail, newsletters and its World Wide
Web page on the Internet to build brand name awareness.
COMPETITION
The Company participates in geographic markets and product market segments
which are very competitive. As the Company has realized success and gained a
position of market share leader in 3D audio, numerous competitive technologies
and competitors have emerged. Competition tends to be product market segment
specific, and management is not aware of any company that offers a full
complement of technologies that compete with the total offerings of the Company.
In the general field of 3D audio enhancement for multiple markets, Qsound Labs
and Spatializer continue to be the most visible competitors. In the computer
multimedia market, Harmon International offers a competitive technology to the
Company's TRUSURROUND technology and Aureal offers technologies that compete
with SRS and TRUSURROUND. Wave, an Israeli company, offers technology that
competes with BASER, and Virtual Listening Systems offers technology that
potentially competes with SRS Headphone. The Company is not aware of any direct
competitors for VIP. The Company's technologies may, in the future, compete with
audio technologies developed by other companies, some of whom may be current
customers of the Company.
With respect to Valence, there are numerous semiconductor companies which
tend to dominate the global markets such as Intel, Texas Instruments, National
Semiconductor and Motorola. Many of these companies are chip partners with the
Company. Within every major market there is a need and a place for local, niche
participants, such as Valence, that do not compete directly with the industry
giants. In Valence's home markets, sensitivity to local business practices and
ongoing flexibility are as important as global size and reputation. Often, it is
firms like Valence that fulfill specific needs in a market and create new
markets for the larger global leaders to enter as these markets begin to mature.
Certain of these companies that compete with the Company and Valence have,
or may have, substantially greater resources than the Company to devote to
further technologies and new product developments. The Company believes that it
will compete based primarily on the quality and performance of its proprietary
technologies, brand name awareness, the ease and cost of implementing its
technologies, the ability to meet
11
<PAGE> 14
OEMs' needs to differentiate their products, and the strength of its licensee
relationships. There can be no assurance that based on these factors the Company
will continue to be competitive with existing or future products or technologies
of its competitors.
INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are important
for success. The Company relies on a variety of intellectual property
protections for its products and services, including patent, copyright,
trademark and trade secret laws, and contractual obligations, and pursues a
policy of vigorously enforcing such rights. There can be no assurance, however,
that the Company's intellectual property rights will be adequate to ensure the
Company's competitive position, or that competitors will not be able to produce
a non-infringing competitive product or service. There can be no assurance that
third parties will not assert infringement claims against the Company, or, that
if required to obtain any third-party licenses as a result of an infringement
dispute, the Company will be able to obtain such licenses. The Company believes
that its patents and trademarks are important to its business.
SRS is the subject of five U.S. patents containing a combined total of 275
claims. The expiration dates for these U.S. patents are May 31, 2005, June 20,
2006, September 12, 2006, October 5, 2010 and August 26, 2014, respectively. In
addition, the Company has 55 issued foreign patents relating to SRS and over 40
additional foreign patents pending. The expiration dates for these foreign
patents vary depending on the particular patent and the particular country, but
in most cases the duration of such foreign patents will extend into the year
2006.
The Company also owns three U.S. patents for speaker technology and one for
VIP. Foreign patents are both issued and pending in countries worldwide for the
Company's speaker technologies and the VIP technology. The expiration dates for
these U.S. patents are April 4, 2006, June 6, 2006, January 10, 2010 and October
17, 2012, respectively. The expiration dates for these foreign patents varies
depending on the particular patent and the particular country, but, in most
cases, the duration of such foreign patents will extend into the year 2006. The
Company has multiple new audio technology patents pending in the U.S. and
worldwide for improvements to SRS and its FOCUS and TRUSURROUND technologies.
The Company also is the owner of the federally registered trademarks
SRS(R), the SRS logo "(-)(R)", Sound Retrieval System(R), ORB(R), BASER(R) and
"everything else is only stereo(R)." Trademark applications have been filed for
F(-)CUS(TM), TRUSURROUND(TM), VIP(TM) AVT(TM), Dr. 3D(TM), 3D STEREO(TM), 3D
STEREO II(TM), 3D CINEMA SOUND(TM), MEGA WIDE(TM), MEGA SPACE(TM) and ORS(TM).
The initial duration of the Company's registered trademarks ranges from August
23, 1998 to September 23, 2001. The duration of these trademarks can be
maintained indefinitely provided proper maintenance fees are paid and the
trademarks are continually used or licensed by the Company. The Company
currently intends to maintain all of these trademarks.
EMPLOYEES
The Company employed 16 full-time individuals and one part-time individual
as of December 31, 1997. None of the Company's employees are covered by a
collective bargaining agreement or is presently represented by a labor union.
The Company has not experienced any work stoppages and considers its employee
relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Santa Ana, California,
in a 23,400 square foot facility consisting of office and warehouse space. The
Company leases the facility from Daimler Commerce Partners, L.P. (the
"Partnership"), an affiliated partnership. The general partner of the
Partnership is Conifer Investments, Inc. ("Conifer"). The sole shareholders of
Conifer are Thomas C.K. Yuen and Misako Yuen, as co-trustees of the Thomas Yuen
Family Trust (the "Trust"), and the executive officers of Conifer include Mr.
and Mrs. Yuen. Mr. and Mrs. Yuen, as co-trustees of the Trust, also beneficially
own a significant amount of
12
<PAGE> 15
the Company's outstanding shares of common stock. Mr. Yuen is the Chairman of
the Board and Chief Executive Officer of the Company.
The original lease with the Partnership, pursuant to which the Company
leased 11,700 square feet of space, commenced on June 1, 1994, and expired on
May 31, 1997. Upon the expiration of the original lease, the Company entered
into a new lease agreement with the Partnership to lease 23,400 square feet of
space at the same facility. The lease term commenced on June 1, 1997 and will
expire on May 31, 2000. At the time of expiration, the Company will have an
option to renew the lease for two additional years commencing on June 1, 2000
and terminating on May 31, 2002. Rent for the year beginning June 1, 1997 was
$.59 per square foot per month plus common area expenses, real property taxes,
utilities, insurance premiums and maintenance. Pursuant to the leases with the
Partnership, the Company paid the Partnership rent of $63,180 during Fiscal
1995, $63,430 during Fiscal 1996 and $129,369 during Fiscal 1997.
The Company, through Valence and its subsidiaries, leases several offices
and warehouses in Hong Kong and China. Valence's principal operations are
conducted at two leased facilities located in Hong Kong. The principal executive
offices of Valence are located in Kowloon Tong, Hong Kong, in a 3,037 square
foot office facility under a lease that expires in August 1998. Valence's other
principal office is located in Kwun Tong, Kowloon, Hong Kong, in a 7,453 square
foot office facility under a lease that expires in December 2000.
The Company believes that the current facilities of the Company and its
subsidiaries will be adequate to meet the Company's needs for the foreseeable
future. Should the Company need further additional space, management believes
that the Company will be able to secure additional space at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
As of March 26, 1998, neither the Company nor any of its subsidiaries was a
party to any pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The common stock of the Company, par value $.001 per share (the "Common
Stock"), trades on the Nasdaq Stock Market as a National Market System Security
under the symbol SRSL. There was no active trading market for the Common Stock
prior to August 8, 1996, the effective date of the Company's initial public
offering.
The table below reflects the high and low sales prices of the Common Stock,
as reported by The Nasdaq Stock Market, Inc., from August 8, 1996 through the
end of Fiscal 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996
Third Quarter (beginning August 8, 1996).................. $15 5/8 $8
Fourth Quarter............................................ 16 8 5/8
FISCAL 1997
First Quarter............................................. 11 1/8 7 1/4
Second Quarter............................................ 11 7/8 9 1/8
Third Quarter............................................. 10 3/4 4 5/8
Fourth Quarter............................................ 8 5/8 5
</TABLE>
HOLDERS
At March 26, 1998, there were 393 stockholders of record and an estimated
2,300 beneficial holders.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock. The Company
currently intends to retain its available funds from earnings for future growth
and, therefore, does not anticipate paying any dividends in the foreseeable
future.
SALES OF UNREGISTERED SECURITIES
During Fiscal 1997, the Company did not sell any of its equity securities
that were not registered under the Securities Act of 1933, as amended (the
"Securities Act").
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 acknowledged 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).
14
<PAGE> 17
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 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 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 on the basis
that they were issued under circumstances not involving a public offering.
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 Fiscal 1997,
the Company did not utilize (except with respect to temporary investment) any of
its net offering proceeds from such public offering. 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 OF 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 Transaction, the Company utilized $500,000 of the
proceeds as part of the consideration to purchase the VIP technology. In
connection with the Valence Transaction, 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.
15
<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following table sets forth selected financial data of the Company from
its inception (June 23, 1993) through December 31, 1993, and for the fiscal
years ended December 31, 1994, 1995, 1996, and 1997, which has been derived from
the Company's audited financial statements. The following information should be
read in conjunction with the Financial Statements and Notes thereto included
elsewhere in this Report.
<TABLE>
<CAPTION>
JUNE 23, 1993
(DATE OF INCEPTION) FISCAL YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ------------------------------------
1993 1994 1995 1996 1997
--------------------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalty revenues......................... $ 125 $ 547 $ 823 $4,620 $ 8,671
Other revenues........................... 228 440 21 772 1,410
------ ------- ------- ------ -------
Total revenues................... 353 987 844 5,392 10,081
Cost of sales.............................. 227 678 15 95 210
------ ------- ------- ------ -------
Gross margin............................. 126 309 829 5,297 9,871
Operating costs and expenses
Sales and marketing...................... 149 674 937 1,163 2,112
Research and development................. 6 340 384 522 596
General and administrative............... 132 1,079 1,107 1,616 2,615
------ ------- ------- ------ -------
Total operating expenses......... 287 2,093 2,428 3,301 5,323
------ ------- ------- ------ -------
Income (loss) from operations.............. (161) (1,784) (1,599) 1,996 4,548
Interest income (expense), net........... (71) (92) (41) 366 1,088
------ ------- ------- ------ -------
Income (loss) from operations before
provision for income taxes............... (232) (1,876) (1,640) 2,362 5,636
Provision for income taxes................. 1 1 1 501 1,863
------ ------- ------- ------ -------
Net income (loss).......................... (233) (1,877) (1,641) 1,861 3,773
====== ======= ======= ====== =======
Net income (loss) per share of common
stock:
Basic............................ $(0.08) $ (0.38) $ (0.28) $ 0.24 $ 0.39
====== ======= ======= ====== =======
Diluted.......................... $ -- $ -- $ -- $ 0.21 $ 0.35
====== ======= ======= ====== =======
Weighted average number of shares used in
the calculation of net income per common
share:
Basic............................ 2,554 4,942 5,928 7,625 9,556
====== ======= ======= ====== =======
Diluted.......................... -- -- -- 8,686 10,852
====== ======= ======= ====== =======
Balance Sheet Data:
Working Capital....................... 10 (645) 431 3,375 9,075
Total Assets.......................... 1,533 927 1,698 26,674 31,542
Long-term obligations, net of current
portion............................. 861 340 211 69 --
Stockholders' Equity (deficit)........ (100) (227) 888 25,151 29,420
Selected Operating Data:
Total licensees.......................... 2 19 43 82 170
</TABLE>
OVERVIEW
The Company develops, markets and licenses proprietary audio technologies
for use in four worldwide markets: consumer home audio, computer multimedia, car
audio and professional sound. The Company licenses its flagship technology, SRS,
to leading OEMs and semiconductor manufacturers.
On March 2, 1998, the Company acquired all of the outstanding capital stock
of Valence. Valence, which conducts its business through its subsidiaries based
in Hong Kong and China, is engaged in two primary areas of business, namely, the
design, manufacture and marketing of ASIC (application-specific integrated
circuit)
16
<PAGE> 19
products and consumer electronic products. The aggregate purchase price of
$19,500,000 consisted of approximately $7,400,000 in cash and approximately
$12,100,000 in shares of Common Stock. The acquisition will be accounted for as
a purchase. The acquisition, which for accounting purposes had an effective date
of February 1, 1998, will have a material impact on the Company's financial
statements as of and for the three months ended March 31, 1998 and for reporting
periods thereafter. Additionally, because of the impact that the acquisition
will have on the Company's future financial statements, those future financial
statements may not be directly comparable to the Company's historical financial
statements.
This Management's Discussion and Analysis or Plan of Operation should be
read in conjunction with the Company's Financial Statements and Notes thereto
included in Part II, Item 7 of this Report.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenue in Fiscal 1997 was $10,081,283 compared to $5,392,280 in
Fiscal 1996, an increase of 87.0%. This increase resulted primarily from
increased shipments of products incorporating SRS on which royalties are paid by
licensees. Of the $10,081,283 in revenues in Fiscal 1997, $1,410,000 related to
one-time license fees and $8,671,283 related to on-going royalties, as compared
to $5,392,280 in revenues in Fiscal 1996, which included $772,180 in one-time
license fees and $4,620,100 related to on-going royalties. The number of
licensees as of December 31, 1997 was 170, compared to 82 as of December 31,
1996.
Cost of Sales
Cost of sales consists primarily of fees paid to third-party
representatives for sales administration and support. Cost of sales in Fiscal
1997 was $210,348 compared to $95,378 in Fiscal 1996, an increase of 120.5%. As
a percentage of total revenues, cost of sales increased to 2.1% in Fiscal 1997
from 1.8% in Fiscal 1996. This increase resulted from the increase in license
revenue on which the Company pays fees to third-party representatives.
Sales and Marketing
Sales and marketing expenses were $2,111,839 in Fiscal 1997 compared to
$1,163,409 in Fiscal 1996, an increase of 81.5%. This increase was primarily
attributable to increased staffing to promote new technologies, increased travel
costs to support the Company's global presence and an increase in marketing and
promotional activities aimed at establishing SRS as an international standard.
As a percentage of total revenues, sales and marketing expenses decreased to
20.9% in Fiscal 1997 from 21.6% in Fiscal 1996 as the Company leveraged its
expenses on higher sales volumes.
Research and Development
Research and development expenses were $595,689 in Fiscal 1997 compared to
$521,482 in Fiscal 1996, an increase of 14.2%. This increase was primarily
attributable to an increase in expenses associated with the internal development
of new and existing technologies. As a percentage of total revenues, research
and development expenses decreased to 5.9% in Fiscal 1997 from 9.7% in Fiscal
1996 as the Company leveraged its expenses on higher sales volumes.
General and Administrative
General and administrative expenses were $2,615,706 in Fiscal 1997 compared
to $1,615,648 in Fiscal 1996, an increase of 61.9%. This increase was primarily
attributable to increased staffing, increased professional fees associated with
maintaining patent and trademark rights in the U.S. and foreign countries, costs
associated with being a public company and general management expenses for the
support of licensing activities and new business development. As a percentage of
total revenues, general and administrative
17
<PAGE> 20
expenses decreased to 25.9% in Fiscal 1997 from 30.0% in Fiscal 1996 as the
Company leveraged its expenses on higher sales volumes.
Interest Income, net
Interest income was $1,088,718 in Fiscal 1997 compared to $365,583 in
Fiscal 1996, an increase of 197.8%. The increase represents the difference in
earned interest for a full year in Fiscal 1997, as opposed to a partial year's
worth of earnings in Fiscal 1996. The interest is earned on investment of the
proceeds from the Company's initial public offering which took place on August
8, 1996.
Provision for Income Taxes
The effective tax rate for Fiscal 1997 was 33.1% compared to 21.2% for
Fiscal 1996. Higher pre-tax earnings for Fiscal 1997 and the full utilization of
the net operating loss carryforwards in Fiscal 1996 were responsible for the
increase in the effective rate.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Total revenue in Fiscal 1996 was $5,392,280 compared to $843,789 in the
fiscal year ended December 31, 1995 (" Fiscal 1995"), an increase of 539.1%.
This increase resulted primarily from growth of the licensee base from 43
licensees at the end of 1995 to 82 licensees at December 31, 1996, and increased
shipments of products incorporating SRS on which royalties are paid by
licensees. Of the $5,392,280 in revenues in Fiscal 1996, $772,180 related to
one-time license fees and $4,620,100 related to on-going royalties.
Cost of Sales
Cost of sales consists primarily of fees paid to third-party
representatives for sales administration and support. Cost of sales in Fiscal
1996 was $95,378 compared to $14,957 in Fiscal 1995, an increase of 537.7%. Cost
of sales was 1.8% of total revenues in both Fiscal 1996 and 1995.
Sales and Marketing
Sales and marketing expenses were $1,163,409 in Fiscal 1996 compared to
$937,293 in Fiscal 1995, an increase of 24.1%. This increase was primarily
attributable to increased staffing and an increase in marketing and promotional
activities. As a percentage of total revenues, sales and marketing expenses
decreased to 21.6% in Fiscal 1996 from 111.1% in Fiscal 1995 as the Company
leveraged its expenses on higher sales volumes.
Research and Development
Research and development expenses were $521,482 in Fiscal 1996 compared to
$383,948 in Fiscal 1995, an increase of 35.8%. This increase was primarily
attributable to increased staffing and an increase in expenses associated with
the internal development of new and existing technologies. As a percentage of
total revenues, research and development expenses decreased to 9.7% in Fiscal
1996 from 45.5% in Fiscal 1995, as the Company leveraged its expenses on higher
sales volumes.
General and Administrative
General and administrative expenses were $1,615,648 in Fiscal 1996 compared
to $1,106,519 in Fiscal 1995, an increase of 46.0%. This increase was primarily
attributable to increased staffing and general management expenses for support
of the licensing activities and new business development. As a percentage of
total revenues, general and administrative expenses decreased to 30.0% in Fiscal
1996 from 131.1% in Fiscal 1995 as the Company leveraged its expenses on higher
sales volumes.
18
<PAGE> 21
Interest Income (expense), net
Interest income was $365,583 in Fiscal 1996 compared to interest expense of
$41,035 in Fiscal 1995. The increase is due to interest earned on investing the
proceeds from the Company's initial public offering.
Provision for Income Taxes
Income tax expense in Fiscal 1996 was $500,937 compared to $800 in Fiscal
1995, which represented minimum state income taxes as the Company had a net loss
during that period. Income tax expenses in Fiscal 1996 are partially offset by
the use of federal and state tax loss carryforwards.
SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth certain quarterly financial data for the
eight quarters in the period ended December 31, 1997. The quarterly information
is based upon unaudited financial statements prepared by the Company on a basis
consistent with the Company's audited financial statements and, in management's
opinion, includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the information for the periods
presented. This information should be read in conjunction with the Company's
audited Financial Statements and Notes thereto appearing elsewhere in this
Report. The operating results for any quarter are not necessarily indicative of
results for any future period. The Company's quarterly operating results have
varied significantly in the past and are expected to vary significantly in the
future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalty Revenues............. $ 985 $ 890 $1,151 $1,594 $1,802 $2,016 $1,930 $2,923
Other Revenues............... 50 174 300 248 410 100 575 325
------ ------ ------ ------ ------ ------ ------ ------
Total Revenues........ 1,035 1,064 1,451 1,842 2,212 2,116 2,505 3,248
Gross Margin................... 1,030 1,047 1,421 1,799 2,173 2,040 2,434 3,224
Operating Expenses............. 729 657 774 1,141 1,327 966 1,153 1,877
------ ------ ------ ------ ------ ------ ------ ------
Operating Income............... 301 390 647 658 846 1,074 1,281 1,347
Net Income................... 218 289 633 721 695 848 1,083 1,147
Net Income per share of common
stock:
Basic...................... $ .03 $ .05 $ .08 $ .08 $ .07 $ .09 $ .11 $ .12
Diluted.................... $ .03 $ .04 $ .07 $ .07 $ .07 $ .08 $ .11 $ .11
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 130 established
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 131 established
standards of reporting by publicly-held business enterprises and disclosure of
information about operating segments in annual financial statements and, to a
lesser extent, in interim financial reports issued to stockholders. SFAS Nos.
130 and 131 are effective for the Company beginning in 1998. As these standards
deal with the form and content of financial statement disclosures, the Company
does not anticipate that the adoption of these new standards will have a
material impact on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In August 1996, the Company completed an initial public offering of
3,107,452 shares of common stock at $8.00 per share. Net proceeds to the Company
were approximately $22 million.
19
<PAGE> 22
From inception through August 1996, the Company financed its operations
primarily through the private placement of equity securities. As of December 31,
1996 and 1997, cash, cash equivalents, and investments totaled $24,425,782 and
$26,013,790, respectively. The Company's cash provided by operating activities
decreased to $1,829,621 for Fiscal 1997 from $2,255,320 for Fiscal 1996,
primarily resulting from an increase in the Company's royalty receivable.
Royalty receivable increased by $3,286,961 due primarily to the increase in
licensing royalties and the execution of licensing agreements during the last
quarter of the period.
The Company's principal source of liquidity at December 31, 1997 consisted
of cash, cash equivalents and investments. The Company has adopted investment
guidelines which restrict the types and quality of investments the Company is
authorized to enter into. At December 31, 1997, the Company had cash and cash
equivalents of $4,446,753 and investments of $21,567,037. Investments consist of
municipal bonds rated a minimum of A1.
On March 2, 1998, the Company acquired all of the outstanding shares of
capital stock of Valence for an aggregate purchase price of $19,500,000,
consisting of approximately $7,400,000 in cash and approximately 1,800,000
shares of Common Stock.
On March 4, 1998 the Company obtained a bank line of credit. The total
availability under the line is $10 million and expires June 1, 2000. Borrowings
under the facility are collateralized by certain of the Company's marketable
securities and bear interest at the rate of LIBOR plus 0.75% or the bank's prime
rate. As of March 26, 1998, the Company had loans outstanding of $7,000,000.
In connection with the acquisition of all of the outstanding shares of
capital stock of Valence, the Company has 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 also expects to provide
Valence with up to an additional $8,000,000 in working capital over the next six
months.
Based on current plans and business conditions, the Company expects 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 cash requirements for at least the next 12
months. 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 INFORMATION AND CERTAIN FACTORS
Included in Part I, Item 1. Description of Business, this Item 6 and
elsewhere in this Report are certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, reflecting
management's current expectations. Examples of such forward-looking statements
include the expectations of the Company with respect to statements made under
the caption "Company Strategy" in Part I, Item 1 of this Report, and statements
regarding its expectations relating to the acquisitions of Valence and the VIP
technology. Although the Company believes that its expectations are based upon
reasonable assumptions, there can be no assurances that the Company's financial
goals will be realized. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Numerous factors may
affect the Company's actual results and may cause results to differ materially
from those expressed in forward-looking statements made by or on behalf of the
Company. Such factors include, among others, those set forth 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
20
<PAGE> 23
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, seasonal customer demand, the
Company's ability to continue to effectively compete with others in the field of
audio enhancement technologies, processes and products and general business
economic conditions, particularly those effecting the consumer electronics
market.
Integration of Valence
As a result of the acquisition of Valence, the success of the Company will
depend in 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.
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. 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. 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
As a result of existing and new competitors into the 3D audio market, the
Company has experienced, and anticipates that it will continue to experience,
increased pricing pressures due to aggressive pricing from certain of the
Company's competitors. Due to competitive pricing pressures, the Company may,
from time to time, reduce the average unit royalty fees charged to its
customers. In order to offset declines in average unit selling prices, the
Company depends upon increased usage of its technologies by existing customers
and expansion into new market segments. The degree to which the Company can
expand usage of its technology by both new and existing customers will depend on
a number of factors including semiconductor development and delivery schedules,
the ability of the Company to manage expansion in international marketing and
sales and timely introduction of new technologies. There is no assurance that
the Company will achieve the desired volume growth to offset the negative effect
to revenue caused by the reduction in average unit price.
Semiconductor Solutions
The delivery of the Company's technologies to OEMs in a semiconductor-based
solution improves the Company's ability to deliver cost-effective, reliable
solutions to its customers. The existence of semiconductor-based technology
solutions, however, increases the dependence of the Company's operating results
on the ability of semiconductor manufacturers to timely deliver such solutions
to the marketplace. The Company's reliance on outside semiconductor
manufacturers reduces the Company's ability to control the supply of products to
the marketplace. The occurrence of any supply problems for the Company's
products, as well as a
21
<PAGE> 24
lack of semiconductor manufacturers' sales focus, may have an adverse effect on
the Company's operating results.
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 market 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 are currently evaluating all internal
operating systems and in 1998 will initiate a comprehensive project to update
their accounting software to programs that are Year 2000 compliant. The Company
expects to complete the project in early 1999, and the total cost for this
project, based on management's best estimates, could range as high as
$1,500,000, including the cost of new systems, which will be capitalized.
In addition, the Company is 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.
22
<PAGE> 25
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 24
Balance Sheets as of December 31, 1996 and 1997............. 25
Statements of Operations for the years ended December 31,
1995, 1996 and 1997....................................... 26
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997.................... 27
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997....................................... 28
Notes to Financial Statements............................... 29
</TABLE>
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
SRS Labs, Inc.:
We have audited the accompanying balance sheets of SRS Labs, Inc. (the
"Company") as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of SRS Labs, Inc. as of December 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 6, 1998 (March 4, 1998, as to Note 10)
24
<PAGE> 27
SRS LABS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS (Note 2):
Cash and cash equivalents................................. $ 3,455,997 $ 4,446,753
Investments available for sale (Note 3)................... -- 2,010,775
Royalty receivable........................................ 702,966 3,989,927
Interest receivable....................................... 325,822 316,815
Other receivables (Note 7)................................ 20,030 4,714
Prepaid expenses.......................................... 105,919 257,428
Deferred income taxes (Note 6)............................ 218,936 170,674
----------- -----------
Total current assets.............................. 4,829,670 11,197,086
INVESTMENTS AVAILABLE FOR SALE (Note 3)..................... 20,969,785 19,556,262
FURNITURE, FIXTURES AND EQUIPMENT, net of accumulated
depreciation (Notes 2 and 4).............................. 281,189 245,779
PATENTS, net of accumulated amortization of $46,913 (1996)
and $76,294 (1997)........................................ 126,827 201,323
GOODWILL, net of accumulated amortization of $594,002 (1996)
and $805,781 (1997) (Note 2).............................. 280,052 112,350
DEFERRED INCOME TAXES (Note 6).............................. 186,576 229,223
----------- -----------
$26,674,099 $31,542,023
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 8)................................. $ 275,554 $ 202,352
Accrued liabilities, including deferred income of $256,686
(1996) and $41,635 (1997) and accrued salaries of
$129,216 (1996) and $185,000 (1997).................... 566,139 826,242
Income taxes payable...................................... 433,021 1,011,426
Current portion of consideration due on asset purchase
(Notes 2 and 8)........................................ 180,000 81,804
----------- -----------
Total current liabilities......................... 1,454,714 2,121,824
CONSIDERATION DUE ON ASSET PURCHASE, net of current portion
(Notes 2 and 8)........................................... 68,635 --
COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY
(Note 7):
Preferred stock -- $0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock -- $0.001 par value; 56,000,000 shares
authorized; 9,468,548 (1996) and 9,609,867 (1997)
shares issued and outstanding.......................... 9,469 9,610
Additional paid-in capital................................ 24,678,961 25,022,437
Deferred compensation..................................... 154,386 231,087
Unrealized gain on investments available for sale, net of
income taxes of $58,795 (1996) and $109,696 (1997)..... 87,688 163,600
Retained earnings......................................... 220,246 3,993,465
----------- -----------
Total stockholders' equity........................ 25,150,750 29,420,199
----------- -----------
$26,674,099 $31,542,023
=========== ===========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 28
SRS LABS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES (Note 8):
Royalty revenues.................................... $ 822,559 $4,620,100 $8,671,283
Other revenues...................................... 21,230 772,180 1,410,000
----------- ---------- ----------
Total revenues.............................. 843,789 5,392,280 10,081,283
COST OF SALES......................................... 14,957 95,378 210,348
----------- ---------- ----------
GROSS MARGIN.......................................... 828,832 5,296,902 9,870,935
SALES AND MARKETING................................... 937,293 1,163,409 2,111,839
RESEARCH AND DEVELOPMENT.............................. 383,948 521,482 595,689
GENERAL AND ADMINISTRATIVE (Note 8)................... 1,106,519 1,615,648 2,615,706
----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS......................... (1,598,928) 1,996,363 4,547,701
INTEREST INCOME (EXPENSE), net........................ (41,035) 365,583 1,088,718
----------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES....... (1,639,963) 2,361,946 5,636,419
PROVISION FOR INCOME TAXES (Note 6)................... 800 500,937 1,863,200
----------- ---------- ----------
NET INCOME (LOSS)..................................... $(1,640,763) $1,861,009 $3,773,219
=========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
BASIC............................................... $ (0.28) $ 0.24 $ 0.39
=========== ========== ==========
DILUTED............................................. $ -- $ 0.21 $ 0.35
=========== ========== ==========
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION OF NET
INCOME (LOSS) PER COMMON SHARE:
BASIC............................................... 5,927,615 7,625,075 9,556,015
DILUTED............................................. -- 8,686,408 10,852,281
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 29
SRS LABS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAINS ON RETAINED
------------------ PAID-IN DEFERRED INVESTMENTS, EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION NET (DEFICIT) TOTAL
--------- ------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995........... 5,141,302 $5,142 $ 1,877,858 $ -- $ -- $(2,110,026) $ (227,026)
Issuance of common stock
(Note 7)....................... 857,730 858 2,682,643 -- -- -- 2,683,501
Reclassification of accumulated
deficit (Note 7)............... -- -- (2,110,026) -- -- 2,110,026 --
Deferred compensation (Note 7)... -- -- -- 21,965 -- -- 21,965
Ascribed value of services
contributed (Note 7)........... -- -- 50,000 -- -- -- 50,000
Net loss......................... -- -- -- -- -- (1,640,763) (1,640,763)
--------- ------ ----------- -------- -------- ----------- -----------
BALANCE, December 31, 1995......... 5,999,032 6,000 2,500,475 21,965 -- (1,640,763) 887,677
Issuance of common stock
(Note 7)....................... 3,107,452 3,107 22,049,848 -- -- -- 22,052,955
Proceeds from exercise of stock
options........................ 362,064 362 99,638 -- -- -- 100,000
Deferred compensation (Note 7)... -- -- -- 132,421 -- -- 132,421
Ascribed value of services
contributed (Note 7)........... -- -- 29,000 -- -- -- 29,000
Unrealized gain on investments
available for sale, net of tax
(Note 3)....................... -- -- -- -- 87,688 -- 87,688
Net income....................... -- -- -- -- -- 1,861,009 1,861,009
--------- ------ ----------- -------- -------- ----------- -----------
BALANCE, December 31, 1996......... 9,468,548 9,469 24,678,961 154,386 87,688 220,246 25,150,750
Proceeds from exercise of stock
options........................ 141,319 141 144,461 -- -- -- 144,602
Tax benefit associated with
exercise of stock options...... -- -- 199,015 -- -- -- 199,015
Deferred compensation (Note 7)... -- -- -- 76,701 -- -- 76,701
Unrealized gain on investments
available for sale, net of tax
(Note 3)....................... -- -- -- -- 75,912 -- 75,912
Net income....................... -- -- -- -- -- 3,773,219 3,773,219
--------- ------ ----------- -------- -------- ----------- -----------
BALANCE, December 31, 1997......... 9,609,867 $9,610 $25,022,437 $231,087 $163,600 $ 3,993,465 $29,420,199
========= ====== =========== ======== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 30
SRS LABS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $(1,640,763) $ 1,861,009 $ 3,773,219
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 240,109 285,063 341,152
Deferred income taxes.............................. -- (405,512) 5,615
Amortization of premium on investments available
for sale........................................ -- 27,300 109,817
Loss on disposal of furniture, fixtures and
equipment....................................... 7,095 -- --
Accretion of consideration due on asset purchase... 50,990 38,064 23,844
Increase in deferred compensation.................. 21,965 132,421 76,701
Ascribed value of services contributed............. 50,000 29,000 --
Changes in operating assets and liabilities:
Increase in royalty receivable.................. (42,961) (660,005) (3,286,961)
Decrease in accounts receivable................. 51,659 11,961 --
Decrease (increase) in interest receivable...... -- (325,822) 9,007
Decrease in inventories......................... 6,638 1,144 --
Decrease (increase) in prepaid expenses and
other receivables............................. (546,140) 463,689 (136,193)
(Decrease) increase in accounts payable......... (118,112) 121,642 (73,202)
Increase in other accrued liabilities........... 222,846 301,140 260,103
Decrease in interest payable.................... (8,191) -- --
Increase in income taxes payable................ -- 374,226 726,519
----------- ------------ -----------
Net cash provided by (used in) operating
activities............................... (1,704,865) 2,255,320 1,829,621
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment...... (105,653) (157,654) (64,582)
Expenditures related to patents.................... -- (114,641) (103,877)
Purchases of investments, available for sale....... -- (22,050,602) (580,256)
Proceeds from sale of investments, available for
sale............................................ -- 1,200,000 --
----------- ------------ -----------
Net cash used in investing activities...... (105,653) (21,122,897) (748,715)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable................. (311,907) -- --
Payment of consideration due on asset purchase..... (231,421) (213,468) (234,752)
Issuance of common stock........................... 2,683,501 22,152,955 --
Exercise of stock options.......................... -- -- 144,602
----------- ------------ -----------
Net cash provided by (used in) financing
activities............................... 2,140,173 21,939,487 (90,150)
----------- ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 329,655 3,071,910 990,756
CASH AND CASH EQUIVALENTS, beginning of period....... 54,432 384,087 3,455,997
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 384,087 $ 3,455,997 $ 4,446,753
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Income taxes.................................... $ 800 $ 126,711 $ 811,700
=========== ============ ===========
Interest........................................ $ 20,721 $ -- $ --
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Additional consideration accrued for asset purchase
(Note 2)........................................ $ 51,243 $ 33,080 $ 44,077
Unrealized gain on investments, net (Note 3)....... $ -- $ 87,688 $ 75,912
Tax benefit associated with exercise of stock
options......................................... $ -- $ -- $ 199,015
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 31
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- SRS Labs, Inc. (the "Company") was incorporated
under the laws of the State of California on June 23, 1993 and reincorporated
under the laws of the State of Delaware on June 28, 1996. The Company licenses
SRS, a three dimensional audio sound enhancement technology, and related
technologies to original equipment manufacturers ("OEMs") of various types of
media equipment as well as semiconductor manufacturers who sell their SRS
integrated chips to OEMs.
The Company's success is dependent on its licensing of proprietary
technology to companies engaged in the manufacture of consumer electronics
primarily in the multi-media equipment sector. The Company's licensees, which
are located throughout the world, are subject to several market risks, including
but not limited to, changing consumer preferences, consumer demand and
technology changes. The market for the Company's technologies is also highly
competitive. Changes in these and other market conditions could adversely impact
future operating results of the Company. Additionally, the Company's future
operating success is dependent, at least in part, on its ability to maintain
proprietary technology and enforce its rights under its patents.
Cash Equivalents -- The Company considers all highly-liquid investments
with an original maturity of three months or less to be cash equivalents.
Investments -- Investments, consisting primarily of municipal bonds, have
been classified as available for sale and are reported at fair value, based on
quoted market prices, in the accompanying balance sheets. Unrealized gains, net
of applicable income taxes, are reported as a separate component of
stockholders' equity.
Furniture, Fixtures and Equipment -- Furniture, fixtures and equipment are
stated at cost, net of accumulated depreciation. Depreciation is provided for
using the straight-line method which amortizes cost over the estimated useful
lives of the respective assets or as to leasehold improvements, the term of the
related lease if less than the estimated service life ranging from three to five
years.
Patents -- Costs paid by the Company related to the establishment and
transfer of patents, primarily legal costs, are capitalized and amortized over
periods ranging from five to ten years, depending on the estimated life of the
technology patented.
Goodwill -- Consideration for the purchase of assets in excess of the fair
market value of specifically identified tangible assets has been capitalized as
goodwill in the accompanying balance sheets. Goodwill is being amortized over an
estimated useful life of five years. The recoverability of goodwill is
determined by comparing the carrying value of goodwill to the estimated future
operating income of the Company on an undiscounted cash flow basis. Should the
carrying value of goodwill exceed the estimated operating income for the
expected period of benefit, an impairment for the excess is recorded at that
time.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Revenue Recognition -- Royalty revenues associated with ongoing royalty
license agreements are recognized when license payments are due upon receipt of
reports from licensees stating the number of products implementing SRS on which
royalties are due. Licensing revenues for one-time technology transfer fees,
which are included in other revenues, are recognized in the period in which the
license agreement is consummated and the related technology is transferred.
Research and Development -- Research and development costs are expensed as
incurred.
29
<PAGE> 32
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Income Taxes -- Effective January 1, 1995, the Company revoked its election
to be taxed as an S corporation for federal and state tax purposes. For all
periods prior to January 1, 1995, the Company elected to be treated as an S
corporation for both federal and state taxation purposes. Due to the Company's
net loss in periods in which the Company was an S corporation, pro forma income
taxes are not reflected in the accompanying financial statements (see Note 7).
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred taxes
on income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes.
Net Income (Loss) Per Common Share -- Effective December 31, 1997, the
Company adopted SFAS No. 128, Earnings per Share, which requires the disclosure
of basic and diluted earnings per share for all current and prior periods. Basic
net income (loss) per common share is computed by dividing income available to
common stockholders by the weighted-average number of shares of common shares
outstanding during each year. Diluted net income per common share reflects the
maximum dilution, based on the average price of the Company's common stock each
period and is computed similar to basic income (loss) per share except that the
denominator is increased to include the number of additional shares that would
have been outstanding if potentially dilutive stock options had been exercised.
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 YEAR ENDED DECEMBER 31, 1995 FOR YEAR ENDED DECEMBER 31, 1996
--------------------------------------- --------------------------------------
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......... (1,640,763) 5,927,615 $(0.28) 1,861,009 7,625,075 $0.24
====== =====
Effect of Dilutive
Securities:
Stock Options.......... N/A 1,061,333
--------- ---------
Diluted:
Income available to
common stockholders
plus assumed
conversion........... N/A N/A N/A $1,861,009 8,686,408 $0.21
========== ========= ====== ========== ========= =====
<CAPTION>
FOR YEAR ENDED DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic:
Income (loss) available
to common
stockholders......... 3,773,219 9,556,015 $0.39
=====
Effect of Dilutive
Securities:
Stock Options.......... 1,296,266
----------
Diluted:
Income available to
common stockholders
plus assumed
conversion........... $3,773,219 10,852,281 $0.35
========== ========== =====
</TABLE>
Initial Public Offering -- In August 1996, the Company completed an initial
public offering of 3,107,452 shares of its common stock at an offering price of
$8 per share for net proceeds of approximately $22 million.
Reverse Stock Split and Reincorporation -- On June 27, 1996, the Company
effected a .7241279-for-one stock split of its authorized and outstanding shares
of common stock. On June 28, 1996 the Company reincorporated in the State of
Delaware and increased its authorized shares of common stock to 56,000,000
shares and shares of preferred stock to 2,000,000 shares. All share and per
share data relating to periods prior to the reverse stock split and
reincorporation have been restated to give effect to the reverse stock split.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principle Board's Opinion (APB) No. 25, Accounting for Stock Issued to
Employees.
Customer Concentration -- During the years ended December 31, 1995, 1996
and 1997, two customers (not necessarily the same customers each year) accounted
for 62%, 38% and 39%, respectively, of license revenue. Given the significant
amount of revenues derived from these customers, the loss of any such
30
<PAGE> 33
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
customer or the uncollectibility of related receivables could have a material
adverse effect on the Company's financial condition and results of operations.
Concentrations of Credit Risk -- Royalty receivable, which represents the
Company's only significant financial instrument with potential credit risk, is
from customers in various industries and geographic locations. The Company makes
periodic evaluations of the creditworthiness of its customers and generally does
not require collateral. To date, the Company has not experienced any material
write-offs or collection problems.
Recent Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 established standards of reporting by
publicly-held business enterprises and disclosure of information about operating
segments in annual financial statements and, to a lesser extent, in interim
financial reports issued to stockholders. SFAS Nos. 130 and 131 are effective
for the Company beginning in 1998. As these standards deal with the form and
content of financial statement disclosures, the Company does not anticipate that
the adoption of these new standards will have a material impact on its financial
position or results of operations.
Reclassifications -- Certain amounts as previously reported have been
reclassified to conform to the current year presentation.
2. TECHNOLOGY ACQUISITION
On June 30, 1993 (the "Closing Date"), the Company purchased from Hughes
Aircraft Company ("Hughes") certain assets related to Hughes' Sound Retrieval
System (SRS) and ORB product lines for $200,000 cash, a $625,481 note payable
and future royalty payments, subject to certain minimums. The note payable was
paid in full during 1995. The assets acquired included inventory, equipment and
the direct ownership of the SRS technology (goodwill) which had estimated fair
market values at the date of acquisition of $719,030, $106,451 and $678,594,
respectively.
In accordance with the purchase agreement with Hughes (the "Hughes
Agreement"), the Company is required to pay Hughes additional consideration
based on certain percentages, ranging from 10% to 63% of gross profits, from the
sale of certain products to, and licensing royalties from, certain existing and
target customers, as defined in the Hughes Agreement. Such additional amounts
are payable for a period equal to the longer of the term of the applicable
license agreements or five years. This additional consideration is subject to a
minimum of $180,000 per year (the "Guaranteed Minimum") for five years from the
Closing Date. The aggregate Guaranteed Minimum has been discounted at 10%,
yielding an initial value of $678,594, and is included as part of the purchase
price on June 30, 1993. This balance is reflected as "goodwill" and
"consideration due on asset purchase" in the accompanying balance sheets.
Additional consideration paid during the five-year period in excess of the
Guaranteed Minimum is capitalized and amortized over the remaining estimated
life of goodwill (see Note 1). At the end of the five years subsequent to the
Closing Date, the Company is required to pay Hughes royalties based upon certain
percentages, ranging from 10% to 50% of gross profits from the sale of certain
product to, and licensing royalties from two customers, as defined in the Hughes
Agreement, for an indefinite period.
In addition, the Company is required to pay Hughes a royalty of 3% of net
sales of all SRS or ORB products manufactured by the Company, excluding
inventory acquired from Hughes as specified in the Hughes Agreement, over the
remaining lives of the applicable patents. There were no sales of applicable
products in the years ended December 31, 1995, 1996 and 1997.
31
<PAGE> 34
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Under the terms of the Hughes Agreement, all license fees subject to the
Guaranteed Minimum will be deposited into an escrow account to cover any amounts
due to Hughes under the Hughes Agreement. The note payable and Guaranteed
Minimum payments are secured by assets held in trust owned by one of the
Company's stockholders and substantially all of the Company's assets.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table summarizes the Company's investment securities
available for sale as of December 31, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Municipal bonds available for sale:
Cost............................................ $20,823,302 $21,293,741
Gross unrealized gains.......................... 146,555 273,296
Gross unrealized losses......................... (72)
----------- -----------
Estimated fair value............................ $20,969,785 $21,567,037
=========== ===========
</TABLE>
The contractual maturities of investments at December 31, 1996 and 1997 are
shown below. Actual maturities may differ from contractual maturities.
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Municipal bonds:
Due in one year or less... $ -- $ -- $ 2,007,939 $ 2,010,775
Due in one to five
years.................. 19,823,302 19,969,785 18,285,802 18,556,262
Due in five to ten
years.................. -- -- -- --
Due after ten years....... 1,000,000 1,000,000 1,000,000 1,000,000
----------- ----------- ----------- -----------
$20,823,302 $20,969,785 $21,293,741 $21,567,037
=========== =========== =========== ===========
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures............................... $ 319,866 $ 343,395
Equipment............................................ 133,944 174,997
Leasehold improvements............................... 4,641 4,641
--------- ---------
458,451 523,033
Less accumulated depreciation........................ (177,262) (277,254)
--------- ---------
$ 281,189 $ 245,779
========= =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancelable
operating leases.
32
<PAGE> 35
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The Company leases its office and storage facilities under a lease
agreement with a partnership which is affiliated with a stockholder and officer
of the Company. The original lease term commenced on June 1, 1994 and expired on
May 31, 1997. Upon expiration, the Company entered into a new lease agreement
for additional space at the same facility with the same lessor. The new lease is
for a term of three years commencing June 1, 1997, with an option to extend the
term for an additional two years thereafter. Total rent expense incurred on
office facilities was $46,447 (net of sublease income of $16,733), $63,430 and
$129,369 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future annual minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OFFICE
FACILITY EQUIPMENT TOTAL
-------- --------- --------
<S> <C> <C> <C>
1998....................................... $165,672 $ 8,164 $173,836
1999....................................... 165,672 8,164 173,836
2000....................................... 69,030 6,777 75,807
2001....................................... -- 4,836 4,836
-------- ------- --------
$400,374 $27,941 $428,315
======== ======= ========
</TABLE>
As of December 31, 1997, the Company had employment agreements with two
employees. Minimum aggregate compensation remaining under those employment
agreements is $185,000 (1998) and $130,000 (1999).
6. INCOME TAXES
For the years ended December 31, 1995, 1996 and 1997, the provision for
income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal............................... $ -- $ 574,970 $1,078,637
State................................. 800 168,256 482,791
Foreign............................... -- 163,223 296,157
--------- --------- ----------
800 906,449 1,857,585
Deferred:
Federal............................... (530,298) 371,428 (15,724)
State................................. (97,932) 47,884 21,339
Valuation Allowance................... 628,230 (824,824) --
--------- --------- ----------
$ 800 $ 500,937 $1,863,200
========= ========= ==========
</TABLE>
33
<PAGE> 36
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The reconciliation of the provision for income taxes computed at U.S.
federal statutory rates to the provision for income taxes for the years ended
December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Tax at U.S. federal statutory rates..... $(540,859) $ 803,062 $1,916,382
State income taxes...................... (64,107) 142,653 334,079
Tax exempt interest..................... -- (105,862) (365,194)
Restoration of deferred income tax
assets in connection with the
Company's conversion to a C
corporation........................... (196,594) 126,123 --
Change in valuation allowance........... 824,824 (824,824) --
Accruals without tax effect............. (22,464) 359,785 (22,067)
--------- --------- ----------
Total income tax expense...... $ 800 $ 500,937 $1,863,200
========= ========= ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
State income taxes...................... $ (48,490) $ 30,816 $121,952
Depreciation and amortization........... 154,615 186,576 247,038
Accruals not currently deductible....... 193,974 188,120 30,907
Other................................... 45,220 -- --
Net operating losses.................... 479,505 -- --
--------- -------- --------
824,824 405,512 399,897
Valuation allowance..................... (824,824) -- --
--------- -------- --------
Total net deferred tax assets... $ -- $405,512 $399,897
========= ======== ========
</TABLE>
For all periods prior to January 1, 1995, the Company elected to be treated
as an S corporation under the provisions of the Internal Revenue Code. Effective
January 1, 1995, the Company converted to a C corporation and became subject to
regular federal and state income taxes on a go-forward basis.
7. STOCKHOLDERS' EQUITY
Sales of Common Stock -- On January 9, 1995, the Company entered into a
Stock Purchase Agreement with Packard Bell Electronics, Inc. ("Packard Bell"),
pursuant to which Packard Bell purchased 572,061 newly issued shares of common
stock at $2.62 per share for a total purchase price of $1,500,000. In connection
with the Stock Purchase Agreement, Packard Bell also entered into (i) a License
Agreement with the Company to license SRS for use in multimedia computers, and
(ii) a Stock Option Agreement with the Company whereby the Company granted an
option to purchase 382,104 shares of common stock at an exercise price of $4.14
per share.
During the years ended December 31, 1995 and 1996, the Company recorded
$50,000 and $29,000, respectively, of additional paid-in capital related to the
estimated fair value of services performed by a Company officer for which no
cash consideration was paid by the Company.
34
<PAGE> 37
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
In August 1996, the Company completed an initial public offering of
3,107,452 shares of its common stock at an offering price of $8.00 per share for
net proceeds of approximately $22 million.
Reclassification -- Upon electing to revoke its election to be taxed as an
S corporation (see Note 1), on January 1, 1995, in accordance with a regulation
of the Securities and Exchange Commission, the Company reclassified its
accumulated deficit of $2,110,026 to additional paid-in capital.
Stock Award/Option Plans -- On December 10, 1993, the Company's Board of
Directors and shareholders adopted an Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan (the "1993 Plan"). Under the 1993
Plan, 801,971 shares of the Company's common stock are reserved for issuance to
executives, employees and non-employee directors of the Company at the
discretion of the Board of Directors or the committee administering the 1993
Plan. The Compensation Committee of the Board has been appointed to administer
the 1993 Plan. Options issued under the 1993 Plan vest in the manner prescribed
by the Compensation Committee. As of December 31, 1997, options to purchase
801,971 shares of the Company's common stock were granted under the 1993 Plan.
In January 1994, the Company entered into stock option agreements with two
Company officers whereby options to purchase 181,032 shares of the Company's
common stock were granted to each of the officers at an exercise price of $0.14
per share (collectively, the "Executive Option Agreements").
In June 1997, the Company's Board of Directors adopted, and the Company's
stockholders approved, the Amended and Restated 1996 Long-Term Incentive Plan
(the "1996 Plan"), for which 2,000,000 shares of the Company's common stock are
reserved for issuance to officers, employees and consultants of the Company. The
Compensation Committee of the Board of Directors has been appointed to
administer the 1996 Plan. Options issued under the 1996 Plan vest in the manner
prescribed by the Compensation Committee. As of December 31, 1997, options to
purchase 1,131,301 shares of the Company's common stock were granted under the
1996 Plan.
In July 1996, the Company's Board of Directors adopted, and the Company's
stockholders approved, the 1996 Non-employee Directors Stock Option Plan (the
"Non-employee Directors Plan"), a non-discretionary formula plan for which
120,000 shares of the Company's common stock are reserved for issuance to the
Company's Non-employee Directors. The Non-employee Directors Plan is
administered by a committee consisting of all directors who are not eligible to
participate in the Non-employee Directors Plan and the Chief Financial Officer
of the Company. With the exception of the initial option granted to a
non-employee director, which vests immediately, options granted under the
Non-employee Directors Plan vest over a three-year period, the first installment
vesting on the date of grant. As of December 31, 1997, options to purchase
45,000 shares of common stock were granted under the Non-employee Directors
Plan.
35
<PAGE> 38
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The following table summarizes stock option activity under the 1993 Plan,
the 1996 Plan, the Executive Option Agreements, the Non-employee Director Plan
and the stock option grant to Packard Bell for the periods indicated:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
Outstanding at January 1, 1995........................ 939,194 $ 0.28
Granted............................................. 936,424 $ 3.81
----------
Outstanding at December 31, 1995...................... 1,875,618 $ 2.04
Granted............................................. 688,386 $ 8.11
Stock options exercised............................. (362,064) $ 0.28
Forfeited........................................... (25,344) $10.36
----------
Outstanding at December 31, 1996...................... 2,176,596 $ 4.16
Granted............................................. 1,366,801 $ 5.70
Stock options exercised............................. (141,319) $ 1.02
Forfeited........................................... (1,017,582) $ 7.68
----------
Outstanding at December 31, 1997...................... 2,384,496 $ 3.69
==========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED WEIGHTED
OPTIONS CONTRACTUAL AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Range of exercise
prices:
$0.14 - $ 0.76..... 457,174 73 months $0.26 426,395 $0.22
$2.62 - $ 4.56..... 902,026 87 months $3.80 632,107 $3.90
$5.00 - $10.50..... 1,025,296 105 months $5.12 238,262 $5.04
--------- ---------
2,384,496 $3.69 1,296,764 $2.90
========= =========
</TABLE>
On December 1, 1995, options were granted for the purchase of up to 300,875
common shares at prices of $4.14 to $4.56 per share, which the Company's Board
of Directors deemed the fair market value of the common stock at the date of
grant. The Company will record compensation expense resulting from the
difference between the option price per share and the estimated fair market
value of the common stock ($4.99) determined by a third-party appraisal
completed in May 1996, totaling $236,456. This amount will be recorded ratably
over the vesting period of the respective options. During the years ended
December 31, 1995, 1996 and 1997, the Company had recorded $21,965, $132,421 and
$56,397, respectively, of deferred compensation expense associated with these
stock option grants.
36
<PAGE> 39
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected Life.......................... 60 months 60 months 60 months
Stock Volatility....................... 1% 1% 69%
Risk-Free Interest Rate................ 5.50% 5.50% 5.45%
</TABLE>
The Company's calculations are based on a single-option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
1995, 1996 and 1997 awards had been amortized to expense over the vesting period
of the awards, pro forma net income (loss) would have been ($1,659,858), or
($.28) per share in 1995, $1,762,497, or $.21 per share in 1996 and $3,429,526,
or $.32 per share in 1997. However, the impact of outstanding nonvested stock
options granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995, 1996 and 1997 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
8. RELATED PARTY TRANSACTIONS
The Company shares certain general and administrative expenses with an
affiliated company which is 100% owned by a Company officer/stockholder.
Pursuant to a written agreement, one-half of these expenses are allocated to the
Company.
Total revenue from an affiliated company during the years ended December
31, 1995, 1996 and 1997, which is 100% owned by a Company officer/stockholder,
amounted to $71,217, $28,449 and $17,779, respectively. As of December 31, 1996
and 1997 accounts receivable from this affiliated company were $3,000 and
$4,395, respectively. Amounts due to this affiliated company were $12,639 and
$18,266 as of December 31, 1996 and 1997, respectively.
An officer/stockholder of the Company has pledged certain personal assets
to secure amounts due related to the acquisition of certain assets (see Note 2).
A stockholder of the Company paid $1,500,000 and $2,500,000 in license
royalties to the Company during the years ended December 31, 1996 and 1997.
9. EMPLOYEE BENEFIT PLAN
The Company's employees may participate in a salary deferral plan (the
"401(k) Plan") in which eligible employees can contribute up to 15% of their
eligible compensation. The Company also may contribute on a discretionary basis.
During the years ended December 31, 1995, 1996 and 1997, the Company did not
contribute to the 401(k) Plan.
10. SUBSEQUENT EVENTS
On January 28, 1998, the Company completed the acquisition of all rights
associated with the VIP (Voice Intelligibility Processor) technology from R.G.A.
& Associates ("R.G.A."). The approximate aggregate purchase price of the
acquisition was $1,000,000, consisting of $500,000 in cash, 25,000 shares of
37
<PAGE> 40
SRS LABS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
the Company's common stock and 100,000 warrants to purchase the Company's common
stock. In connection with the acquisition, the Company entered into an agreement
to pay R.G.A. royalties based upon certain percentages ranging from 10% to 15%
of licensing royalties generated from VIP for a period of 4 years.
On March 2, 1998, 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"). Valence, which conducts its business through its subsidiaries based
in Hong Kong and China, is engaged in two primary areas of business, namely, the
design, manufacture and marketing of ASIC (application-specific integrated
circuit) products and consumer electronic products. The aggregate purchase price
of $19,500,000 consisted of approximately $7,400,000 in cash and approximately
1,680,000 shares of the Company's common stock. The acquisition will be
accounted for as a purchase. In connection with such acquisition, three of the
four 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.
On March 4, 1998, the Company obtained a revolving line of credit (the
"Credit Agreement") 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%.
38
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information set forth under the captions "ELECTION OF DIRECTORS" and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of Stockholders scheduled to be held in June
1998, is incorporated herein by reference. The Proxy Statement will be filed
with the U.S. Securities and Exchange Commission (the "Commission") not later
than 120 days after the close of Fiscal 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the captions "COMPENSATION OF EXECUTIVE
OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD -- Compensation of Directors" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
The Exhibits listed below are hereby filed with the Commission as part of
this Report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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).
3.1 Certificate of Incorporation of the Company, previously
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form SB-2, specifically included
in Amendment No. 1 to such Registration Statement filed with
the Commission on July 3, 1996 (File No. 333-4974-LA) (the
"Registration Statement Amendment No. 1"), which is
incorporated herein by reference.
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3.2 Bylaws of the Company, previously filed with the Commission
as Exhibit 3.2 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans
or Arrangements
10.1 Employment Agreement dated July 1, 1996, between the Company
and Thomas C.K. Yuen, previously filed with the Commission
as Exhibit 10.8 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.2 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Thomas C.K. Yuen, previously
filed with the Commission as Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed with the Commission on March 31,
1997 (the "1996 Annual Report"), which is incorporated
herein by reference.
10.3 Employment Agreement dated July 1, 1996, between the Company
and Stephen V. Sedmak, previously filed with the Commission
as Exhibit 10.9 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.4 Employment Agreement dated July 1, 1996, between the Company
and Arnold I. Klayman, previously filed with the Commission
as Exhibit 10.10 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.5 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Arnold I. Klayman, previously
filed as Exhibit 10.5 to the 1996 Annual Report, which is
incorporated herein by reference.
10.6 Employment Agreement dated July 1, 1996, between the Company
and Alan D. Kraemer, previously filed with the Commission as
Exhibit 10.11 to the Registration Statement Amendment No. 1,
which is incorporated herein by reference.
10.7 Letter Agreement of Employment dated September 6, 1996,
between the Company and Robert A. Veri, previously filed as
Exhibit 10.7 to the 1996 Annual Report, which is
incorporated herein by reference.
10.8 SRS Labs, Inc. Incentive Stock Option, Nonqualified Stock
Option and Restricted Purchase Plan -- 1993, as amended and
restated, previously filed with the Commission as Exhibit
10.12 to the Company's Registration Statement on Form SB-2
filed with the Commission on June 3, 1996 (File No.
333-4974-LA) (the "Registration Statement"), which is
incorporated herein by reference.
10.9 Stock Option Agreement dated January 19, 1994, between the
Company and Stephen V. Sedmak, as amended, previously filed
with the Commission as Exhibit 10.13 to the Registration
Statement, which is incorporated herein by reference.
10.10 Stock Option Agreement dated January 19, 1994, between the
Company and James S. Lucas, previously filed with the
Commission as Exhibit 10.14 to the Registration Statement,
which is incorporated herein by reference.
10.11 SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive
Plan, previously filed with the Commission as Appendix A to
the Company's definitive Proxy Statement dated April 30,
1997, filed with the Commission on April 30, 1997, which is
incorporated herein by reference.
10.12 SRS Labs, Inc. 1996 Nonemployee Directors Stock Option Plan,
previously filed with the Commission as Exhibit 10.16 to the
Registration Statement Amendment No. 1, which is
incorporated herein by reference.
10.13 Annual Incentive Bonus Plan, previously filed with the
Commission as Exhibit 10.18 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.14 SRS Labs, Inc. Supplemental Executive Incentive Bonus Plan,
previously filed with the Commission as Exhibit 10.14 to the
1996 Annual Report, which is incorporated herein by
reference.
10.15 Form of Indemnification Agreement, previously filed with the
Commission as Exhibit 10.20 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.16 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Technology Inc., and Thomas Wah Tong
Wan.
10.17 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Semiconductor Design Limited, and Choi
Yat Ming.
10.18 Employment Agreement dated as of March 2, 1998, by and among
the Company, LEC Electronic Components Limited, and Wong Yin
Bun.
10.19 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.
10.20 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.
10.21 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
10.22 Shareholders Agreement dated as of January 27, 1994, between
the Company and the Shareholders of the Company named
therein, previously filed with the Commission as Exhibit 9.3
to the Company's Registration Statement on Form SB-2,
specifically included in Amendment No. 2 to such
Registration Statement filed with the Commission on August
2, 1996 (File No. 333-4974-LA) (the "Registration Statement
Amendment No. 2"), which is incorporated herein by
reference.
10.23 Shareholders Agreement II dated as of January 9, 1995,
between the Company and the Shareholders of the Company
named therein, previously filed with the Commission as
Exhibit 9.1 to the Registration Statement, which is
incorporated herein by reference.
10.24 Shareholders Agreement III dated as of April 21, 1995,
between the Company and the Shareholders of the Company
named therein, previously filed with the Commission as
Exhibit 9.2 to the Registration Statement, which is
incorporated herein by reference. 10.25 Asset Purchase
Agreement dated as of June 30, 1993, between the Company and
Hughes Aircraft, previously filed with the Commission as
Exhibit 10.1 to the Registration Statement, which is
incorporated herein by reference.
10.25 Asset Purchase Agreement dated as of June 30, 1993, between
the Company and Hughes Aircraft, previously filed with the
Commission as Exhibit 10.1 to the Registration Statement,
which is incorporated herein by reference.
10.26 First Amendment to Security Agreement dated as of September
14, 1994, by and among the Company, Hughes Aircraft,
Cruttenden & Company, Walter W. Cruttenden III, Pacific
National Bank and The Thomas Yuen Family Trust, previously
filed with the Commission as Exhibit 10.2 to the
Registration Statement, which is incorporated herein by
reference.
10.27 Stock Purchase Agreement dated as of January 9, 1995,
between the Company and Packard Bell Electronics, Inc. d/b/a
Packard Bell Corporation, previously filed with the
Commission as Exhibit 10.3 to the Registration Statement
Amendment No. 2, which is incorporated herein by reference.
10.28 Amended and Restated Stock Option Agreement dated as of
January 9, 1995, between the Company and Packard Bell
Electronics, Inc. d/b/a/ Packard Bell Corporation,
previously filed with the Commission as Exhibit 10.4 to the
Registration Statement, which is incorporated herein by
reference.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.29 License Agreement dated as of January 9, 1995, between the
Company and Packard Bell Electronics, Inc. d/b/a/ Packard
Bell Corporation, previously filed with the Commission as
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2, specifically included in Amendment No. 3 to such
Registration Statement filed with the Commission on August
7, 1996 (File No. 333-4974-LA) (the "Registration Statement
Amendment No. 3"), which is incorporated herein by
reference.
10.30 License Agreement dated as of June 27, 1988, between Hughes
Aircraft and Sony Corporation, as amended and assigned to
the Company, previously filed with the Commission as Exhibit
10.6 to the Registration Statement Amendment No. 3, which is
incorporated herein by reference.
10.31 Real Property Lease dated June 1, 1994, between the Company
and Daimler Commerce Partners, L.P., a California Limited
Partnership, previously filed with the Commission as Exhibit
10.7 to the Registration Statement, which is incorporated
herein by reference.
10.32 Industrial Real Estate Lease dated May 30, 1997, between the
Company and Daimler Commerce Partners, L.P., previously
filed with the Commission as Exhibit 10.1 to the Company's
Form 10-QSB for the quarterly period ended June 30, 1997,
filed with the Commission on August 13, 1997, which is
incorporated herein by reference.
10.33 Tenancy Agreement dated September 1, 1995, by and between
Hong Kong Industrial Technology Centre Corporation and
Valence Semiconductor Design Limited relating to the
premises located at Unit 413 on the Fourth Floor of the Hong
Kong Industrial Technology Centre.
10.34 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.
10.35 Stock Divestment Agreement dated July 1, 1996, between the
Company, Thomas C.K. Yuen, Stephen V. Sedmak and Walter W.
Cruttenden III, previously filed with the Commission as
Exhibit 10.17 to the Registration Statement Amendment No. 2,
which is incorporated herein by reference.
10.36 Services Agreement dated July 1, 1996, between the Company
and Sierra Digital Productions, Inc., previously filed with
the Commission as Exhibit 10.19 to the Registration
Statement Amendment No. 1, which is incorporated herein by
reference.
10.37 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.
10.38 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).
10.39 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Herbert H. Wax.
10.40 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Steven E. Loyd.
10.41 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.
10.42 Business Loan Agreement dated March 4, 1998, between the
Company and Bank of America National Trust and Savings
Association.
21 Subsidiaries.
23 Consent of Deloitte & Touche LLP dated March 30, 1998.
24 Power of attorney (included on page 44 of the Form 10-KSB).
27.1 Financial Data Schedule (FYE 1997).
27.2 Financial Data Schedule (Q 1-3, 1997, Restated).
27.3 Financial Data Schedule (Q 3 and FYE 1996, Restated).
</TABLE>
42
<PAGE> 45
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year covered by this Form 10-KSB.
(This portion of page intentionally left blank)
43
<PAGE> 46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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: March 30, 1998 By: /s/ THOMAS C.K. YUEN
----------------------------------
Thomas C.K. Yuen
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that such person whose signature appears
below constitutes and appoints Stephen V. Sedmak and Janet M. Biski, and each of
them his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-KSB and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the U.S. Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ THOMAS C.K. YUEN Director, Chairman of the March 30, 1998
- -------------------------------------------------------- Board and Chief Executive
Thomas C.K. Yuen Officer (Principal Executive
Officer)
/s/ STEPHEN V. SEDMAK Director, President and Chief March 30, 1998
- -------------------------------------------------------- Operating Officer
Stephen V. Sedmak
/s/ JANET M. BISKI Vice President, Chief March 30, 1998
- -------------------------------------------------------- Financial Officer, Secretary
Janet M. Biski and Treasurer (Principal
Financial and Accounting
Officer)
Director and Vice President
- --------------------------------------------------------
Thomas W.T. Wan
/s/ JOHN AUYEUNG Director March 30, 1998
- --------------------------------------------------------
John Auyeung
/s/ JEFFREY I. SCHEINROCK Director March 30, 1998
- --------------------------------------------------------
Jeffrey I. Scheinrock
/s/ JOHN TU Director March 30, 1998
- --------------------------------------------------------
John Tu
</TABLE>
44
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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).
3.1 Certificate of Incorporation of the Company, previously
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form SB-2, specifically included
in Amendment No. 1 to such Registration Statement filed with
the Commission on July 3, 1996 (File No. 333-4974-LA) (the
"Registration Statement Amendment No. 1"), which is
incorporated herein by reference.
3.2 Bylaws of the Company, previously filed with the Commission
as Exhibit 3.2 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
Material Contracts Relating to Management Compensation Plans
or Arrangements
10.1 Employment Agreement dated July 1, 1996, between the Company
and Thomas C.K. Yuen, previously filed with the Commission
as Exhibit 10.8 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.2 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Thomas C.K. Yuen, previously
filed with the Commission as Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed with the Commission on March 31,
1997 (the "1996 Annual Report"), which is incorporated
herein by reference.
10.3 Employment Agreement dated July 1, 1996, between the Company
and Stephen V. Sedmak, previously filed with the Commission
as Exhibit 10.9 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.4 Employment Agreement dated July 1, 1996, between the Company
and Arnold I. Klayman, previously filed with the Commission
as Exhibit 10.10 to the Registration Statement Amendment No.
1, which is incorporated herein by reference.
10.5 Amendment to Employment Agreement dated as of March 14,
1997, between the Company and Arnold I. Klayman, previously
filed as Exhibit 10.5 to the 1996 Annual Report, which is
incorporated herein by reference.
10.6 Employment Agreement dated July 1, 1996, between the Company
and Alan D. Kraemer, previously filed with the Commission as
Exhibit 10.11 to the Registration Statement Amendment No. 1,
which is incorporated herein by reference.
10.7 Letter Agreement of Employment dated September 6, 1996,
between the Company and Robert A. Veri, previously filed as
Exhibit 10.7 to the 1996 Annual Report, which is
incorporated herein by reference.
10.8 SRS Labs, Inc. Incentive Stock Option, Nonqualified Stock
Option and Restricted Purchase Plan -- 1993, as amended and
restated, previously filed with the Commission as Exhibit
10.12 to the Company's Registration Statement on Form SB-2
filed with the Commission on June 3, 1996 (File No.
333-4974-LA) (the "Registration Statement"), which is
incorporated herein by reference.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.9 Stock Option Agreement dated January 19, 1994, between the
Company and Stephen V. Sedmak, as amended, previously filed
with the Commission as Exhibit 10.13 to the Registration
Statement, which is incorporated herein by reference.
10.10 Stock Option Agreement dated January 19, 1994, between the
Company and James S. Lucas, previously filed with the
Commission as Exhibit 10.14 to the Registration Statement,
which is incorporated herein by reference.
10.11 SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive
Plan, previously filed with the Commission as Appendix A to
the Company's definitive Proxy Statement dated April 30,
1997, filed with the Commission on April 30, 1997, which is
incorporated herein by reference.
10.12 SRS Labs, Inc. 1996 Nonemployee Directors Stock Option Plan,
previously filed with the Commission as Exhibit 10.16 to the
Registration Statement Amendment No. 1, which is
incorporated herein by reference.
10.13 Annual Incentive Bonus Plan, previously filed with the
Commission as Exhibit 10.18 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.14 SRS Labs, Inc. Supplemental Executive Incentive Bonus Plan,
previously filed with the Commission as Exhibit 10.14 to the
1996 Annual Report, which is incorporated herein by
reference.
10.15 Form of Indemnification Agreement, previously filed with the
Commission as Exhibit 10.20 to the Registration Statement
Amendment No. 1, which is incorporated herein by reference.
10.16 Employment Agreement dated as of March 2, 1998, by and among
the Company,Valence Technology Inc., and Thomas Wah Tong
Wan.
10.17 Employment Agreement dated as of March 2, 1998, by and among
the Company, Valence Semiconductor Design Limited, and Choi
Yat Ming.
10.18 Employment Agreement dated as of March 2, 1998, by and among
the Company, LEC Electronic Components Limited, and Wong Yin
Bun.
10.19 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.
10.20 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.
10.21 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
10.22 Shareholders Agreement dated as of January 27, 1994, between
the Company and the Shareholders of the Company named
therein, previously filed with the Commission as Exhibit 9.3
to the Company's Registration Statement on Form SB-2,
specifically included in Amendment No. 2 to such
Registration Statement filed with the Commission on August
2, 1996 (File No. 333-4974-LA) (the "Registration Statement
Amendment No. 2"), which is incorporated herein by
reference.
10.23 Shareholders Agreement II dated as of January 9, 1995,
between the Company and the Shareholders of the Company
named therein, previously filed with the Commission as
Exhibit 9.1 to the Registration Statement, which is
incorporated herein by reference.
10.24 Shareholders Agreement III dated as of April 21, 1995,
between the Company and the Shareholders of the Company
named therein, previously filed with the Commission as
Exhibit 9.2 to the Registration Statement, which is
incorporated herein by reference.
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.25 Asset Purchase Agreement dated as of June 30, 1993, between
the Company and Hughes Aircraft, previously filed with the
Commission as Exhibit 10.1 to the Registration Statement,
which is incorporated herein by reference.
10.26 First Amendment to Security Agreement dated as of September
14, 1994, by and among the Company, Hughes Aircraft,
Cruttenden & Company, Walter W. Cruttenden III, Pacific
National Bank and The Thomas Yuen Family Trust, previously
filed with the Commission as Exhibit 10.2 to the
Registration Statement, which is incorporated herein by
reference.
10.27 Stock Purchase Agreement dated as of January 9, 1995,
between the Company and Packard Bell Electronics, Inc. d/b/a
Packard Bell Corporation, previously filed with the
Commission as Exhibit 10.3 to the Registration Statement
Amendment No. 2, which is incorporated herein by reference.
10.28 Amended and Restated Stock Option Agreement dated as of
January 9, 1995, between the Company and Packard Bell
Electronics, Inc. d/b/a/ Packard Bell Corporation,
previously filed with the Commission as Exhibit 10.4 to the
Registration Statement, which is incorporated herein by
reference.
10.29 License Agreement dated as of January 9, 1995, between the
Company and Packard Bell Electronics, Inc. d/b/a/ Packard
Bell Corporation, previously filed with the Commission as
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2, specifically included in Amendment No. 3 to such
Registration Statement filed with the Commission on August
7, 1996 (File No. 333-4974-LA) (the "Registration Statement
Amendment No. 3"), which is incorporated herein by
reference.
10.30 License Agreement dated as of June 27, 1988, between Hughes
Aircraft and Sony Corporation, as amended and assigned to
the Company, previously filed with the Commission as Exhibit
10.6 to the Registration Statement Amendment No. 3, which is
incorporated herein by reference.
10.31 Real Property Lease dated June 1, 1994, between the Company
and Daimler Commerce Partners, L.P., a California Limited
Partnership, previously filed with the Commission as Exhibit
10.7 to the Registration Statement, which is incorporated
herein by reference.
10.32 Industrial Real Estate Lease dated May 30, 1997, between the
Company and Daimler Commerce Partners, L.P., previously
filed with the Commission as Exhibit 10.1 to the Company's
Form 10-QSB for the quarterly period ended June 30, 1997,
filed with the Commission on August 13, 1997, which is
incorporated herein by reference.
10.33 Tenancy Agreement dated September 1, 1995, by and between
Hong Kong Industrial Technology Centre Corporation and
Valence Semiconductor Design Limited relating to the
premises located at Unit 413 on the Fourth Floor of the Hong
Kong Industrial Technology Centre.
10.34 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.
10.35 Stock Divestment Agreement dated July 1, 1996, between the
Company, Thomas C.K. Yuen, Stephen V. Sedmak and Walter W.
Cruttenden III, previously filed with the Commission as
Exhibit 10.17 to the Registration Statement Amendment No. 2,
which is incorporated herein by reference.
10.36 Services Agreement dated July 1, 1996, between the Company
and Sierra Digital Productions, Inc., previously filed with
the Commission as Exhibit 10.19 to the Registration
Statement Amendment No. 1, which is incorporated herein by
reference.
10.37 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.
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.38 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).
10.39 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Herbert H. Wax.
10.40 Warrant to Purchase 2,500 Shares of Common Stock of the
Company dated February 26, 1998, held by Steven E. Loyd.
10.41 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.
10.42 Business Loan Agreement dated March 4, 1998, between the
Company and Bank of America National Trust and Savings
Association.
21 Subsidiaries.
23 Consent of Deloitte & Touche LLP dated March 30, 1998.
24 Power of attorney (included on page 44 of the Form 10-KSB).
27.1 Financial Data Schedule (FYE 1997).
27.2 Financial Data Schedule (Q 1-3, 1997, Restated).
27.3 Financial Data Schedule (Q 3 and FYE 1996, Restated).
</TABLE>
<PAGE> 1
EX-2.3
ASSET PURCHASE AGREEMENT
BETWEEN
SRS LABS, INC.
AND
R.G.A. & ASSOCIATES, LTD.
D/B/A TOTEVISION AND VIP LABS(R)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
I. Purpose of Agreement.............................................................1
II. Purchase and Sale of the Assets.................................................1
A. Manufacturing, Test and Demonstration Equipment, Furnishings and
Documentation...............................................................1
C. Business Records and Data................................................1
D. Intellectual Property....................................................2
E. Contract Rights..........................................................2
III. Assumption of Certain Liabilities..............................................2
IV. Consideration...................................................................2
A. Initial Payments.........................................................2
B. Royalty Payments.........................................................3
IV. Representations and Warranties..................................................4
A. Representations and Warranties of Each Party.............................4
B. Representations and Warranties of Seller.................................4
C. Representations and Warranties of Purchaser..............................7
V. Covenants........................................................................8
A. Liability of The Parties.................................................8
B. Cooperation..............................................................9
C. Public Communications....................................................9
D. Bulk Sales..............................................................10
VI. Taxes on This Purchase.........................................................10
A. Sales and Other Transfer Taxes..........................................10
B. Other Taxes.............................................................10
VII. Additional Agreements; Opinions...............................................10
VIII. Miscellaneous................................................................11
B. Notices.................................................................11
C. Amendments; Waivers.....................................................12
D. Section Headings........................................................12
E. Counterparts............................................................12
F. Assignment..............................................................12
G. Governing Law...........................................................12
H. Disputes................................................................13
I. Entire Agreement; Supersedure...........................................13
J. Subsequent Invalidity, Illegality or Unenforceability...................13
</TABLE>
Note: The following Attachments and Exhibits to this Asset Purchase Agreement
- ----- have not been filed herewith. The Registrant will furnish supplementally
to the Commission, upon request, a copy of any such omitted Attachment or
Exhibit.
Attachment 1: A. Description of Manufacturing, Test and Demonstration
------------- Equipment
B. Description of Inventory
Attachment 2: Form of Assignment Agreement - Intellectual Property
------------- Other Than Patents and Trademarks
Attachment 3: Form of Assignment Agreement - Trademarks
-------------
Attachment 4: Form of Assignment Agreement - Patents
-------------
Attachment 5: Form of Assignment Agreement - Contracts
-------------
Attachment 6: Assumed Liabilities
-------------
Attachment 7: Royalty Payments
-------------
Exhibit A: Form of Warrant
----------
Exhibit B: Form of Corporate Counsel Opinion
----------
-i-
<PAGE> 3
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement"), dated as of January 28,
1998 ("Effective Date"), is entered into by and among R.G.A. & Associates, Ltd.,
d/b/a ToteVision and VIP Labs(R) (the "Seller") and SRS Labs, Inc.
("Purchaser").
I. Purpose of Agreement
On December 6, 1993, the Seller and Hughes Aircraft Company ("Hughes")
entered into an Asset Purchase Agreement (the "Hughes Agreement"),
pursuant to which the Seller purchased certain assets related to Hughes'
Audio Intelligibility Systems for use in connection with the Seller's
voice intelligibility processor technology business (the "Business").
Seller wants to sell to Purchaser, and Purchaser wants to buy from
Seller, the current assets of Seller related to the Business, whether or
not such assets were purchased by Seller from Hughes or thereafter
developed by, or on behalf of, Seller.
II. Purchase and Sale of the Assets.
The Seller hereby agrees to sell to the Purchaser and the Purchaser
hereby agrees to purchase from the Seller, subject to and upon the terms
and conditions contained herein, all of the Assets (as defined below),
free and clear of any option, lien, pledge, mortgage, security interest
or other encumbrance of any kind, except for the security interest
granted to Hughes pursuant to the Hughes Agreement.
The "Assets" means the following property related to the Business:
A. Manufacturing, Test and Demonstration Equipment, Furnishings
and Documentation
Machinery, equipment, tools and tooling, molds, fixtures,
laboratory and test equipment and furnishings, office
furniture, documentation, instructions, blueprints, drawings,
schematics, trade show equipment and displays, bins, racks and
shelving (including set up plans and instructions associated
therewith), demonstration discs (CD's), audio and video tapes,
and other similar items of property, whether owned or leased,
utilized in the design, manufacture, testing and demonstration
of the products of the Business, listed in ATTACHMENT 1.
B. Inventory
Work in process, materials and supplies inventories,
components and sub assemblies, products (including prototypes,
mockups, products returned as defective, salesperson's samples
and/or demonstration units), listed in ATTACHMENT 1.
C. Business Records and Data
Except for corporate organizational documents, all operating
files of the Business, including notebooks, records, reports,
customer and vendor lists and contact logs, sales order and
vendor history files, confidentially and other business
agreements, advertising materials and signs (including copy,
artwork, photographic negatives or
<PAGE> 4
plates and agreements with advertising agencies), and all
documentation relating to the filing for and
award/registration of the patents and trademarks described in
Paragraph D below.
D. Intellectual Property
1. The intellectual property other than patents and
trademarks described in the Assignment Agreement --
Intellectual Property Other Than Patents
and Trademarks (ATTACHMENT 2).
2. The trademarks and trademark applications, including, all
goodwill associated therewith, described in the Assignment
Agreement -- Trademarks
(ATTACHMENT 3).
3. The patents and patent applications described in the
Assignment Agreement - Patents (ATTACHMENT 4).
E. Software
All software, whether DSP-based or higher level language, which
is used in demonstrating and implementing aspects of the
Business. All forms of such software, including all media storage
and printed versions, together with all associated documentation
shall be provided to Purchaser by Seller.
F. Contract Rights
All rights of the Seller, under the agreements described in the
Assignment Agreement - Contracts (ATTACHMENT 5) (the
"Contracts").
III. Assumption of Certain Liabilities
The Purchaser hereby agrees that, subject to and upon the terms and
conditions contained herein, it hereby assumes and agrees to satisfy and
perform when due only the obligations and liabilities of the Seller
described on ATTACHMENT 6 (the "Assumed Liabilities"). Notwithstanding
anything in this Agreement to the contrary, the Purchaser is not
assuming and will not perform any liabilities or obligations not
specifically described in attachment 6.
IV. Consideration
In consideration for the Assets, Purchaser shall pay to Seller the
following amounts:
A. Initial Payments.
1. $500,000.00 shall be paid on the date hereof to
Seller by delivery of cashier's check or wire
transfer to an account designated by Seller.
2. Irrevocable instructions shall be delivered on the
date hereof by the Company to the Company's transfer
agent to deliver to the Seller a certificate in the
name
-2-
<PAGE> 5
of the Seller (or such other individual or entity as
shall be nominated by Seller) representing 25,000
shares of the Purchaser's Common Stock (the
"Shares").
3. A 4-year warrant to purchase 100,000 shares of the
Purchaser's Common Stock at an exercise price equal
to $9.467 per share, in the form of EXHIBIT A
attached hereto, shall be delivered in the name of
the Seller (or such other individual or entity as
shall be nominated by Seller) to the Seller on the
date hereof (the "Warrant").
B. Royalty Payments
1. For the periods aggregating four (4) years after the
date hereof, the Purchaser shall pay to the Seller
the royalties described on ATTACHMENT 7. Royalties
shall be computed based on the currency of the United
States and shall be paid in the currency of the
United States. Royalties shall be calculated at the
end of every calendar quarter ("Payment Period") and
paid within forty-five (45) days after the end of
such Payment Period. A written statement ("Royalty
Statement") shall accompany each royalty payment, or
shall be sent alone within such forty-five (45) day
period if no royalties are due for the respective
Payment Period, providing a complete itemized
description of the calculation of the royalties paid
for the respective Payment Period.
2. The Purchaser shall maintain books of account and
records concerning costs, sales and other items
necessary for the calculation of royalties for a
period of three (3) years after the respective
royalty is paid. A certified public accountant
appointed by the Seller may, at the Seller's expense,
examine such books and records solely for the purpose
of verifying the accuracy of any Royalty Statement or
other accounting rendered by the Purchaser hereunder.
The Seller agrees that such certified public
accountant shall be required to sign an agreement
with the Purchaser protecting confidential
information of the Purchaser and shall be authorized
by the Purchaser to report to the Seller only the
amount of royalties due and payable in respect of the
Royalty Statement examined. Such examination shall
take place at a mutually agreed upon time and place,
but in any event only during the Purchaser's normal
business hours and upon reasonable advance written
request. The Purchaser agrees to pay for the
reasonable fees, costs and expenses charged by any
certified public accountant engaged by the Seller for
such review if the royalties paid pursuant to the
Royalty Statement examined are understated by more
than fifteen percent (15%) of the royalties actually
due. The Seller shall have no other rights to examine
the Purchaser's books and records.
3. The Purchaser shall, at its option, be entitled to
reduce the amounts that the Purchaser would otherwise
be obligated to pay to the Seller pursuant to this
Section IV.B, in satisfaction of any of the Seller's
obligations to the Purchaser hereunder, including,
without limitation the obligation to pay the
Purchaser for warranty services provided by the
Purchaser as described in ATTACHMENT 6.
-3-
<PAGE> 6
V. Representations and Warranties
A. Representations and Warranties of Each Party
Each Party (where applicable) represents and warrants to the
other Party as follows:
1. It is a corporation duly organized, validly existing and
in good standing, and has all necessary corporate power
to enter into this Agreement and the other documents and
agreements referenced or contemplated herein and to
perform all of its obligations hereunder and thereunder.
2. The execution, delivery and performance of this
Agreement and the other documents and agreements
referenced or contemplated herein has been duly
authorized by its management.
3. Each of this Agreement and the other documents and
agreements referenced or contemplated herein constitutes
a valid and legally binding obligation of such Party,
enforceable in accordance with its respective terms.
B. Representations and Warranties of Seller
Except as set forth on the disclosure schedule attached hereto
and incorporated herein by this reference (the "Disclosure
Schedule"), the Seller represents and warrants to Purchaser as
follows:
1. The execution and the delivery of this Agreement and the
other documents and agreements referenced or
contemplated herein and the consummation of the
transactions contemplated hereby and thereby will not:
a. violate any term or provision of the Seller's
Articles of Incorporation or Bylaws;
b. result in the creation of any lien or
encumbrance upon any of the Assets; or
c. violate or result in a breach of or constitute a
default under any judgment, order, decree, law,
rule, regulation or other restriction of any
court, government or governmental agency
relating to the Assets.
2. Seller has and, upon Closing, the Purchaser shall have,
sole, good and marketable title to the Assets
(notwithstanding any actions taken by the Purchaser with
respect to the Assets), free and clear of all liens,
encumbrances or claims of any kind or nature whatsoever,
including those portions of the Assets which may have
been developed by Seller's consultants or independent
contractors. Notwithstanding the foregoing, Seller makes
no representation or warranty with respect to the
physical condition of the Assets described in Section
II.A.
-4-
<PAGE> 7
3. Seller was issued and continues to hold a patent or
patents issued from the U.S. Patent Office and/or from
other agencies, if any, pursuant to any and all patent
applications acquired by the Seller under the Hughes
Agreement, and such patents are included in the
intellectual property portion of the Assets listed or
included in Attachment 4 of this Agreement.
4. The Seller has not sold, transferred, licensed,
abandoned, released, pledged or subjected to lien,
charge or encumbrance of any kind any of the
intellectual property acquired by the Seller from Hughes
pursuant to the Hughes Agreement, and the intellectual
property listed or included in Attachments 2, 3 and 4 to
this Agreement accurately and completely list or
encompass and include all of such intellectual property,
together with any and all additional intellectual
property owned by Seller in connection with the Business
as of the date hereof, which intellectual property
collectively constitutes the intellectual property
portion of the Assets. The Seller has paid all
maintenance fees or other governmental fees, and made
all necessary filings, required to keep the intellectual
property listed in Attachments 2, 3 and 4 in full force
and effect. There are no immediate necessary formal
actions which must be taken to maintain the intellectual
property listed in Attachments 2, 3 and 4 except as
specifically noted in the respective attachment.
5. The operations of the Business, the use of the products
of the Business by Seller's customers for the purpose
for which sold, and the use or publication by Seller or
Purchaser of the technology disclosed in the patents and
the trademarks included in the Assets do not, to the
best of Seller's knowledge, involve infringement or
claimed infringement of any patent or trademark. Seller
warrants that the patents and trademarks included in the
Assets are, to the best of Seller's knowledge, valid,
enforceable and free from defects.
6. There are no actions, suits, or proceedings pending or,
to the actual knowledge of Seller, threatened which,
individually or in the aggregate, would have a material
adverse effect on the Assets or which would seek to
question, delay or prevent the consummation of, or
materially impair the ability of Seller to consummate
the transactions contemplated hereby.
7. Except as specifically provided in this Agreement, there
are no authorizations, approvals, consents or waivers
required to be obtained from, or notices or filings
required to be given to or made with, any government,
governmental agency or third party for the consummation
by Seller of the transactions contemplated hereby or the
continued operation of the Business.
8. True and complete copies of all Contracts included in
the Assets have been made available to Purchaser prior
to the execution hereof. As of the date hereof, except
as otherwise provided in this Agreement:
a. there exist no circumstances which would affect
the validity or enforceability of any of the
Contracts in accordance with their respective
terms;
-5-
<PAGE> 8
b. Seller has performed and complied in all
material respects with all obligations required
to be performed by it to date under, and is not
in default (without giving effect to any
required notice or grace period) under, or in
breach of the terms, conditions or provisions of
any of the Contracts; and
c. the validity and enforceability of any of the
Contracts has not been and shall not in any
manner be affected by the consummation of the
transactions contemplated hereby.
9. Seller holds all licenses, franchises, permits and
authorizations necessary for the lawful conduct of the
Business as presently conducted, and has to the best of
its actual knowledge, complied with all applicable
statutes, laws, ordinances, rules and regulations of all
governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over it, with respect
to the conduct of the Business, where the failure to so
comply could have a material adverse affect upon any of
the Assets. Any such permits and licenses will be
assigned or transferred to Purchaser to the extent
permitted by law, on or prior to the date hereof.
10. The Seller represents and warrants that the Warrant and
the Shares are being acquired by the Seller (or such
other individual or entity as shall be nominated by
Seller) for its personal account, for investment
purposes only, and not with a view to the distribution,
resale or other disposition thereof.
11. Seller acknowledges that Purchaser may issue shares upon
the exercise of the Warrant without registering such
shares under the Securities Act of l933, as amended (the
"Securities Act"), on the basis of certain exemptions
from such registration requirement. Accordingly, Seller
agrees that the exercise of the Warrant may be expressly
conditioned upon delivery to the Purchaser of an
investment certificate including such representations
and undertakings as the Purchaser may reasonably require
in order to assure the availability of such exemptions,
including a representation that the entity exercising
the Warrant is acquiring the shares for investment and
not with a present intention of selling or otherwise
disposing thereof and an agreement by such entity that
the certificates evidencing the shares may bear a legend
indicating such non-registration under the Securities
Act and the resulting restrictions on transfer. Seller
acknowledges that, because shares received upon exercise
of the Warrant may be unregistered, the shares may be
required to be held indefinitely unless they are
subsequently registered for resale under the Securities
Act or an exemption from such registration is available.
12. Seller hereby acknowledges that U.S. federal and state
securities laws may require the placement of certain
restrictive legends upon the Shares and the shares
issued upon exercise of the Warrant, and Seller hereby
consent to the placing of any such legends upon
certificates evidencing the Shares or such shares as the
Purchaser, or its counsel, may deem necessary or
advisable.
-6-
<PAGE> 9
13. Neither this Agreement, nor any certificate, exhibit or
other written document provided to Purchaser by Seller
with respect to the transactions contemplated hereby
contains any untrue statement of a material fact nor
omits nor misstates any material fact which may
reasonably be expected to materially and adversely
affect any of the Assets.
14. Since the inception of the Business, the Seller has duly
filed all federal, state, county and local tax returns
required to have been filed, and have paid or caused to
be paid all taxes required to be paid, with respect to
the Business in those jurisdictions where the nature or
conduct of the Business requires such filing and where
the failure to do so would have a material adverse
affect on the Assets.
C. Representations and Warranties of Purchaser
Purchaser represents and warrants to Seller as follows:
1. The execution and the delivery of this Agreement and the
other documents and agreements referenced or
contemplated herein and the consummation of the
transactions contemplated hereby and thereby will not:
a. violate any term or provision of its Articles of
Incorporation or Bylaws; or
b. violate or result in a breach of or constitute a
default under any judgment, order, decree, law,
rule, regulation or other restriction of any
court, government or governmental agency
relating to the Assets.
2. There are no actions, suits, or proceedings pending or,
to the knowledge of Purchaser, threatened which,
individually or in the aggregate, would have a material
adverse effect on or which would seek to question, delay
or prevent the consummation of, or materially impair the
ability of Purchaser to consummate, the transactions
contemplated hereby.
3. There are no authorizations, approvals, consents or
waivers required to be obtained from, or notices or
filings required to be given to or made with, any
government, governmental agency or third party for the
consummation by Purchaser of the transactions
contemplated hereby.
4. Upon consummation of the transactions contemplated
hereby, the Shares will be, and upon the exercise of the
Warrant (assuming the Seller has paid the exercise price
therefor), the shares of Common Stock issuable
thereunder will be, fully paid and non-assessable, and
issued to the Seller free and clear of all liens,
encumbrances, or claims of any kind or nature
whatsoever.
5. To the best of Purchaser's actual knowledge, neither
this Agreement, nor any certificate, exhibit or other
written document provided to Seller by Purchaser with
respect to the transactions contemplated hereby contains
any untrue
-7-
<PAGE> 10
statement of a material fact nor omits nor misstates any
material fact which may reasonably be expected to
materially and adversely affect its ability to
consummate the transactions contemplated hereby.
6. No reports, schedules, forms, statements, exhibits and
other documents filed by the Purchaser with the
Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended (copies of
which have been made available by the Purchaser to the
Seller prior to the date hereof) contains any untrue
statement of a material fact nor omits nor misstates any
material fact, except as qualified or modified by
subsequent reports filed by the Purchaser with the
Securities and Exchange Commission or by other public
disclosure.
VI. Covenants
A. Liability of The Parties
1. Liability of Seller
Seller shall be liable for and shall indemnify, defend
and hold Purchaser harmless from and against any and all
actual or threatened:
a. actions, suits, liabilities, expenses (including
reasonable attorneys' fees), charges,
obligations, claims, taxes, assessments, amounts
in judgment or settlement, installment and lease
payments and any sums due or owing or which may
become due or owing, together with any penalties
or interest, applicable to or arising out of
Seller's possession, ownership, use or transfer
of the Assets and operation of the Business
prior to the date hereof, other than the Assumed
Liabilities; provided, however, any liability of
Seller pursuant to Section V.B.5 hereof as a
result of anticipating art not made of record to
the U.S. Patent and Trademark Office during
prosecution thereof and known to Purchaser or
its employees or agents as of the date of this
Agreement shall arise only if a patent included
in the Assets is found to be invalid or
unenforceable by a court of competent
jurisdiction and any such Seller's liability
with respect thereto shall be limited to
$500,000 less any net profits (defined as Net
Royalty Revenue (as defined in Attachment 7 to
this Agreement) less royalties paid to Seller)
realized by the Purchaser from: (i) licensing of
the Assets or (ii) sales of products
incorporating the technology of the Assets; and
b. actions, suits, liabilities, expenses (including
reasonable attorneys' fees), charges,
obligations, claims and amounts in judgment or
settlement arising out of the products of the
Business made and sold by Seller.
-8-
<PAGE> 11
2. Liability of Purchaser
Purchaser shall be liable for and shall indemnify,
defend and hold Seller harmless from and against any and
all actual or threatened
a. actions, suits, liabilities, expenses (including
reasonable attorneys' fees), charges,
obligations, claims, taxes, assessments, amounts
in judgment or settlement, installment and lease
payments, and any sums due or owing or which may
become due or owing, together with any penalties
or interest applicable to or arising out of
Purchaser's possession, ownership and/or use of
the Assets and/or out of the Assumed Liabilities
on or after the date hereof, except to the
extent that the same relate to a breach by
Seller of a representation or warranty under
this Agreement or otherwise relate to a breach
of this Agreement; and
b. actions, suits, liabilities, expenses (including
reasonable attorneys' fees), charges,
obligations, claims and amounts in judgment or
settlement arising out of the products made or
sold by Purchaser.
3. Negligence or Misconduct of Purchaser or Seller
Each party shall indemnify, and hold the other harmless
from and against any loss, expense, damage, liability or
claim to the extent caused by such indemnifying party's
negligence or misconduct during the performance of its
obligations under this Agreement.
4. Limitation of Liability
In no event shall either party seek or be entitled to an
award of exemplary or punitive damages against the
other.
B. Cooperation
Each party agrees to provide to the other party, at such other
party's request, reasonably required assistance in the defense
or settlement of the matters referenced in Article VI.A.
C. Public Communications
The Seller will cooperate with Purchaser, if necessary, with
respect to the making of a public communications release
relating to this Agreement. Except as may be required by
applicable law, Seller and its affiliates, parents or
subsidiaries shall not issue any press releases or other public
communications relating to this Agreement or the transactions
contemplated hereunder without the prior written consent of the
Purchaser. In the event that any such press release or other
public communication shall be required by applicable law, Seller
shall first consult in good faith with the Purchaser with
respect to the form and substance of such release or
communication.
-9-
<PAGE> 12
D. Bulk Sales
Seller and Purchaser agree to waive compliance with Article 6 of
the Uniform Commercial Code to the extent, if any, that it is
applicable to the transactions contemplated hereby.
E. Delivery of Assets.
Seller will make all of the Assets transferred hereby available
to Purchaser at Seller's location. Purchaser shall bear all
costs and expenses of transporting the Assets to the location of
Purchaser's choice.
VII. Taxes on This Purchase
A. Sales and Other Transfer Taxes
Seller shall be responsible for the payment of and shall pay all
sales and other transfer taxes incurred in connection with the
sale of the Assets. In the event that the transactions
contemplated hereby are subject to such taxes, and Purchaser is
required to pay such taxes, Purchaser shall pay such taxes and
Seller shall reimburse Purchaser therefor. Each party shall
cooperate with the other in its filing of any forms required to
be filed with respect to the determination and payment of such
sales taxes.
B. Other Taxes
Seller shall be responsible for the payment of any other taxes,
such as use taxes, in connection with the consummation of the
transactions contemplated hereby and shall indemnify, defend and
hold Purchaser harmless from and against all liability for such
taxes and for any interest and penalties which may be assessed
on account of their nonpayment or otherwise. Each party shall
cooperate with the other in its filing of any forms required to
be filed with respect to the determination and payment of such
taxes.
VIII. Additional Agreements; Opinions
A. Concurrently with the execution of this Agreement, each party
shall execute and deliver to the other the following (to the
extent a party thereto):
1. Assignment Agreement - Intellectual Property Other than
Patents and Trademarks, in the form attached hereto as
ATTACHMENT 2.
2. Assignment Agreement - Trademarks, in the form attached
hereto as ATTACHMENT 3.
3. Assignment Agreement - Patents and Trademarks, in the
form attached hereto as ATTACHMENT 4.
-10-
<PAGE> 13
4. Assignment Agreement - Contracts, in the form attached
hereto as ATTACHMENT 5.
B. On, or prior to the date hereof, Van Valkenberg Furber Law Group
P.L.L.C., counsel to the Seller shall deliver, or shall have
delivered, a legal opinion to the Purchaser in the form attached
hereto as EXHIBIT B.
IX. Miscellaneous
A. Expenses Generally
Except as otherwise specifically provided herein and elsewhere
in this Agreement, each party shall bear its own expenses
incurred in connection with the preparation and execution of
this Agreement and the consummation of the transactions
contemplated hereby.
B. Notices
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and shall
be deemed duly given if delivered sent by registered or
certified mail, postage prepaid, as follows, or to such other
address or person as any Party may designate by notice to the
other Party or Parties hereunder:
If to Seller:
VIP Labs(R)
969 Thomas Street
Seattle, WA 98109-5212
Attention: William S. Taraday
with a copy to:
Van Valkenberg Furber Law Group P.L.L.C.
1325 4th Avenue, Suite 1200
Seattle, Washington 98101
Attention: William E. Van Valkenberg, Esq.
If to Purchaser:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, CA 92705
Attention: Janet M. Biski,
Vice President and Chief Financial Officer
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<PAGE> 14
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Nick E. Yocca, Esq.
C. Amendments; Waivers
This Agreement may not be changed orally and, except as
otherwise provided specifically herein, no waiver of compliance
with any provision or condition and no consent provided for in
this Agreement shall be effective unless evidenced by an
instrument in writing duly executed by the proper party. Either
party may at any time waive compliance by the other party with
any covenants or conditions contained in this Agreement only by
written instrument executed by the party waiving such
compliance. No such waiver, however, shall be deemed to
constitute the waiver of any such covenant or condition in any
other circumstance or the waiver of any other covenant or
condition.
D. Section Headings
The section and paragraph headings contained in this Agreement
are for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement.
E. Counterparts
This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
F. Assignment
This Agreement shall be binding upon and inure to the benefit of
successors and assigns of Seller and Purchaser and Purchaser may
freely assign its rights and obligations under this Agreement;
provided that the obligations of Seller under this Agreement may
not be assigned without the prior written consent of the
Purchaser, which consent shall not be unreasonably withheld.
G. Governing Law
This Agreement shall be governed by, and construed and enforced
in accordance with, the internal laws of the State of California
without regard to California's conflict of law rules.
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<PAGE> 15
H. Disputes
In lieu of litigation, all disputes under this Agreement shall
be resolved as follows:
1. Cooperation
The parties agree to cooperate with each other to
attempt to settle all disputes arising under this
Agreement without resort to arbitration.
2. Arbitration
Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled
by binding arbitration in a forum as selected by the
party asserting the claim.
a. Procedure. Any party to this Agreement can
initiate arbitration pursuant to this Agreement
by serving notice on the other parties of an
intent to arbitrate. The notice shall specify
with particularity the claims or issues that are
to be arbitrated. Within ten days of receipt of
the notice by all parties, the parties shall use
all reasonable efforts to obtain a list of
available arbitrators from the local office of
the Judicial Arbitration and Mediation Service
("JAMS") and select a mutually acceptable
arbitrator. If the parties are unable to agree
on an arbitrator within ten days, any party may
petition the Presiding Judge of the forum's
Superior Court to select a single arbitrator
from the JAMS list. The parties shall have the
discovery rights available under the forum's
Civil Rules, subject to the limitation that each
side shall be limited to no more than five
depositions unless, upon a showing of good
cause, the party can convince the arbitrator
that more depositions should be permitted. It
shall be the intention of the parties to select
an arbitrator and set a schedule according to
the following: (1) all discovery must be
concluded within 120 days of the selection of an
arbitrator, (2) the arbitration hearing must be
concluded within 30 days of the close of
discovery and it will be conducted in accordance
with the forum's Rules of Evidence, and (3) the
arbitrator's final decision shall be rendered
within ten days of the final hearing day.
Judgment upon the arbitrator's final award may
be entered in any court having jurisdiction
thereof.
b. Costs and Fees. The parties shall bear in equal
shares the arbitrator's fees and costs. In those
cases where the arbitrator's judgment consists
solely of monetary damages, the prevailing party
in the arbitration shall be awarded its
reasonable attorneys' fees and all costs, other
than the arbitrator's fees and costs. For the
purpose of determining who is the prevailing
party, each side will submit to the other a
single written offer of settlement ten days
prior to the start of the arbitration hearing
and the party whose offer most closely resembles
the arbitrator's award shall
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<PAGE> 16
be deemed the prevailing party for the purpose
of awarding attorneys' fees.
I. Entire Agreement; Supersedure
This Agreement constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
J. Subsequent Invalidity, Illegality or Unenforceability
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way
be affected or impaired.
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<PAGE> 17
IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to
be duly executed as of the date first above written.
SRS Labs, Inc. R.G.A. & Associates, Ltd. d/b/a ToteVision
and VIP Labs(R)
/s/ STEPHEN V. SEDMAK /s/ WILLIAM S. TARADAY
- -------------------------------- -----------------------------------------
Stephen V. Sedmak, President William S. Taraday, President
<PAGE> 1
EX-10.16
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of March 2, 1998, by and
between SRS Labs, Inc., a Delaware corporation (the "Company"), Valence
Technology Inc., a British Virgin Islands company ("Valence"), and Thomas Wah
Tong Wan, an individual (the "Employee").
RECITALS
A. The Company develops, markets and licenses unique, leading-edge,
proprietary audio technologies and has need for management personnel.
B. The Employee, prior to the date hereof, has been an executive
officer and director of Valence.
C. Pursuant to two separate stock purchase agreements, the Company
has acquired 100% of the issued and outstanding share capital of Valence.
D. The Company desires to employ the Employee in the same or similar
capacity as that previously existing between the Employee and Valence upon the
terms and conditions set forth in this Agreement.
E. The Employee is willing to enter into this Agreement with respect
to the Employee's employment and services upon the terms and conditions set
forth in this Agreement.
AGREEMENT
In consideration of the provisions set forth in this Agreement, the
parties agree as follows:
1. Employment; Duties and Obligations
1.1 Employment. The Company hereby employs the Employee as a Vice
President of the Company and the Company and Valence hereby employ the Employee
as the President and Chief Executive Officer of Valence for the term of this
Agreement, and the Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth. Notwithstanding anything to the contrary
herein, except
<PAGE> 2
with the consent of the Employee, the Employee's principal place of employment
during the term of this Agreement or any renewal thereof shall be located in
Hong Kong.
1.2 Service to the Company and Valence. The Employee shall have
primary responsibility for, among other things, managing and directing the
day-to-day business of Valence, subject to applicable law and the policies of
the Company's Board of Directors and the Executive Committee of the Company's
Board of Directors and the Board of Directors of Valence.
1.3 Devotion of Time to the Business. The Employee shall devote
his entire professional time and best efforts to the business of the Company and
its subsidiaries, and shall not during the term of this Agreement engage in any
other business activities. This Agreement shall not be construed as preventing
the Employee from investing his assets in such form or manner as will not
require any services on the part of the Employee for or with respect to any of
the entities in which such investments are made, except as otherwise restricted
pursuant to Section 7 herein. This Agreement shall not be interpreted to
prohibit the Employee from making passive personal investments or conducting
private business affairs if those activities do not materially interfere with
the services required under this Agreement. The Employee shall not, directly or
indirectly, acquire, hold, or retain any interest in any business directly
competing with or similar in nature to the business of the Company or any of its
subsidiaries; provided however, that the Employee's beneficial ownership of debt
securities in an amount not exceeding U.S. $500,000 and/or publicly-traded
equity securities in an amount not exceeding 5% of the total outstanding number
of shares of the particular class of such equity securities, which are issued by
any entity engaged in activities which are competitive with the business of the
Company or any of its subsidiaries shall not be deemed to be a breach of any
duty or obligation owed by the Employee to the Company or any of its
subsidiaries hereunder.
2. Term. The initial term of this Agreement shall commence as of March
3, 1998 (Hong Kong Time), and shall continue in effect until December 31, 2000
(Hong Kong Time). On December 31, 2000 (Hong Kong Time), and on the 31st day of
December (Hong Kong Time) of each year thereafter (unless this Agreement shall
have been previously terminated), the term of this Agreement shall be
automatically extended for an additional term of one year unless either party
shall provide the other with at least 30-days written notice prior to such
December 31st of the party's intent to terminate this Agreement. In the event
that the Company shall provide written notice of termination to the Employee,
the Employee will be entitled to the severance benefits set forth in Section 4.3
herein. Upon the payment of such severance benefits, the Company and Valence
shall be relieved from any liability for the expired term of this Agreement.
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<PAGE> 3
3. Compensation
3.1 Base Salary. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with the regular payroll practices of the Company (but at
least once a month), at a rate determined in accordance with this Agreement.
3.1.1 Initial Base Salary. The initial Base Salary to
be paid hereunder is H.K. $1,859,000 per year.
3.1.2 Adjustments to Base Salary. The Compensation
Committee of the Board (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall review the Base Salary of the Employee and determine whether
to adjust it; provided however that the Base Salary for any fiscal year shall
not be less than the initial Base Salary to be paid to the Employee hereunder.
The first such review shall occur prior to July 1, 1998 (California time);
thereafter, such reviews shall occur within three months of the end of each of
the Company's fiscal years, commencing with the Company's fiscal year ending
December 31, 1998.
3.2 Salary Deferral Plan. The Employee shall be eligible to
participate in the Company's voluntary salary deferral plan and such other
similar plans as the Company may adopt from time to time.
3.3 Performance Bonus.
3.3.1 Initial Bonus. Notwithstanding anything to the
contrary, Employee shall be eligible to receive a bonus relating to Valence's
fiscal year ending March 31, 1998 based upon the performance formula submitted
to and accepted by the Compensation Committee.
3.3.2 Subsequent Bonuses. Irrespective of any other
bonus payment payable to the Employee pursuant to this Agreement, the
Compensation Committee (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall evaluate the Employee's performance at the end of each fiscal
year commencing with the Company's fiscal year ending December 31, 1998 and
determine whether the Employee's performance merits payment of a performance
bonus to the Employee. The performance bonus is wholly discretionary.
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<PAGE> 4
3.4 Long-Term Incentive Compensation. The Employee shall be
eligible to participate in all of the Company's long-term incentive compensation
plans, including, but not limited to, any Company stock option, restricted stock
or SAR plan (with the exception of those plans only applicable to non-employee
directors).
3.5 Other Benefits. The Employee shall be eligible to participate
in, and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance (including tax gross up amounts), vacation and sick
leave.
3.6 No Prohibition as to Other Compensation. Nothing herein shall
be deemed to preclude the Company, or any of the Company's subsidiaries, if any,
from awarding additional compensation or benefits to the Employee during the
term of this Agreement, upon approval of the Compensation Committee (or in the
absence of a compensation committee, the Board committee performing equivalent
functions or the entire Board of Directors of the Company), whether in the form
of raises, bonuses, additional fringe benefits or otherwise.
3.7 Expenses. The Company, in accordance with its policy (which
may be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business of the Company,
including, without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.
3.8 Tax Withholding. The Company and, to the extent applicable,
any other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.
4. Termination
4.1 Termination for Cause. The Company or Valence may terminate
this Agreement and discharge the Employee for cause at any time upon written
notice specifying the reasons for such termination. For purposes of this
Agreement, "cause" shall mean (a) the failure to follow the reasonable
instructions of the Board of Directors of the Company or Valence, (b) the
material breach of any term of this Agreement and failure to cure such breach
within ten (10) days after written notice thereof from the Company or Valence,
as the case may be, or (c) the misappropriation of assets of the
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<PAGE> 5
Company or any subsidiary of the Company by the Employee resulting in a material
loss to such entity. The Employee shall not be entitled to receive any further
payments or other benefits under this Agreement after the expiration of 30 days
from the date of such notice, other than benefits which have previously vested
in the Employee.
4.2 Termination Upon Death. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company and/or its subsidiaries, if any, as the case may be, shall pay to
the Employee's legal representative the full salary for the month in which he
dies and such legal representative shall be entitled to receive those benefits
which have previously vested in the Employee.
4.3 Termination by the Company or Valence Without
Cause/Severance. In the event the Company or Valence shall give written notice
of its intent not to extend the term of this Agreement for an additional term of
one year, as provided in Section 2 herein, or the Company or Valence otherwise
gives written notice of termination without cause during the then current term
of this Agreement, the Employee's term of employment shall terminate effective
on the last day of the month such notice is deemed effective. Thereafter, the
Employee shall be entitled to receive for the remainder of the then current term
of this Agreement, and for a period of twelve months following the end of such
term, the Base Salary then in effect, less the long-term service payment, if
any, referenced in the Employment Ordinance, Cap. 57, Laws of Hong Kong, and the
health, life, disability insurance benefits and the other employee benefits
which the Employee had prior to such termination including, but not limited to
those set forth in Sections 3.3 through 3.7 herein (collectively referred to
herein as the "Termination Benefits"). During the continuation period, the
Employee will provide advisory services from time to time to the Chairman of the
Board of the Company and the Chief Executive Officer of the Company, as
reasonably requested by such individuals and acceptable in timing and scope to
the Employee. The Company anticipates that such advisory services will he
limited to transitional or management continuity matters and market trends in
the Company's primary market segments. During the continuation period (a)
outstanding options shall continue to vest and vesting or performance
restrictions on any stock awards shall continue to lapse according to the
schedules set forth in the respective stock option or stock award agreements and
(b) any bonus amount earned pursuant to the annual incentive bonus plan or such
similar plan and payable during such continuation period shall be paid to the
Employee. If the Employee accepts employment from any other party during the
continuation period, the continuation period cash salary and Termination
Benefits will immediately terminate on the date on which such new employment
commences and the Employee will receive a lump sum severance payment equal to
80% of the balance of the continued salary payable under this Section 4.3. Any
cash bonus amount which would otherwise be payable within the twelve month
period, if not paid on or prior to such acceptance date shall not be paid. In
addition, for
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<PAGE> 6
purposes of options or other awards pursuant to the Company's employee benefit
plans, such acceptance date shall be deemed the termination date under such
plans. For purpose of this Section 4.3 and subject to Section 5 herein,
"employment" shall exclude (a) service as an officer or director of the
Employee's personal investment holding company, (b) service as a director on the
board of a corporation, (c) engagement as a bona fide part-time consultant, or
(d) self-employment or engagement as an officer or director of an operating
corporation or enterprise (as opposed to a personal investment holding company)
founded or controlled by the Employee and which has revenues of less than
$5,000,000 per year.
4.4 Termination By the Employee. Notwithstanding anything to the
contrary herein, this Agreement may be terminated by the Employee upon 60 days
prior written notice.
5. Termination Following Change in Control.
5.1 Election. If either (a) the Company or Valence elects to
terminate the Employee without cause pursuant to Section 4.3 within 90 days
before or one year after a Change in Control (as hereinafter defined) or (b) the
Employee elects to resign with Good Reason (as hereinafter defined) within one
year after a Change in Control, then as a severance benefit and in lieu of all
compensation or damages, the Company or Valence shall (a) pay the Employee in
one lump sum or in equal monthly installments, at the sole election of the
Employee, an aggregate amount equal to the Base Salary in effect at the time of
such termination or resignation for the remainder of the then current term of
the Agreement plus an additional period of twelve months; (b) pay the Employee
any bonus amount earned pursuant to the Company's annual incentive bonus plan or
such similar plan and which would otherwise be paid if the Employee were
employed by the Company, one of its subsidiaries, if any, or successors thereto
during the twelve month period commencing on the day of such termination or
resignation under this Section 5 (the "Termination Period"); and (c) provide to
the Employee all Termination Benefits (as such term is defined in Section 4.3
herein).
5.2 Terms of Stock Options or Other Stock-Based Awards. Any stock
option agreement or other stock award agreement heretofore or hereafter granted
under the Company's stock based compensation plans shall have as a term and
condition of such grant or award (in addition to such other provisions and
whether inserted into the applicable agreement or not) the following provision:
"Notwithstanding anything to the contrary, if in connection
with or as a result of a Change in Control (as defined in the
Employment Agreement, hereinafter defined) the Company or
Valence elects
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<PAGE> 7
to terminate the Employee or the Employee elects to resign
under Section 5 of the Employment Agreement by and between
the Company or Valence and the Employee dated as of March 2,
1998 (the "Employment Agreement"), then the date of
exercisability of each outstanding option, and the date on
which all vesting or performance restrictions lapse on any
award pursuant to the Company's employee benefit plans, shall
be immediately accelerated, allowing the Employee to
immediately acquire all of the outstanding unvested options
or to immediately hold such stock free and clear of any
vesting or performance restrictions, as the case may be."
5.3 Definitions
5.3.1 For purposes of this Section 5 "Change in Control" shall
mean:
(a) The Company is merged, consolidated or
reorganized into or with another corporation or other
legal person and as a result of such merger, consolidation
or reorganization less than a majority of the combined
voting power of the then-outstanding securities of such
corporation or person immediately after such transaction
are held in the aggregate by the holders of Voting Stock
(as that term is defined in subsection (c) hereof) of the
Company immediately prior to such transaction;
(b) The Company sells all or substantially all
of its assets to any other corporation or other legal
person, less than a majority of the combined voting power
of the then-outstanding voting securities of which are
held directly or indirectly in the aggregate by the
holders of Voting Stock of the Company immediately prior
to such sale;
(c) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or
report), each as promulgated pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"), disclosing that
any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial
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<PAGE> 8
owner" is defined under Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing 30% or more of the combined voting
power of the then-outstanding securities of the Company
entitled to vote generally in the election of directors of
the Company ("Voting Stock");
(d) The Company files a report or proxy
statement with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in, or in response
to, Form 8-K or Schedule 14A (or any successor schedule,
form or report or item therein) that a Change in Control
of the Company has or may have occurred or will or may
occur in the future pursuant to any then-existing contract
or transaction;
(e) If during any period of two consecutive
years, the individuals who constituted the Board at the
beginning of any such period cease for any reason to
constitute at least a majority thereof unless the election
(including, but not limited to, filling of a vacancy by
the remaining Board members), or the nomination for
election by the Company's stockholders, of new members of
the Board was approved by a vote of at least two-thirds of
the members of the Board still in office who were members
of the Board at the beginning of any such period; or
(f) Notwithstanding the foregoing provisions of
(i) subsections (c) or (d) hereof, a "Change in Control"
shall not be deemed to have occurred for purposes of this
Agreement solely because the Company, an entity in which
the Company directly or indirectly beneficially owns 50%
or more of the voting securities of such entity (an
"Affiliate"), any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the
Company either files or becomes obligated to file a report
or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it of
shares of voting securities of the Company, whether in
excess of 30% or otherwise, or because the Company reports
that a Change in Control of the Company has or may have
occurred or will or may occur in the future by reason of
such beneficial ownership or (ii) subsection (c) hereof, a
"Change in Control" shall not be deemed to have occurred
for purposes of
-8-
<PAGE> 9
this Agreement solely because a person who is a holder of
five percent (5%) or more of the Voting Stock and who also
is an officer and director of the Company on the date of
this Agreement acquires 30% or more of the Voting Stock.
(g) Notwithstanding the foregoing provisions of
subsections (a) and (b) hereof, a "Change of Control"
shall not be deemed to have occurred for purposes of this
Agreement solely because the Company engages in an
internal reorganization, which may include a transfer of
assets to one or more Affiliates, provided that such
transaction has been approved by at least two-thirds of
the Directors of the Company and as a result of such
transaction or transactions, at least 80% of the combined
voting power of the outstanding securities of the Company
or its successor are held in the aggregate by the holders
of Voting Stock immediately prior to such transactions.
5.3.2 For purposes of this Section 5, the Employee
shall be deemed to have resigned "with Good Reason" if he does so following a
Change in Control as a result of the Company or any or its subsidiaries, if any,
having done any or all of the following without the Employee's express written
consent: (a) assigned the Employee different duties or made changes in his
reporting responsibilities, title, or office that are substantially inconsistent
with the Employee's duties, responsibilities, titles, or offices immediately
prior to the Change in Control; (b) reduced the Employee's Base Salary from that
in effect at the time of the Change in Control; (c) failed to continue any bonus
plan in substantially the same form as it existed prior to the Change in
Control; (d) required the Employee to he based more than 50 miles from his
present office location, except for required travel consistent with the
Employee's present business travel obligations; (e) failed to continue any plan
or program for compensation, employee benefits, stock purchase or ownership,
life insurance, group medical, disability, or vacation in substantially the same
form as immediately prior to the Change in Control, or otherwise made any
material reduction in the Employee's fringe benefits including but not limited
to those described in Section 3 herein; or (f) failed to obtain the assumption
of this Agreement by any successor to the Company.
5.4 Relationship to Other Termination Sections. The Employee
shall not be entitled to the benefits of this Section 5 if this Agreement and
his employment are terminated pursuant to Sections 4.1, 4.2, 4.3 or 4.4.
5.5 Company's Sole Obligations. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to such termination and of the severance benefits
set forth in this
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<PAGE> 10
Section 5 as applicable constitute the sole obligations of the Company and are
in lieu of any damages or other compensation that the Employee may claim in
connection with this Agreement.
6. Resignation as Director and Officer. In the event of any termination
or resignation pursuant to Sections 4.1, 4.3, 4.4 or 5, the Employee shall be
deemed to have resigned voluntarily as an officer and director of the Company
(and of any subsidiaries of the Company) if he was serving in either of such
capacities at the time of termination.
7. Non-Competition. The Employee acknowledges that, in connection with
the acquisition of Valence by the Company and the Company's employment of the
Employee hereunder, the Employee has entered into a Non-Competition Agreement
with the Company bearing even date herewith.
8. Inventions and Improvements.
(a) The Employee hereby assigns to the Company (or, at the
discretion of the Company, any of its subsidiaries that it designates) an
exclusive right to all inventions, discoveries, ideas and improvements made by
him, whether alone or jointly with others, relevant to the subject matter of his
employment, prior to the date of his employment hereunder.
(b) In carrying out research, developmental and productive
activities for the Company and its subsidiaries, the Employee shall accurately
record the precise nature thereof and the data derived therefrom, and all such
data and records shall be and remain the sole and exclusive property of the
Company and its subsidiaries.
(c) The Employee hereby recognizes as the exclusive property of
the Company (and, as appropriate, its subsidiaries) and hereby assigns to the
Company (and, as appropriate, its subsidiaries) without further consideration:
(i) all inventions, discoveries, ideas, copyright rights,
maskworks, improvements and any other intellectual property made, conceived or
discovered, by the Employee during the term of this Agreement, whether by
himself or jointly with others (whether or not employees of the Company or its
subsidiaries) and whether or not made at the Company's premises or during
working hours, relating or pertaining in any way to the kind of business or any
tests, research or development carried on by the Company, or any subsidiary or
affiliate of the Company; and
(ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company or its subsidiaries), may hereafter
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<PAGE> 11
file with respect to any such invention, discovery, idea or improvement and each
patent that may be issued thereon.
(d) The Employee agrees to execute any assignments to the Company
or its nominee of his rights, title and interest in any such inventions,
discoveries, ideas, copyright rights, maskworks, improvements, and any other
intellectual property, and any other instruments and documents requisite or
desirable in applying for and obtaining patents, trademarks or copyrights, at
the cost of the Company with respect thereto in the United States and all
foreign countries as and when requested by the Company. The Employee further
agrees, whether in the employ of the Company (or its subsidiaries) or not, to
cooperate to the extent and in the manner requested by the Company in the
prosecution or defense of any patent claims or any litigation or other
proceedings involving any inventions, discoveries or improvements covered by
this Agreement, but all expenses thereof shall be paid by the Company or one of
its subsidiaries. Any invention, discovery, idea or improvement within the scope
of this Section 8 shall be disclosed promptly in writing to the Board of
Directors of the Company.
(e) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea or improvement, whether because of his physical or mental
incapacity or for any other reason whatsoever, the Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by him.
9. No conflict With Other Employment Agreements. The Employee represents
and warrants that there are no other agreements or duties on the Employee's part
now in existence to assign inventions, discoveries, ideas or improvements to any
party other than the Company or one of its subsidiaries. The Employee will not
disclose to the Company or one of its subsidiaries or induce the Company or one
of its subsidiaries to use any confidential information or material that he is
now or shall become aware of that belongs to a former employer or any party
other than the Company or one of its subsidiaries .
10. Indemnification. The parties hereto covenant and agree to execute,
contemporaneously herewith, an Indemnification Agreement substantially in the
form attached hereto as Exhibit A.
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<PAGE> 12
11. Confidential Information. The parties hereto covenant and agree to
execute, contemporaneously herewith, a Confidentiality Agreement substantially
in the form attached hereto as Exhibit B.
12. Insurance. The Company shall purchase and keep in full force and
effect for the Employee a policy of directors' and officers' liability insurance
at coverage levels consistent with other executive officers of the Company.
13. Authority. The individual executing this Agreement on behalf of the
Company represents and warrants to the Employee that the performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized by all requisite action and that he has the power and authority
to execute this Agreement.
14. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, facsimile,
telecopy, overnight courier service, or by United States certified or registered
mail, return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by facsimile or telecopy, when such facsimile or telecopy is transmitted
to the facsimile or telecopy number specified in this Section and confirmation
is received; and (c) if given by certified or registered mail, ten days after
the mailing thereof.
Address for notices (unless and until written notice is given of
any other address):
If to the Company:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Attention: Ms. Janet M. Biski,
Chief Financial Officer and Secretary
Fax: (714) 852-1099
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<PAGE> 13
If to the Employee:
Valence Technology Inc.
Unit 413 4th Floor
Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon Ton, Hong Kong
Attention: Thomas Wah Tong Wan,
President and Chief Executive Officer
Fax: (852) 2776-7770
15. Further Documents and Acts. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.
16. Financial Reporting. Any computation pertaining to the Company's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.
17. Attorneys' Fees. In any action, litigation or proceeding between the
parties arising out of or in relation to this Agreement, the prevailing party in
such action shall be awarded, in addition to any damages, injunctions or other
relief, and without regard to whether or not such matter be prosecuted to final
judgment, such party's costs and expenses, including reasonable attorneys' fees.
18. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
19. Venue. The parties hereby irrevocably and unconditionally consent to
submit to the exclusive jurisdiction of the courts of the State of California,
County of Orange, and/or the United States District Court for the Central
District of California (Southern Division) for any actions, suits, controversies
or proceedings arising out of or relating to this agreement and the transactions
contemplated hereby (and the parties agree not to commence any action, suit or
proceeding relating thereto except in such courts), and further agree that
service of any process, summons, notice or document by U.S. registered mail to
the respective addresses set forth above shall be effective service of process
for any action, suit or proceeding brought against the parties in any such
court. The parties hereby irrevocably and unconditionally waive any objection to
the laying of venue of any action, suit, controversies or proceeding arising out
of this agreement or the transactions contemplated hereby, in the courts of the
State of California, County of Orange and/or the United States District Court
for the Central District of California
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<PAGE> 14
(Southern Division), and hereby further irrevocably and unconditionally waive
and agree not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient or
improper forum.
20. Amendments/Waiver. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which such consent was required shall
not be deemed to imply consent or waiver of the necessity of obtaining such
consent for the same or similar acts in the future.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
22. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.
23. Entire Agreement. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written have been fully merged herein and are
superseded hereby.
24. Remedies. All rights, remedies, undertakings, obligations, options,
covenants, conditions and agreements contained in this Agreement shall be
cumulative and no one of them shall be exclusive of any other.
25. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
26. Interpretation. The language in all parts of this Agreement shall be
in all cases construed simply according to its fair meaning and not strictly for
or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other
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<PAGE> 15
gender. The captions of the Sections of this Agreement are for convenience only
and shall not affect the construction or interpretation of any of the provision
herein.
27. Arbitration of Certain Disputes. Any controversy or claim arising
out of or relating to (a) the location of the Employee's principal place of
employment as provided in Section 1.1, (b) the scope of the Employee's duties as
provided in Section 1.2, (c) the termination of the Employee for cause under
Section 4.1, or (d) the resignation of the Employee for Good Reason under
Section 5.3.2 shall be resolved by arbitration. Arbitration proceedings shall be
commenced by the delivery by any party to a dispute to the other of written
notice requesting arbitration. The matter shall be submitted to such
disinterested arbitrator as shall be agreed upon by the parties to the dispute,
which arbitrator shall determine the rules to govern the arbitration
proceedings. Each party shall bear its own costs and expenses incurred by it in
connection with the arbitration; all other costs, including arbitrators' fees
and expenses, shall be borne equally by the parties. Notwithstanding the
foregoing, if the arbitrator determines that one party acted unreasonably and
not in good faith, the arbitrator shall have authority to assess the costs and
expenses of the arbitration, including the arbitrator's fee and reasonable
attorneys' fees, against that party. In the event the parties are unable to
agree upon an arbitrator within ten (10) business days of the date a notice
requesting arbitration is delivered, the arbitration shall be conducted in
accordance with the Labor Arbitration Rules of the American Arbitration
Association ("AAA"). If arbitration is conducted pursuant to the rules of the
AAA, then the controversy or claim shall be decided by a board of three (3)
arbitrators. The Employee, on the one hand, and the Company and Valence, on the
other hand, shall select one (1) arbitrator within ten (10) business days of a
demand for arbitration being made or, in the event of a party's failure to so
select, an arbitrator shall be named for that party by the AAA. Within ten (10)
business days of their selection, the two (2) arbitrators so selected shall
select a third arbitrator from the National Panel of Arbitrators maintained by
the AAA or as they otherwise shall agree. All arbitrators, however selected,
shall possess such experience in, and knowledge of, the subject area of the
controversy or claim so as to qualify as an "expert" with respect to such
subject matter. Any arbitration hearing shall be held in Orange County,
California, unless the parties to the dispute agree otherwise. The governing law
for the purposes of any arbitration arising hereunder shall be as set forth in
Section 18 hereof. Any award rendered by arbitration shall be final and binding
on the parties, and judgment thereon may be entered in any court of competent
jurisdiction. Notwithstanding any arbitration rules to the contrary, the award
of the arbitrator must be made no later than three (3) months following the date
on which the arbitrator or arbitrators are appointed.
28. Miscellaneous. Each provision of this Agreement to be performed by a
party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents
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<PAGE> 16
referenced in this Agreement are fully incorporated into this Agreement by
reference. Unless expressly set forth otherwise, all references herein to a
"day" shall be deemed to be a reference to a calendar day. Unless expressly
stated otherwise, cross-reference herein shall refer to provisions within this
Agreement, and shall not be deemed to be references to the overall transaction
or to any other document. Time is of the essence in the performance of this
Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND UNDERSTANDS
ITS CONTENTS. EMPLOYEE ALSO ACKNOWLEDGES THAT THE COMPANY HAS INFORMED HIM THAT
THIS AGREEMENT DOES NOT REQUIRE EMPLOYEE TO ASSIGN TO THE COMPANY ANY INVENTION
WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE, A COPY OF WHICH IS ATTACHED AS EXHIBIT C TO THIS AGREEMENT. BY
SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO BE BOUND BY ALL OF THE TERMS AND
CONDITIONS OF THIS AGREEMENT.
(signature page follows)
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<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY: SRS LABS, INC., a Delaware corporation
By: /s/ THOMAS C.K. YUEN
--------------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief
Executive Officer
By: /s/ JANET M. BISKI
--------------------------------------
Janet M. Biski
Vice President, Chief Financial
Officer and Secretary
VALENCE: VALENCE TECHNOLOGY INC.,
a British Virgin Islands company
By: /s/ THOMAS WAH TONG WAN
--------------------------------------
Thomas Wah Tong Wan
President and Chief Executive Officer
EMPLOYEE: /s/ THOMAS WAH TONG WAN
--------------------------------------
Thomas Wah Tong Wan
-17-
<PAGE> 18
EXHIBIT A
INDEMNIFICATION AGREEMENT
<PAGE> 19
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 2nd day
of March, 1998, by and between SRS LABS, INC., a Delaware corporation (the
"Company"), and Thomas Wah Tong Wan ("Indemnitee").
WHEREAS, Indemnitee is currently serving as a director and an officer of
the Company and a director, executive officer and an employee of certain of the
Company's subsidiaries and the Company desires Indemnitee to continue in such
capacities. The Indemnitee is willing, subject to certain conditions including,
without limitation, the execution and performance of this Agreement by the
Company, to continue in such capacities;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the Company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company and its subsidiaries, and in order to induce
Indemnitee to provide services to the Company and its subsidiaries as a director
and an officer of the Company and a director, executive officer and an employee
of certain of the Company's subsidiaries, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the fullest extent (whether partial or complete) permitted by law and as set
forth in this Agreement, and, to the extent insurance is maintained, for the
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies.
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<PAGE> 20
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in this
Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or other
agents, so that if Indemnitee is or was a director, officer, employee or
other agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, a subsidiary of the Company, or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes
the "Beneficial Owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing 40% or
more of the total voting power represented by the Company's then
outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period' constitute the Board
and any new director whose nomination for election or election was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; (iii) the
stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by
the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company
(in one transaction or a series of transactions) of all or substantially
all of the Company's assets.
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<PAGE> 21
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in
Control; (ii) any person (including the' Company) publicly announces an
intention' to take or to consider taking actions that, if consummated,
would constitute a Change in Control; (iii) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, a subsidiary
of the Company, a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, or a person who is a party to
an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule
l3d-3 under said Act), directly or indirectly, of securities of the
Company representing 15% or more of the total voting power represented
by the Company's then outstanding Voting Securities; or (iv) the Board
adopts a resolution to the effect that, for purposes of this Agreement,
a Potential Change in Control has occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or
agent of the Company or one of its subsidiaries which imposes duties on,
or involves services by, Indemnitee with respect to an employee benefit
plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, administrative, investigative or criminal
(other than an action by or in the right of the Company), by reason of
the fact that he is or was or had agreed to become a director, officer,
employee or agent of the Company, or is or was serving or had agreed to
serve at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any
appeal therefrom if the Indemnitee acted in good faith and in a manner
he reasonably believed to be in or not
-3-
<PAGE> 22
opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption
that the Indemnitee did not satisfy the foregoing standard of conduct to
the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by or in the right of
the Company to procure a judgment in its favor by reason of the fact
that he is or was or had agreed to become a director, officer, employee
or agent of the Company, or is or was serving or had agreed to serve at
the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against costs, charges and expenses (including attorneys' and
others' fees and expenses) actually and reasonably incurred by him in
connection with the defense or settlement thereof or any appeal
therefrom if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any
claim, issue or matter as to which the Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that
the Court of Chancery or the court in which such action, suit or
proceeding was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall
deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or
otherwise, including without limitation the dismissal of an action
without prejudice, in defense of any action, suit or proceeding referred
to in Sections 2(a) or 2(b) hereof or in defense of any claim, issue or
matter therein, he shall be indemnified against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by him in connection therewith.
(d) Determination of Right of Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court)
shall be made by the Company only as authorized in the specific case
upon a determination in accordance with Section 4 hereof or any
applicable provision of the Certificate, Bylaws, other agreement,
resolution or otherwise. Such determination shall be made (i) by the
Board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding or (ii) if such a quorum
of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided below in
this subsection (d)) in a written opinion or (iii) by the stockholders
of the Company (the "Stockholders"). Independent legal counsel shall be
designated by vote of a majority of the disinterested directors;
provided, however, that if the Board is
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<PAGE> 23
unable or fails to so designate, such designation shall be made by the
Indemnitee subject to the approval of the Company (which approval shall
not be unreasonably withheld). Independent legal counsel shall not be
any person or firm who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in
representing either the Company or the Indemnitee in an action to
determine the Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of such independent legal
counsel and to indemnify fully such counsel against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his
capacity as a director or officer of the Company in defending a civil or
criminal action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding in
the manner prescribed by Section 4(b) hereof.
3. ADDITIONAL INDEMNIFICATION.
(a) Right to Additional Indemnification. Pursuant to Section
145(f) of the General Corporation Law of the State of Delaware (the
"GCL"), without limiting any right which the Indemnitee may have
pursuant to Section 2 hereof, the Certificate, the Bylaws, the GCL, any
policy of insurance or otherwise, but subject to the limitations on the
maximum permissible indemnity which may exist under applicable law at
the time of any request for indemnity hereunder determined as
contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated
to pay relating to or arising out of any claim made against him because
of any act, failure to act or neglect or breach of duty, including any
actual or alleged error, misstatement or misleading statement, which he
commits, suffers, permits or acquiesces in while acting in his capacity
as a director, an officer, an employee or agent of the Company, or, at
the request of the Company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, whether prior to or after the date of this Agreement and
whether or not the basis of the claim is alleged action or inaction in
an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent
of the Company. The payments which the Company is obligated to make
pursuant to this Section 3 shall include without limitation (i) damages,
judgments, settlements (in accordance with Section 6(d) of this
Agreement), fines and similar penalties, and excise taxes and penalties
assessed on a person with respect to an employee benefit plan, (ii)
charges, costs, expenses (including attorneys' and others' fees and
related disbursements), expenses of investigation, expenses of defense
of legal actions, suits, proceedings or claims and appeals therefrom,
expenses relating to serving as a witness and expenses of appeal,
attachment or similar bonds, and (iii) any interest, assessments, or
other charges imposed thereon and any federal, state, local or foreign
taxes imposed as a result of the actual or deemed receipt of such
-5-
<PAGE> 24
payments under this Agreement. Notwithstanding the foregoing, the
Company shall not be obligated under this Section 3(a) to make any
payment in connection with any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental
imposition which the Company is prohibited by applicable law from
paying which results in a final, nonappealable order; or
(ii) to the extent based upon or attributable to the
Indemnitee gaining in fact a personal profit to which he was not
legally entitled, including without limitation profits made from
the purchase and sale by the Indemnitee of equity securities of
the Company which are recoverable by the Company pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended,
and profits arising from transactions in publicly traded
securities of the Company which were effected by the Indemnitee
in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule l0b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this Section 3(a) shall be made in accordance with Section 4(d) hereof.
(b) Advancement of Expenses Relating to Additional
Indemnification. Expenses (including without limitation attorneys' and
others' fees and expenses) incurred by Indemnitee in defending any
actual or threatened civil or criminal action, suit, proceeding or claim
shall be paid by the Company in advance of the final disposition thereof
as authorized in accordance with Section 4(b) hereof.
4. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under
Sections 2(a), 2(b) or 3(a) hereof, as the case may be, the Indemnitee
may, but shall not be required to, (i) submit to the Board a sworn
statement of request for indemnification substantially in the form of
Exhibit 1 attached hereto and made a part hereof (the "Indemnification
Statement") averring that he is entitled to indemnification hereunder;
and (ii) present to the Company reasonable evidence of all expenses for
which payment is requested. Submission of an Indemnification Statement
to the Board shall create a presumption that the Indemnitee is entitled
to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case
may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless within 30 calendar
days after submission of the Indemnification Statement the Board shall
determine by vote of a majority of the directors at a meeting at which a
quorum is present, based upon clear and convincing evidence (sufficient
to rebut the foregoing presumption), and the Indemnitee shall have
received notice within such period in writing of such determination that
the Indemnitee
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<PAGE> 25
is not so entitled to indemnification, which notice shall disclose with
particularity the evidence in support of the Board's determination. The
foregoing notice shall be sworn to by all persons who participated in
the determination and voted to deny indemnification. The provisions of
this Section 4(a) are intended to be procedural only and shall not
affect the right of the Indemnitee to indemnification under this
Agreement and any determination by the Board that the Indemnitee is not
entitled to indemnification and any failure to make the payments
requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement
of expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit
to the Board a sworn statement of request for advancement of expenses
substantially in the form of Exhibit 2 attached hereto and made a part
hereof (the "Undertaking"), averring that (i) he has reasonably incurred
or will reasonably incur actual expenses in defending an actual civil or
criminal action, suit, proceeding or claim and (ii) he undertakes to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Company under this Agreement or
otherwise. For purposes of requesting advancement of expenses pursuant
to Section 3 (b) hereof, the Indemnitee (i) may, but shall not be
required to, submit an Undertaking or (ii) shall submit such other form
of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be,
the Board shall within 20 calendar days authorize immediate payment of
the expenses stated in the Undertaking or Expense Request, whereupon
such payments shall immediately be made by the Company. No security
shall be required in connection with any Undertaking or Expense Request
and any Undertaking or Expense Request shall be accepted without
reference to the Indemnitee's ability to make repayment.
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of
Control and if requested by the Indemnitee at the time of making a claim
for indemnification, (i) any determination under Section 2(a) or 2(b)
(unless ordered by a court) shall be made by Independent Counsel (as
defined below), and (ii) after the submission of an Indemnification
Statement, the determination pursuant to Section 4(a) whether an
Indemnitee shall be entitled to indemnification under Sections 2(a),
2(b) or 3(a) hereof, as the case may be, shall be made by Independent
Counsel (as defined below) instead of by the Board. For purposes of this
Section 4(c) "Independent Counsel" shall be an attorney selected by
Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for
the Company or the Indemnitee (other than in connection with
indemnification matters) within the three years prior to the selection
of the Independent Counsel, and (ii) who shall not, under the applicable
standards of professional conduct then prevailing, have a conflict of
interest in representing either the Company or Indemnitee in an action
to determine Indemnitee's rights under this Agreement. Any determination
by Independent Counsel as to whether and to what extent the Indemnitee
should be
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<PAGE> 26
permitted to be indemnified under applicable law shall be rendered by
its written opinion to the Company and Indemnitee. The Company agrees to
pay the reasonable fees of the Independent Counsel and to indemnify
fully such counsel against any and all expenses (including attorneys'
and others' fees and expenses), claims, liabilities, loss, and damages
arising out of or relating to this Agreement, the engagement of
Independent Counsel pursuant hereto or the opinion of such counsel
pursuant hereto.
5. INDEMNIFICATION PROCESS AND APPEAL.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the
Company within 30 calendar days after a written claim has been received
by the Company, the Indemnitee may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim in any
court having subject matter jurisdiction thereof. The Company hereby
consents to service of process and to appear in any such proceeding. The
remedy provided for in this Section 5 shall be in addition to any other
remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense
to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof
(other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where
the Undertaking, if any is required, has been tendered to the Company)
that the Indemnitee has not met the standards of conduct which make it
permissible under the GCL for the Company to indemnify the Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement that it is not
permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. Neither the failure of the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel to
have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in
applicable law, nor an actual determination by the Company (including
its Board, independent legal counsel or its stockholders) or Independent
Counsel that Indemnitee had not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that Indemnitee
has not met the applicable standard of conduct.
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to
incur the expenses associated with the enforcement of his rights under
this Agreement by litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended
to be extended to the Indemnitee hereunder. Accordingly, if it should
appear to the Indemnitee that the Company has failed to comply with any
of its
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<PAGE> 27
obligations under the Agreement or in the event that the Company or any
other person takes any action to declare the Agreement void or
unenforceable, or institutes any action, suit or proceeding designed (or
having the effect of being designed) to deny, or to recover from, the
Indemnitee the benefits intended to be provided to the Indemnitee
hereunder, the Company irrevocably authorizes the Indemnitee from time
to time to retain counsel of his choice, at the expense of the Company
as hereafter provided, to represent the Indemnitee in connection with
the initiation or defense of any litigation or other legal action,
whether by or against the Company or any director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Regardless of the outcome thereof, the Company shall pay and be solely
responsible for any and all costs, charges and expenses (including
without limitation attorneys' and others' fees and expenses) reasonably
incurred by the Indemnitee (i) as a result of the Company's failure to
perform this Agreement or any provision thereof or (ii) as a result of
the Company or any person contesting the validity or enforceability of
this Agreement or any provision thereof as aforesaid; provided that, if
and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal
therefrom have been exhausted or waived or have lapsed) that each of the
material assertions made by Indemnitee in such litigation or other legal
action was not made in good faith or was frivolous, the Company shall
not be obligated to pay any such costs, charges and expenses incurred by
Indemnitee in connection with such suit and shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company)
for all such amounts theretofore paid under this Section 5(c).
Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section
5(c), Indemnitee from time to time may retain counsel of his choice to
represent him.
6. NOTIFICATION AND DEFENSE OF PROCEEDING.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought
under this Agreement (for purposes of this Section 6, a "Claim").
Indemnitee shall also provide the Company such information and
cooperation as the Company from time to time may reasonably request and
as shall reasonably be within Indemnitee's power to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors'
and officers' liability insurance (or a similar policy covering key
employees, if applicable) in effect, the Company shall give prompt
notice of such Claim to the insurers in accordance with the procedures
set forth in the respective policies. The Company thereafter shall take
all necessary or desirable action to cause such insurers to pay, on
behalf of Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
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<PAGE> 28
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the
Company (for purposes of this Section 6, a "Proceeding"), the Company
will be entitled to participate in the Proceeding at its own expense and
except as otherwise provided below, to the extent the Company so wishes,
it may assume the defense thereof with counsel selected by the Company
and approved by Indemnitee, which approval shall not be unreasonably
withheld. After notice from the Company to Indemnitee of its election to
assume the defense of any Proceeding, the Company will not be liable to
Indemnitee under this Agreement or otherwise for any expenses
subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ his
own counsel in such Proceeding, but all expenses related thereto
incurred after notice from the Company of its assumption of the defense
shall be at Indemnitee's expense unless: (i) the employment of counsel
by Indemnitee has been authorized by the Company; (ii) Indemnitee has
reasonably determined and either the Company shall have agreed, or
disinterested counsel (as defined in this Section 6(c) shall have
determined, that there may be a conflict of interest between Indemnitee
and the Company in the defense of the Proceeding; (iii) after a Change
in Control, the employment of counsel by Indemnitee has been approved by
the Independent Counsel; or (iv) the Company shall not in fact have
employed counsel to assume the defense of such Proceeding, in each of
which case all expenses of the Proceeding shall be borne by the Company,
and Indemnitee's counsel shall have been approved by the Company (which
approval may not be unreasonably withheld) and any carrier of an
applicable insurance policy if required under the terms of that policy
or under applicable law. As used in this Section 6(c), "disinterested
counsel" shall mean counsel selected and compensated by the Company, and
approved by Indemnitee (which approval may not be unreasonably
withheld), to determine whether a conflict of interest may exist, which
counsel shall not represent the Company, Indemnitee or any other party
to the Proceeding for which indemnification is sought. Disinterested
counsel shall be selected promptly following the notice from Indemnitee
to the Company of Indemnitee's belief that a conflict of interest may
exist. The Company shall not be entitled to assume the defense of any
Proceeding as to which the determination provided for in (ii) above
shall have been made. Nothing herein shall limit the right of Indemnitee
to employ counsel at Indemnitee's sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to
indemnify Indemnitee under this Agreement or otherwise for any amounts
paid in settlement of any Proceeding effected without the Company's
written consent; provided, however, that if a Change in Control has
occurred, the Company shall be liable for indemnification of Indemnitee
for amounts paid in settlement if the Independent Counsel has approved
the settlement. The Company shall not settle any Proceeding in any
manner that would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Company nor Indemnitee will
unreasonably withhold its consent to any proposed settlement. The
Company shall not be liable to indemnify Indemnitee under this
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<PAGE> 29
Agreement with regard to any judicial award if the Company was not given
a reasonable and timely opportunity, at its expense, to participate in
the defense of such action; the Company's liability hereunder shall not
be excused if participation in the Proceeding by the Company was barred
by this Agreement.
7. ESTABLISHMENT OF A TRUST. Immediately upon the occurrence of a Change
in Control or a Potential Change in Control, the Company shall, upon written
request by Indemnitee, create a trust (a "Trust") for the benefit of Indemnitee
and from time to time upon written request of Indemnitee shall fund the Trust in
an amount sufficient to satisfy any and all amounts reasonably anticipated at
the time of each such request to be incurred in connection with any claim made
by Indemnitee. The amount or amounts to be deposited in the Trust pursuant to
the foregoing funding obligation shall be determined (i) prior to the occurrence
of a Change in Control or a Potential Change in Control, (a) by the Board by a
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding serving as the basis of a claim by Indemnitee, or (b)
if such a quorum of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided in Section 2(d)) in
a written opinion or (c) by the Stockholders, or (ii) after the occurrence of a
Change in Control or a Potential Change in Control, by Independent Counsel as
defined in Section 4(c) (for purposes of this Section 7, the "Reviewing
Party").The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded without the
written consent of Indemnitee, (ii) the trustee of the Trust (the "Trustee")
shall advance, within 20 business days of the request by Indemnitee, any and all
expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust
under the same circumstances for which Indemnitee would be required to reimburse
the Company under Section 4(b) of this Agreement), (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the Trustee shall promptly pay to Indemnitee all amounts
for which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any
litigation or other legal action initiated or brought voluntarily (and
not by way defense or counterclaim) by Indemnitee against the Company or
any agent of the Company unless (i) the
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<PAGE> 30
Company has joined in or the Board has consented to the initiation of
such litigation or other legal action, (ii) the litigation or other
legal action is brought to establish or enforce a right to
indemnification under Section 5 of this Agreement, or (iii) the
litigation or other legal action is instituted after a Change in Control
and Independent Counsel has approved its initiation; or
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has
otherwise actually received payment (under any insurance policy, bylaw
or otherwise) of the amounts otherwise indemnifiable hereunder.
9. SCOPE; NONEXCLUSIVITY.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the
Certificate, Bylaws, vote of its stockholders or disinterested directors
or applicable law. To the extent that a change in applicable law
(whether by statute, rule or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Certificate, Bylaws, applicable law or this Agreement, it is the intent
of the parties that Indemnitee enjoy by this Agreement the greater
benefits so afforded by such change.
(b) Non exclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the
Certificate, Bylaws, any agreement, any vote of stockholders or
disinterested directors, or otherwise, both as to actions in
Indemnitee's official capacity and as to actions in another capacity
while holding such office, and shall continue after Indemnitee has
ceased to be a director, officer, employee or agent.
10. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, federal or state law or applicable public policy may
prohibit the Company from indemnifying its directors, officers, employees or
other agents under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the U.S. Securities and Exchange Commission or applicable state
securities agencies to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
11. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
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<PAGE> 31
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
12. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as of
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was a director,
officer, employee or agent of the Company, or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
13. PERIOD OF LIMITATION. No legal action shall be brought and no cause
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors, or
personal or legal representatives after the expiration of two years from the
date of accrual of such causes of action, or such longer period as may be
required by state law under the circumstances (i.e., a minimum limitation period
that expressly may not be altered by agreement among the parties). Any claim or
cause of action of the Company or any of its affiliates shall be extinguished
and deemed released unless asserted by the timely filing of a legal action
within such period; provided, however, if any shorter period of limitation is
otherwise applicable to any such cause of action, the shorter period shall
govern.
14. RATIFICATION OF ACTS. None of the provisions contained in this
Agreement is intended to constitute, or shall be construed in any manner as
constituting, a ratification by the Company (or by any of its directors,
officers or other agents) of any action or inaction on the part of Indemnitee.
15. CONTINUED EMPLOYMENT. No provision contained herein shall be
construed as conferring upon Indemnitee any right with respect to continuance of
performance of services for the Company or a subsidiary of the Company, nor
shall any such provisions interfere in any way with the right of the Company to
terminate Indemnitee's services as an officer, employee or other agent at any
time with or without cause.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or
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<PAGE> 32
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and legal representatives. The Company shall require
and cause any successor (whether direct or indirect by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business and!or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. Nothing in this
Section 16 shall be construed to limit the protections afforded Indemnitee under
this Agreement which would occur upon a Change in Control or a Potential Change
in Control. The indemnification provided under this Agreement shall continue as
to Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any litigation or other legal action relating to events for which a
claim for indemnification is made by Indemnitee hereunder.
17. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
18. CHOICE OF LAW. This Agreement shall be governed by, and its
provisions construed in accordance with, the laws of the State of Delaware,
including without limitation, all matters of formation, construction, validity,
performance and enforcement and without giving effect to the principles of
conflicts of laws.
19. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 19. If this Agreement or any portion hereof shall be invalidated
or held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. AMENDMENT AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No
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<PAGE> 33
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver. Except as specifically
provided herein, no failure to exercise or any delay in exercising any right or
remedy hereunder shall constitute a waiver thereof.
21. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
22. FUTURE AGREEMENTS. The Company shall not adopt any amendment to its
Certificate or Bylaws the effect of which would be to deny, diminish or encumber
Indemnitee's rights to indemnity pursuant to the Certificate, the Bylaws, the
GCL or any other applicable law as applied to any act or failure to act
occurring in whole or in part prior to the date (the "Effective Date") upon
which the amendment was approved by the Board or the stockholders, as the case
may be. In the event that the Company shall adopt any amendment to its
Certificate or Bylaws the effect of which is to so deny, diminish or encumber
Indemnitee's rights to indemnity, such amendment shall apply only to acts or
failures to act occurring entirely after the Effective Date thereof unless the
Indemnitee shall have voted in favor of such adoption as a director or holder of
record of the Company's Voting Securities, as the case may be.
23. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which counterparts taken
together shall constitute one and the same document.
24. HEADINGS. Section headings herein are for reference purposes only
and shall not affect the meaning or interpretation of any provision of this
Agreement.
[Signature Page Follows]
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SRS LABS, INC.,
a Delaware corporation
By:
----------------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief Executive
Officer
Address: 2909 Daimler Street
Santa Ana, California 92705
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -------------------------------
Thomas Wah Tong Wan
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
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<PAGE> 35
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF_______________)
) ss
COUNTY OF______________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement, dated as of March 2, 1998, between SRS Labs, Inc.
(the "Company"), a Delaware corporation, and the undersigned.
2. I am requesting indemnification against charges, costs,
expenses (including attorneys' and others' fees and expenses), judgments, fines
and amounts paid in settlement, all of which have been or will be incurred by me
in connection with an actual or threatened action, suit, proceeding or claim to
which I am a party or am threatened to be made a party.
3. With respect to all matters related to any such action, suit,
proceeding or claim, I am entitled to be indemnified as herein contemplated
pursuant to the aforesaid Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I
am requesting indemnification against liabilities which have or may arise out of
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
__________________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
__________________________
[Seal]
My commission expires the ___ day of _______________, _____.
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<PAGE> 36
EXHIBIT 2
UNDERTAKING
STATE OF_______________)
) ss
COUNTY OF______________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of March 2, 1998, between SRS Labs, Inc. (the "Company"), a
Delaware corporation, and the undersigned.
2. I am requesting advancement of certain costs, charges and
expenses which I have incurred or will incur in defending an actual or pending
civil or criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it
shall ultimately be determined that I am not entitled to be indemnified by the
Company under the aforesaid Agreement or otherwise.
4. The costs, charges and expenses for which advancement is
requested are, in general, all expenses related to _________________________
____________________________________________________________________________
____________________________________________________________________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
____________________________
[Seal]
My commission expires the ___ day of _______________, _____.
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<PAGE> 37
EXHIBIT B
CONFIDENTIALITY AGREEMENT
<PAGE> 38
EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY
In return for new or continued employment by SRS LABS, INC.(the
"Company"), I acknowledge and agree that:
1. DEFINITION. For purposes of this Agreement, unless otherwise
noted, all references to the "Company" shall include the Company and/or all of
its direct and indirect subsidiaries.
2. OBLIGATIONS OF CONFIDENTIALITY. I will maintain in confidence and
will not, either during or at any time after the term of my employment without
the prior express written consent of the Company, communicate or disclose to, or
use for the benefit of myself or any other person, firm, association or
corporation (including, without limitation, any subsequent employer) any
proprietary or confidential information, trade secret or know-how belonging to
the Company ("Proprietary Information"), whether or not it is in written or
permanent form, except to the extent required to perform duties on behalf of the
Company in my capacity as an employee. Such Proprietary Information includes,
but is not limited to, techniques, processes, plans or methods of the Company in
developing, marketing and licensing products and services, and technical and
business information relating to the Company's inventions or products, research
and development, production processes, manufacturing and engineering processes,
machines and equipment, finances, existing and potential customers and
suppliers, marketing and future business plans. However, such Proprietary
Information shall not include any materials, techniques, or information of the
type specified to the extent that such materials, techniques or information are
publicly known or generally utilized by others engaged in the same business or
activities as that in the course of which the Company utilized, developed or
otherwise acquired such materials, techniques, or information. Upon termination
of my employment or at the request of my supervisor before termination, I will
deliver to the Company all written and tangible material in my possession
belonging to the Company incorporating the Proprietary Information or otherwise
relating to the Company's Business. These obligations with respect to
Proprietary Information extend to information belonging to customers and
suppliers of the Company who may have disclosed such information to me as the
result of my status as an employee of the Company. The covenants made in this
Section 2 shall commence on the date hereof and shall be perpetual with respect
to any Proprietary Information.
3. POSSESSION OF INFORMATION IN TANGIBLE FORM. All Proprietary
Information consisting of records, reports, notes, compilations, computer
software programs or disks or other recorded matter, and copies or reproductions
thereof, relating to the Company's operations, activities or business, made or
received by me during any period of employment with the Company are and shall be
the Company's exclusive property, and I will keep the same at all times in the
Company's custody and subject to its control, and will surrender the same at the
termination of my employment if not before.
4. COMPANY'S REMEDIES FOR BREACH. I acknowledge that a breach by me
of this Agreement cannot reasonably or adequately be compensated in damages in
an action at law, and that
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a breach of any of the provisions contained in this Agreement will cause the
Company irreparable injury and damage. By reason thereof, I agree that the
Company shall be entitled, in addition to any other remedies it may have under
this Agreement or otherwise, to preliminary and permanent injunctive and other
equitable relief to prevent or curtail any breach of this Agreement; provided,
however, that no specification in this Agreement of a specific legal or
equitable remedy shall be construed as a waiver or prohibition against the
pursuing of other legal or equitable remedies in the event of such a breach.
5. SEVERABILITY. In the event that any provision of this Agreement or
any word, phrase, clause, sentence or other portion thereof should be held to be
unenforceable or invalid for any reason, such provision or portion thereof shall
be modified or deleted in such a manner so as to make this Agreement as modified
legal and enforceable to the fullest extent permitted under applicable laws.
6. BINDING EFFECT. This Agreement shall be binding upon my heirs,
executors, administrators or other legal representatives or assigns and shall
inure to the benefit of and be enforceable by the Company and its successors and
assigns.
7. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
9. VENUE. The parties hereby irrevocably and unconditionally consent
to submit to the exclusive jurisdiction of the courts of the State of
California, County of Orange, and/or the United States District Court for the
Central District of California (Southern Division) for any actions, suits,
controversies or proceedings arising out of or relating to this Agreement and
the transactions contemplated hereby (and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts), and further
agree that service of any process, summons, notice or document by U.S.
registered mail to the respective addresses set forth above shall be effective
service of process for any action, suit or proceeding brought against the
parties in any such court. The parties hereby irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit, controversies or
proceeding arising out of this Agreement or the transactions contemplated
hereby, in the courts of the State of California, County of Orange and/or the
United States District Court for the Central District of California (Southern
Division), and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient or improper forum.
(signature page follows)
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IN WITNESS WHEREOF, I have hereunto set my hand as of this 2nd day of
March, 1998.
------------------------------------------
Thomas Wah Tong Wan
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology
Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
Accepted and agreed:
SRS LABS, INC.,
a Delaware corporation
- --------------------------------------------
Thomas C.K. Yuen
Chairman of the Board and
Chief Executive Officer
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<PAGE> 41
EXHIBIT C
SECTION 2870 OF THE CALIFORNIA LABOR CODE
<PAGE> 42
SECTION 2870 OF THE CALIFORNIA LABOR CODE
SECTION 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
EX-10.17
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of March 2, 1998, by and
between SRS Labs, Inc., a Delaware corporation (the "Company"), Valence
Semiconductor Design Limited, a Hong Kong company ("VSD") and Choi Yat Ming, an
individual (the "Employee").
RECITALS
A. The Company develops, markets and licenses unique, leading-edge,
proprietary audio technologies and has need for management personnel.
B. The Employee, prior to the date hereof, has been an executive
officer and director of VSD.
C. Pursuant to two separate stock purchase agreements, the Company
has acquired 100% of the issued and outstanding share capital of Valence
Technology Inc., a British Virgin Islands company.
D. The Company desires to employ the Employee in the same or similar
capacity as that previously existing between the Employee and VSD upon the terms
and conditions set forth in this Agreement.
E. The Employee is willing to enter into this Agreement with respect
to the Employee's employment and services upon the terms and conditions set
forth in this Agreement.
AGREEMENT
In consideration of the provisions set forth in this Agreement, the
parties agree as follows:
1. Employment; Duties and Obligations
1.1 Employment. The Company and VSD hereby employ the Employee as
President of VSD for the term of this Agreement, and the Employee hereby accepts
such employment upon the terms and conditions hereinafter set forth.
Notwithstanding anything to the contrary herein, except with the consent of the
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<PAGE> 2
Employee, the Employee's principal place of employment during the term of this
Agreement or any renewal thereof shall be located in Hong Kong.
1.2 Service to the Company and VSD. The Employee shall have
primary responsibility for, among other things, managing and directing the
day-to-day business of VSD, subject to applicable law and the policies of the
Company's Board of Directors and the Executive Committee of the Company's Board
of Directors and the Board of Directors of VSD.
1.3 Devotion of Time to the Business. The Employee shall devote
his entire professional time and best efforts to the business of the Company and
its subsidiaries, and shall not during the term of this Agreement engage in any
other business activities. This Agreement shall not be construed as preventing
the Employee from investing his assets in such form or manner as will not
require any services on the part of the Employee for or with respect to any of
the entities in which such investments are made, except as otherwise restricted
pursuant to Section 7 herein. This Agreement shall not be interpreted to
prohibit the Employee from making passive personal investments or conducting
private business affairs if those activities do not materially interfere with
the services required under this Agreement. The Employee shall not, directly or
indirectly, acquire, hold, or retain any interest in any business directly
competing with or similar in nature to the business of the Company or any of its
subsidiaries; provided however, that the Employee's beneficial ownership of debt
securities in an amount not exceeding U.S. $500,000 and/or publicly-traded
equity securities in an amount not exceeding 5% of the total outstanding number
of shares of the particular class of such equity securities, which are issued by
any entity engaged in activities which are competitive with the business of the
Company or any of its subsidiaries shall not be deemed to be a breach of any
duty or obligation owed by the Employee to the Company or any of its
subsidiaries hereunder.
2. Term. The initial term of this Agreement shall commence as of
March 3, 1998 (Hong Kong Time), and shall continue in effect until December 31,
2000 (Hong Kong Time). On December 31, 2000 (Hong Kong Time), and on the 31st
day of December (Hong Kong Time) of each year thereafter (unless this Agreement
shall have been previously terminated), the term of this Agreement shall be
automatically extended for an additional term of one year unless either party
shall provide the other with at least 30-days written notice prior to such
December 31st of the party's intent to terminate this Agreement. In the event
that the Company shall provide written notice of termination to the Employee,
the Employee will be entitled to the severance benefits set forth in Section 4.3
herein. Upon the payment of such severance benefits, the Company and VSD shall
be relieved from any liability for the expired term of this Agreement.
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<PAGE> 3
3. Compensation
3.1 Base Salary. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with the regular payroll practices of the Company (but at
least once a month), at a rate determined in accordance with this Agreement.
3.1.1 Initial Base Salary. The initial Base Salary
to be paid hereunder is H.K. $1,430,000 per year.
3.1.2 Adjustments to Base Salary. The Compensation
Committee of the Board (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall review the Base Salary of the Employee and determine whether
to adjust it; provided however that the Base Salary for any fiscal year shall
not be less than the initial Base Salary to be paid to the Employee hereunder.
The first such review shall occur prior to July 1, 1998 (California Time);
thereafter, such reviews shall occur within three months of the end of each of
the Company's fiscal years, commencing with the Company's fiscal year ending
December 31, 1998.
3.2 Salary Deferral Plan. The Employee shall be eligible to
participate in the Company's voluntary salary deferral plan and such other
similar plans as the Company may adopt from time to time.
3.3 Performance Bonus.
3.3.1 Initial Bonus. Notwithstanding anything to the
contrary, Employee shall be eligible to receive a bonus relating to the fiscal
year of Valence Technology Inc., a British Virgin Islands company, ending March
31, 1998 based upon the performance formula submitted to and accepted by the
Compensation Committee.
3.3.2 Subsequent Bonuses. Irrespective of any other
bonus payment payable to the Employee pursuant to this Agreement, the
Compensation Committee (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall evaluate the Employee's performance at the end of each fiscal
year commencing with the Company's fiscal year ending December 31, 1998 and
determine whether the Employee's performance merits payment of a performance
bonus to the Employee. The performance bonus is wholly discretionary.
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<PAGE> 4
3.4 Long-Term Incentive Compensation. The Employee shall be
eligible to participate in all of the Company's long-term incentive compensation
plans, including, but not limited to, any Company stock option, restricted stock
or SAR plan (with the exception of those plans only applicable to non-employee
directors).
3.5 Other Benefits. The Employee shall be eligible to participate
in, and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance (including tax gross up amounts), vacation and sick
leave.
3.6 No Prohibition as to Other Compensation. Nothing herein shall
be deemed to preclude the Company, or any of the Company's subsidiaries, if any,
from awarding additional compensation or benefits to the Employee during the
term of this Agreement, upon approval of the Compensation Committee (or in the
absence of a compensation committee, the Board committee performing equivalent
functions or the entire Board of Directors of the Company), whether in the form
of raises, bonuses, additional fringe benefits or otherwise.
3.7 Expenses. The Company, in accordance with its policy (which
may be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business of the Company,
including, without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.
3.8 Tax Withholding. The Company and, to the extent applicable,
any other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.
4. Termination
4.1 Termination for Cause. The Company or VSD may terminate this
Agreement and discharge the Employee for cause at any time upon written notice
specifying the reasons for such termination. For purposes of this Agreement,
"cause" shall mean (a) the failure to follow the reasonable instructions of the
Board of Directors of the Company or VSD, (b) the material breach of any term of
this Agreement and failure to cure such breach within ten (10) days after
written notice thereof from the Company or VSD, as the case may be, or (c) the
misappropriation of assets of the
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<PAGE> 5
Company or any subsidiary of the Company by the Employee resulting in a material
loss to such entity. The Employee shall not be entitled to receive any further
payments or other benefits under this Agreement after the expiration of 30 days
from the date of such notice, other than benefits which have previously vested
in the Employee.
4.2 Termination Upon Death. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company and/or its subsidiaries, if any, as the case may be, shall pay to
the Employee's legal representative the full salary for the month in which he
dies and such legal representative shall be entitled to receive those benefits
which have previously vested in the Employee.
4.3 Termination by the Company or VSD Without Cause/Severance. In
the event the Company or VSD shall give written notice of its intent not to
extend the term of this Agreement for an additional term of one year, as
provided in Section 2 herein, or the Company or VSD otherwise gives written
notice of termination without cause during the then current term of this
Agreement, the Employee's term of employment shall terminate effective on the
last day of the month such notice is deemed effective. Thereafter, the Employee
shall be entitled to receive for the remainder of the then current term of this
Agreement, and for a period of twelve months following the end of such term, the
Base Salary then in effect, less the long-term service payment, if any,
referenced in the Employment Ordinance, Cap. 57, Laws of Hong Kong, and the
health, life, disability insurance benefits and the other employee benefits
which the Employee had prior to such termination including, but not limited to
those set forth in Sections 3.3 through 3.7 herein (collectively referred to
herein as the "Termination Benefits"). During the continuation period, the
Employee will provide advisory services from time to time to the Chairman of the
Board of the Company and the Chief Executive Officer of the Company, as
reasonably requested by such individuals and acceptable in timing and scope to
the Employee. The Company anticipates that such advisory services will he
limited to transitional or management continuity matters and market trends in
the Company's primary market segments. During the continuation period (a)
outstanding options shall continue to vest and vesting or performance
restrictions on any stock awards shall continue to lapse according to the
schedules set forth in the respective stock option or stock award agreements and
(b) any bonus amount earned pursuant to the annual incentive bonus plan or such
similar plan and payable during such continuation period shall be paid to the
Employee. If the Employee accepts employment from any other party during the
continuation period, the continuation period cash salary and Termination
Benefits will immediately terminate on the date on which such new employment
commences and the Employee will receive a lump sum severance payment equal to
80% of the balance of the continued salary payable under this Section 4.3. Any
cash bonus amount which would otherwise be payable within the twelve month
period, if not paid on
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<PAGE> 6
or prior to such acceptance date shall not be paid. In addition, for purposes of
options or other awards pursuant to the Company's employee benefit plans, such
acceptance date shall be deemed the termination date under such plans. For
purpose of this Section 4.3 and subject to Section 5 herein, "employment" shall
exclude (a) service as an officer or director of the Employee's personal
investment holding company, (b) service as a director on the board of a
corporation, (c) engagement as a bona fide part-time consultant, or (d)
self-employment or engagement as an officer or director of an operating
corporation or enterprise (as opposed to a personal investment holding company)
founded or controlled by the Employee and which has revenues of less than
$5,000,000 per year.
4.4 Termination By the Employee. Notwithstanding anything to the
contrary herein, this Agreement may be terminated by the Employee upon 60 days
prior written notice.
5. Termination Following Change in Control.
5.1 Election. If either (a) the Company or VSD elects to
terminate the Employee without cause pursuant to Section 4.3 within 90 days
before or one year after a Change in Control (as hereinafter defined) or (b) the
Employee elects to resign with Good Reason (as hereinafter defined) within one
year after a Change in Control, then as a severance benefit and in lieu of all
compensation or damages, the Company or VSD shall (a) pay the Employee in one
lump sum or in equal monthly installments, at the sole election of the Employee,
an aggregate amount equal to the Base Salary in effect at the time of such
termination or resignation for the remainder of the then current term of the
Agreement plus an additional period of twelve months; (b) pay the Employee any
bonus amount earned pursuant to the Company's annual incentive bonus plan or
such similar plan and which would otherwise be paid if the Employee were
employed by the Company, one of its subsidiaries, if any, or successors thereto
during the twelve month period commencing on the day of such termination or
resignation under this Section 5 (the "Termination Period"); and (c) provide to
the Employee all Termination Benefits (as such term is defined in Section 4.3
herein).
5.2 Terms of Stock Options or Other Stock-Based Awards. Any stock
option agreement or other stock award agreement heretofore or hereafter granted
under the Company's stock based compensation plans shall have as a term and
condition of such grant or award (in addition to such other provisions and
whether inserted into the applicable agreement or not) the following provision:
"Notwithstanding anything to the contrary, if in connection
with or as a result of a Change in Control (as defined in the
Employment Agreement, hereinafter defined) the Company or VSD
elects to
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<PAGE> 7
terminate the Employee or the Employee elects to resign under
Section 5 of the Employment Agreement by and between the
Company or VSD and the Employee dated as of March 2, 1998
(the "Employment Agreement"), then the date of exercisability
of each outstanding option, and the date on which all vesting
or performance restrictions lapse on any award pursuant to
the Company's employee benefit plans, shall be immediately
accelerated, allowing the Employee to immediately acquire all
of the outstanding unvested options or to immediately hold
such stock free and clear of any vesting or performance
restrictions, as the case may be."
5.3 Definitions
5.3.1 For purposes of this Section 5 "Change in
Control" shall mean:
(a) The Company is merged, consolidated or
reorganized into or with another corporation or other legal
person and as a result of such merger, consolidation or
reorganization less than a majority of the combined voting
power of the then-outstanding securities of such corporation
or person immediately after such transaction are held in the
aggregate by the holders of Voting Stock (as that term is
defined in subsection (c) hereof) of the Company immediately
prior to such transaction;
(b) The Company sells all or substantially all
of its assets to any other corporation or other legal person,
less than a majority of the combined voting power of the
then-outstanding voting securities of which are held directly
or indirectly in the aggregate by the holders of Voting Stock
of the Company immediately prior to such sale;
(c) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report),
each as promulgated pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act"), disclosing that any person (as
the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial owner
(as the term "beneficial
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<PAGE> 8
owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities
representing 30% or more of the combined voting power of the
then-outstanding securities of the Company entitled to vote
generally in the election of directors of the Company
("Voting Stock");
(d) The Company files a report or proxy
statement with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in, or in response
to, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) that a Change in Control of the
Company has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or transaction;
(e) If during any period of two consecutive
years, the individuals who constituted the Board at the
beginning of any such period cease for any reason to
constitute at least a majority thereof unless the election
(including, but not limited to, filling of a vacancy by the
remaining Board members), or the nomination for election by
the Company's stockholders, of new members of the Board was
approved by a vote of at least two-thirds of the members of
the Board still in office who were members of the Board at
the beginning of any such period; or
(f) Notwithstanding the foregoing provisions of
(i) subsections (c) or (d) hereof, a "Change in Control"
shall not be deemed to have occurred for purposes of this
Agreement solely because the Company, an entity in which the
Company directly or indirectly beneficially owns 50% or more
of the voting securities of such entity (an "Affiliate"), any
Company-sponsored employee stock ownership plan or any other
employee benefit plan of the Company either files or becomes
obligated to file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or
item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting securities of the
Company, whether in excess of 30% or otherwise, or because
the Company reports that a Change in Control of the Company
has or may have occurred or will or may occur in the future
by reason of such beneficial ownership or (ii) subsection (c)
hereof, a "Change in Control" shall not be deemed to have
occurred for purposes of
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this Agreement solely because a person who is a holder of
five percent (5%) or more of the Voting Stock and who also is
an officer and director of the Company on the date of this
Agreement acquires 30% or more of the Voting Stock.
(g) Notwithstanding the foregoing provisions of
subsections (a) and (b) hereof, a "Change of Control" shall
not be deemed to have occurred for purposes of this Agreement
solely because the Company engages in an internal
reorganization, which may include a transfer of assets to one
or more Affiliates, provided that such transaction has been
approved by at least two-thirds of the Directors of the
Company and as a result of such transaction or transactions,
at least 80% of the combined voting power of the outstanding
securities of the Company or its successor are held in the
aggregate by the holders of Voting Stock immediately prior to
such transactions.
5.3.2 For purposes of this Section 5, the Employee shall
be deemed to have resigned "with Good Reason" if he does so following a Change
in Control as a result of the Company or any or its subsidiaries, if any, having
done any or all of the following without the Employee's express written consent:
(a) assigned the Employee different duties or made changes in his reporting
responsibilities, title, or office that are substantially inconsistent with the
Employee's duties, responsibilities, titles, or offices immediately prior to the
Change in Control; (b) reduced the Employee's Base Salary from that in effect at
the time of the Change in Control; (c) failed to continue any bonus plan in
substantially the same form as it existed prior to the Change in Control; (d)
required the Employee to he based more than 50 miles from his present office
location, except for required travel consistent with the Employee's present
business travel obligations; (e) failed to continue any plan or program for
compensation, employee benefits, stock purchase or ownership, life insurance,
group medical, disability, or vacation in substantially the same form as
immediately prior to the Change in Control, or otherwise made any material
reduction in the Employee's fringe benefits including but not limited to those
described in Section 3 herein; or (f) failed to obtain the assumption of this
Agreement by any successor to the Company.
5.4 Relationship to Other Termination Sections. The Employee
shall not be entitled to the benefits of this Section 5 if this Agreement and
his employment are terminated pursuant to Sections 4.1, 4.2, 4.3 or 4.4.
5.5 Company's Sole Obligations. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to such termination and of the severance benefits
set forth in this
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<PAGE> 10
Section 5 as applicable constitute the sole obligations of the Company and are
in lieu of any damages or other compensation that the Employee may claim in
connection with this Agreement.
6. Resignation as Director and Officer. In the event of any
termination or resignation pursuant to Sections 4.1, 4.3, 4.4 or 5, the Employee
shall be deemed to have resigned voluntarily as an officer and director of the
Company (and of any subsidiaries of the Company) if he was serving in either of
such capacities at the time of termination.
7. Non-Competition. The Employee acknowledges that, in connection
with the acquisition of Valence by the Company and the Company's employment of
the Employee hereunder, the Employee has entered into a Non-Competition
Agreement with the Company bearing even date herewith.
8. Inventions and Improvements.
(a) The Employee hereby assigns to the Company (or, at the
discretion of the Company, any of its subsidiaries that it designates) keep
exclusive right to all inventions, discoveries, ideas and improvements made by
him, whether alone or jointly with others, relevant to the subject matter of his
employment, prior to the date of his employment hereunder.
(b) In carrying out research, developmental and productive
activities for the Company and its subsidiaries, the Employee shall accurately
record the precise nature thereof and the data derived therefrom, and all such
data and records shall be and remain the sole and exclusive property of the
Company and its subsidiaries.
(c) The Employee hereby recognizes as the exclusive property of
the Company and hereby assigns to the Company (and, as appropriate, its
subsidiaries) without further consideration:
(i) all inventions, discoveries, ideas, copyright rights,
mask works, improvements and any other intellectual property made, conceived or
discovered, by the Employee during the term of this Agreement, whether by
himself or jointly with others (whether or not employees of the Company or its
subsidiaries) and whether or not made at the Company's premises or during
working hours, relating or pertaining in any way to the kind of business or any
tests, research or development carried on by the Company, or any subsidiary or
affiliate of the Company; and
(ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company or its subsidiaries), may hereafter
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<PAGE> 11
file with respect to any such invention, discovery, idea or improvement and each
patent that may be issued thereon.
(d) The Employee agrees to execute any assignments to the Company
or its nominee of his rights, title and interest in any such inventions,
discoveries, ideas, copyright rights, mask works improvements and any other
intellectual property, and any other instruments and documents requisite or
desirable in applying for and obtaining patents at the cost of the Company with
respect thereto in the United States and all foreign countries as and when
requested by the Company. The Employee further agrees, whether in the employ of
the Company or its subsidiaries or not, to cooperate to the extent and in the
manner requested by the Company in the prosecution or defense of any patent
claims or any litigation or other proceedings involving any inventions,
discoveries or improvements covered by this Agreement, but all expenses thereof
shall be paid by the Company or one of its subsidiaries. Any invention,
discovery, idea or improvement within the scope of this Section 8 shall be
disclosed promptly in writing to the Board of Directors of the Company.
(e) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea or improvement, whether because of his physical or mental
incapacity or for any other reason whatsoever, the Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by him.
9. No conflict With Other Employment Agreements. The Employee
represents and warrants that there are no other agreements or duties on the
Employee's part now in existence to assign inventions, discoveries, ideas or
improvements to any party other than the Company or its subsidiaries. The
Employee will not disclose to the Company or one of its subsidiaries or induce
the Company or one of its subsidiaries to use any confidential information or
material that he is now or shall become aware of that belongs to a former
employer or any party other than the Company or one of its subsidiaries.
10. Indemnification. The parties hereto covenant and agree to
execute, contemporaneously herewith, an Indemnification Agreement substantially
in the form attached hereto as Exhibit A.
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11. Confidential Information. The parties hereto covenant and agree
to execute, contemporaneously herewith, a Confidentiality Agreement
substantially in the form attached hereto as Exhibit B.
12. Insurance. The Company shall purchase and keep in full force and
effect for the Employee a policy of directors' and officers' liability insurance
at coverage levels consistent with other executive officers of the Company.
13. Authority. The individual executing this Agreement on behalf of
the Company represents and warrants to the Employee that the performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized by all requisite action and that he has the power and authority
to execute this Agreement.
14. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, facsimile,
telecopy, overnight courier service, or by United States certified or registered
mail, return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by facsimile or telecopy, when such facsimile or telecopy is transmitted
to the facsimile or telecopy number specified in this Section and confirmation
is received; and (c) if given by certified or registered mail, ten days after
the mailing thereof.
Address for notices (unless and until written notice is given of
any other address):
If to the Company:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Attention: Ms. Janet M. Biski,
Chief Financial Officer and Secretary
Fax: (714) 852-1099
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<PAGE> 13
If to the Employee:
Valence Semiconductor Design Limited
Unit 413 4th Floor
Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon Ton, Hong Kong
Attention: Choi Yat Ming, President
Fax: (852) 2776-7770
15. Further Documents and Acts. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.
16. Financial Reporting. Any computation pertaining to the Company's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.
17. Attorneys' Fees. In any action, litigation or proceeding between
the parties arising out of or in relation to this Agreement, the prevailing
party in such action shall be awarded, in addition to any damages, injunctions
or other relief, and without regard to whether or not such matter be prosecuted
to final judgment, such party's costs and expenses, including reasonable
attorneys' fees.
18. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
19. Venue. The parties hereby irrevocably and unconditionally consent
to submit to the exclusive jurisdiction of the courts of the State of
California, County of Orange, and/or the United States District Court for the
Central District of California (Southern Division) for any actions, suits,
controversies or proceedings arising out of or relating to this agreement and
the transactions contemplated hereby (and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts), and further
agree that service of any process, summons, notice or document by U.S.
registered mail to the respective addresses set forth above shall be effective
service of process for any action, suit or proceeding brought against the
parties in any such court. The parties hereby irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit, controversies or
proceeding arising out of this agreement or the transactions contemplated
hereby, in the courts of the State of California, County of Orange and/or the
United States District Court for the Central District of California
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<PAGE> 14
(Southern Division), and hereby further irrevocably and unconditionally waive
and agree not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient or
improper forum.
20. Amendments/Waiver. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which such consent was required shall
not be deemed to imply consent or waiver of the necessity of obtaining such
consent for the same or similar acts in the future.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
22. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.
23. Entire Agreement. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written have been fully merged herein and are
superseded hereby.
24. Remedies. All rights, remedies, undertakings, obligations,
options, covenants, conditions and agreements contained in this Agreement shall
be cumulative and no one of them shall be exclusive of any other.
25. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
26. Interpretation. The language in all parts of this Agreement shall
be in all cases construed simply according to its fair meaning and not strictly
for or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other
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<PAGE> 15
gender. The captions of the Sections of this Agreement are for convenience only
and shall not affect the construction or interpretation of any of the provision
herein.
27. Arbitration of Certain Disputes. Any controversy or claim arising
out of or relating to (a) the location of the Employee's principal place of
employment as provided in Section 1.1, (b) the scope of the Employee's duties as
provided in Section 1.2, (c) the termination of the Employee for cause under
Section 4.1, or (d) the resignation of the Employee for Good Reason under
Section 5.3.2 shall be resolved by arbitration. Arbitration proceedings shall be
commenced by the delivery by any party to a dispute to the other of written
notice requesting arbitration. The matter shall be submitted to such
disinterested arbitrator as shall be agreed upon by the parties to the dispute,
which arbitrator shall determine the rules to govern the arbitration
proceedings. Each party shall bear its own costs and expenses incurred by it in
connection with the arbitration; all other costs, including arbitrators' fees
and expenses, shall be borne equally by the parties. Notwithstanding the
foregoing, if the arbitrator determines that one party acted unreasonably and
not in good faith, the arbitrator shall have authority to assess the costs and
expenses of the arbitration, including the arbitrator's fee and reasonable
attorneys' fees, against that party. In the event the parties are unable to
agree upon an arbitrator within ten (10) business days of the date a notice
requesting arbitration is delivered, the arbitration shall be conducted in
accordance with the Labor Arbitration Rules of the American Arbitration
Association ("AAA"). If arbitration is conducted pursuant to the rules of the
AAA, then the controversy or claim shall be decided by a board of three (3)
arbitrators. The Employee, on the one hand, and the Company and VSD, on the
other hand, shall select one (1) arbitrator within ten (10) business days of a
demand for arbitration being made or, in the event of a party's failure to so
select, an arbitrator shall be named for that party by the AAA. Within ten (10)
business days of their selection, the two (2) arbitrators so selected shall
select a third arbitrator from the National Panel of Arbitrators maintained by
the AAA or as they otherwise shall agree. All arbitrators, however selected,
shall possess such experience in, and knowledge of, the subject area of the
controversy or claim so as to qualify as an "expert" with respect to such
subject matter. Any arbitration hearing shall be held in Orange County,
California, unless the parties to the dispute agree otherwise. The governing law
for the purposes of any arbitration arising hereunder shall be as set forth in
Section 18 hereof. Any award rendered by arbitration shall be final and binding
on the parties, and judgment thereon may be entered in any court of competent
jurisdiction. Notwithstanding any arbitration rules to the contrary, the award
of the arbitrator must be made no later than three (3) months following the date
on which the arbitrator or arbitrators are appointed.
28. Miscellaneous. Each provision of this Agreement to be performed
by a party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents
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<PAGE> 16
referenced in this Agreement are fully incorporated into this Agreement by
reference. Unless expressly set forth otherwise, all references herein to a
"day" shall be deemed to be a reference to a calendar day. Unless expressly
stated otherwise, cross-reference herein shall refer to provisions within this
Agreement, and shall not be deemed to be references to the overall transaction
or to any other document. Time is of the essence in the performance of this
Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND UNDERSTANDS
ITS CONTENTS. EMPLOYEE ALSO ACKNOWLEDGES THAT THE COMPANY HAS INFORMED HIM THAT
THIS AGREEMENT DOES NOT REQUIRE EMPLOYEE TO ASSIGN TO THE COMPANY ANY INVENTION
WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE, A COPY OF WHICH IS ATTACHED AS EXHIBIT C TO THIS AGREEMENT. BY
SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO BE BOUND BY ALL OF THE TERMS AND
CONDITIONS OF THIS AGREEMENT.
(signature page follows)
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<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY: SRS LABS, INC., a Delaware corporation
By: /s/ THOMAS C.K. YUEN
-----------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief
Executive Officer
By: /s/ JANET M. BISKI
-----------------------------------
Janet M. Biski
Vice President, Chief Financial
Officer and Secretary
VSD: VALENCE SEMICONDUCTOR DESIGN LIMITED,
a Hong Kong company
By: /s/ CHOI YAT MING
-----------------------------------
Choi Yat Ming
EMPLOYEE: /s/ CHOI YAT MING
-----------------------------------
Choi Yat Ming
-17-
<PAGE> 18
EXHIBIT A
INDEMNIFICATION AGREEMENT
<PAGE> 19
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 2nd day
of March, 1998, by and between SRS LABS, INC., a Delaware corporation (the
"Company"), and Choi Yat Ming ("Indemnitee").
WHEREAS, Indemnitee is currently serving as an executive officer of
certain of the Company's subsidiaries and the Company desires Indemnitee to
continue in such capacities. The Indemnitee is willing, subject to certain
conditions including, without limitation, the execution and performance of this
Agreement by the Company, to continue in such capacities;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the Company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company and its subsidiaries, and in order to induce
Indemnitee to provide services to the Company and its subsidiaries as an
executive officer of certain of the Company's subsidiaries. The Company wishes
to provide in this Agreement for the indemnification of and the advancing of
expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the coverage of Indemnitee under the Company's
directors' and officers' liability insurance policies.
-1-
<PAGE> 20
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in this
Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or other
agents, so that if Indemnitee is or was a director, officer, employee or
other agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, a subsidiary of the Company, or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes
the "Beneficial Owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing 40% or
more of the total voting power represented by the Company's then
outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period' constitute the Board
and any new director whose nomination for election or election was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; (iii) the
stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by
the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company
(in one transaction or a series of transactions) of all or substantially
all of the Company's assets.
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<PAGE> 21
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in
Control; (ii) any person (including the Company) publicly announces an
intention' to take or to consider taking actions that, if consummated,
would constitute a Change in Control; (iii) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, a subsidiary
of the Company, a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, or a person who is a party to
an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule
l3d-3 under said Act), directly or indirectly, of securities of the
Company representing 15% or more of the total voting power represented
by the Company's then outstanding Voting Securities; or (iv) the Board
adopts a resolution to the effect that, for purposes of this Agreement,
a Potential Change in Control has occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or
agent of the Company or one of its subsidiaries which imposes duties on,
or involves services by, Indemnitee with respect to an employee benefit
plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, administrative, investigative or criminal
(other than an action by or in the right of the Company), by reason of
the fact that he is or was or had agreed to become a director, officer,
employee or agent of the Company, or is or was serving or had agreed to
serve at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any
appeal therefrom if the Indemnitee acted in good faith and in a manner
he reasonably believed to be in or not
-3-
<PAGE> 22
opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption
that the Indemnitee did not satisfy the foregoing standard of conduct to
the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by or in the right of
the Company to procure a judgment in its favor by reason of the fact
that he is or was or had agreed to become a director, officer, employee
or agent of the Company, or is or was serving or had agreed to serve at
the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against costs, charges and expenses (including attorneys' and
others' fees and expenses) actually and reasonably incurred by him in
connection with the defense or settlement thereof or any appeal
therefrom if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any
claim, issue or matter as to which the Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that
the Court of Chancery or the court in which such action, suit or
proceeding was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall
deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or
otherwise, including without limitation the dismissal of an action
without prejudice, in defense of any action, suit or proceeding referred
to in Sections 2(a) or 2(b) hereof or in defense of any claim, issue or
matter therein, he shall be indemnified against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by him in connection therewith.
(d) Determination of Right of Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court)
shall be made by the Company only as authorized in the specific case
upon a determination in accordance with Section 4 hereof or any
applicable provision of the Certificate, Bylaws, other agreement,
resolution or otherwise. Such determination shall be made (i) by the
Board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding or (ii) if such a quorum
of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided below in
this subsection (d)) in a written opinion or (iii) by the stockholders
of the Company (the "Stockholders"). Independent legal counsel shall be
designated by vote of a majority of the disinterested directors;
provided, however, that if the Board is
-4-
<PAGE> 23
unable or fails to so designate, such designation shall be made by the
Indemnitee subject to the approval of the Company (which approval shall
not be unreasonably withheld). Independent legal counsel shall not be
any person or firm who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in
representing either the Company or the Indemnitee in an action to
determine the Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of such independent legal
counsel and to indemnify fully such counsel against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his
capacity as a director or officer of the Company in defending a civil or
criminal action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding in
the manner prescribed by Section 4(b) hereof.
3. ADDITIONAL INDEMNIFICATION.
(a) Right to Additional Indemnification. Pursuant to Section
145(f) of the General Corporation Law of the State of Delaware (the
"GCL"), without limiting any right which the Indemnitee may have
pursuant to Section 2 hereof, the Certificate, the Bylaws, the GCL, any
policy of insurance or otherwise, but subject to the limitations on the
maximum permissible indemnity which may exist under applicable law at
the time of any request for indemnity hereunder determined as
contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated
to pay relating to or arising out of any claim made against him because
of any act, failure to act or neglect or breach of duty, including any
actual or alleged error, misstatement or misleading statement, which he
commits, suffers, permits or acquiesces in while acting in his capacity
as a director, an officer, an employee or agent of the Company, or, at
the request of the Company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, whether prior to or after the date of this Agreement and
whether or not the basis of the claim is alleged action or inaction in
an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent
of the Company. The payments which the Company is obligated to make
pursuant to this Section 3 shall include without limitation (i) damages,
judgments, settlements (in accordance with Section 6(d) of this
Agreement), fines and similar penalties, and excise taxes and penalties
assessed on a person with respect to an employee benefit plan, (ii)
charges, costs, expenses (including attorneys' and others' fees and
related disbursements), expenses of investigation, expenses of defense
of legal actions, suits, proceedings or claims and appeals therefrom,
expenses relating to serving as a witness and expenses of appeal,
attachment or similar bonds, and (iii) any interest, assessments, or
other charges imposed thereon and any federal, state, local or foreign
taxes imposed as a result of the actual or deemed receipt of such
-5-
<PAGE> 24
payments under this Agreement. Notwithstanding the foregoing, the
Company shall not be obligated under this Section 3(a) to make any
payment in connection with any claim against the Indemnitee:
(i) to the extent of any fine or similar governmental
imposition which the Company is prohibited by applicable law from
paying which results in a final, nonappealable order; or
(ii) to the extent based upon or attributable to the
Indemnitee gaining in fact a personal profit to which he was not
legally entitled, including without limitation profits made from
the purchase and sale by the Indemnitee of equity securities of
the Company which are recoverable by the Company pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended,
and profits arising from transactions in publicly traded
securities of the Company which were effected by the Indemnitee
in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule l0b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this Section 3(a) shall be made in accordance with Section 4(d) hereof.
(b) Advancement of Expenses Relating to Additional
Indemnification. Expenses (including without limitation attorneys' and
others' fees and expenses) incurred by Indemnitee in defending any
actual or threatened civil or criminal action, suit, proceeding or claim
shall be paid by the Company in advance of the final disposition thereof
as authorized in accordance with Section 4(b) hereof.
4. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under
Sections 2(a), 2(b) or 3(a) hereof, as the case may be, the Indemnitee
may, but shall not be required to, (i) submit to the Board a sworn
statement of request for indemnification substantially in the form of
Exhibit 1 attached hereto and made a part hereof (the "Indemnification
Statement") averring that he is entitled to indemnification hereunder;
and (ii) present to the Company reasonable evidence of all expenses for
which payment is requested. Submission of an Indemnification Statement
to the Board shall create a presumption that the Indemnitee is entitled
to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case
may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless within 30 calendar
days after submission of the Indemnification Statement the Board shall
determine by vote of a majority of the directors at a meeting at which a
quorum is present, based upon clear and convincing evidence (sufficient
to rebut the foregoing presumption), and the Indemnitee shall have
received notice within such period in writing of such determination that
the Indemnitee
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<PAGE> 25
is not so entitled to indemnification, which notice shall disclose with
particularity the evidence in support of the Board's determination. The
foregoing notice shall be sworn to by all persons who participated in
the determination and voted to deny indemnification. The provisions of
this Section 4(a) are intended to be procedural only and shall not
affect the right of the Indemnitee to indemnification under this
Agreement and any determination by the Board that the Indemnitee is not
entitled to indemnification and any failure to make the payments
requested in the Indemnification Statement shall be subject to judicial
review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement
of expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit
to the Board a sworn statement of request for advancement of expenses
substantially in the form of Exhibit 2 attached hereto and made a part
hereof (the "Undertaking"), averring that (i) he has reasonably incurred
or will reasonably incur actual expenses in defending an actual civil or
criminal action, suit, proceeding or claim and (ii) he undertakes to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Company under this Agreement or
otherwise. For purposes of requesting advancement of expenses pursuant
to Section 3 (b) hereof, the Indemnitee (i) may, but shall not be
required to, submit an Undertaking or (ii) shall submit such other form
of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be,
the Board shall within 20 calendar days authorize immediate payment of
the expenses stated in the Undertaking or Expense Request, whereupon
such payments shall immediately be made by the Company. No security
shall be required in connection with any Undertaking or Expense Request
and any Undertaking or Expense Request shall be accepted without
reference to the Indemnitee's ability to make repayment.
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of
Control and if requested by the Indemnitee at the time of making a claim
for indemnification, (i) any determination under Section 2(a) or 2(b)
(unless ordered by a court) shall be made by Independent Counsel (as
defined below), and (ii) after the submission of an Indemnification
Statement, the determination pursuant to Section 4(a) whether an
Indemnitee shall be entitled to indemnification under Sections 2(a),
2(b) or 3(a) hereof, as the case may be, shall be made by Independent
Counsel (as defined below) instead of by the Board. For purposes of this
Section 4(c) "Independent Counsel" shall be an attorney selected by
Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for
the Company or the Indemnitee (other than in connection with
indemnification matters) within the three years prior to the selection
of the Independent Counsel, and (ii) who shall not, under the applicable
standards of professional conduct then prevailing, have a conflict of
interest in representing either the Company or Indemnitee in an action
to determine Indemnitee's rights under this Agreement. Any determination
by Independent Counsel as to whether and to what extent the Indemnitee
should be
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<PAGE> 26
permitted to be indemnified under applicable law shall be rendered by
its written opinion to the Company and Indemnitee. The Company agrees to
pay the reasonable fees of the Independent Counsel and to indemnify
fully such counsel against any and all expenses (including attorneys'
and others' fees and expenses), claims, liabilities, loss, and damages
arising out of or relating to this Agreement, the engagement of
Independent Counsel pursuant hereto or the opinion of such counsel
pursuant hereto.
5. INDEMNIFICATION PROCESS AND APPEAL.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the
Company within 30 calendar days after a written claim has been received
by the Company, the Indemnitee may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim in any
court having subject matter jurisdiction thereof. The Company hereby
consents to service of process and to appear in any such proceeding. The
remedy provided for in this Section 5 shall be in addition to any other
remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense
to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof
(other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where
the Undertaking, if any is required, has been tendered to the Company)
that the Indemnitee has not met the standards of conduct which make it
permissible under the GCL for the Company to indemnify the Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement that it is not
permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. Neither the failure of the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel to
have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in
applicable law, nor an actual determination by the Company (including
its Board, independent legal counsel or its stockholders) or Independent
Counsel that Indemnitee had not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that Indemnitee
has not met the applicable standard of conduct.
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to
incur the expenses associated with the enforcement of his rights under
this Agreement by litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended
to be extended to the Indemnitee hereunder. Accordingly, if it should
appear to the Indemnitee that the Company has failed to comply with any
of its
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<PAGE> 27
obligations under the Agreement or in the event that the Company or any
other person takes any action to declare the Agreement void or
unenforceable, or institutes any action, suit or proceeding designed (or
having the effect of being designed) to deny, or to recover from, the
Indemnitee the benefits intended to be provided to the Indemnitee
hereunder, the Company irrevocably authorizes the Indemnitee from time
to time to retain counsel of his choice, at the expense of the Company
as hereafter provided, to represent the Indemnitee in connection with
the initiation or defense of any litigation or other legal action,
whether by or against the Company or any director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Regardless of the outcome thereof, the Company shall pay and be solely
responsible for any and all costs, charges and expenses (including
without limitation attorneys' and others' fees and expenses) reasonably
incurred by the Indemnitee (i) as a result of the Company's failure to
perform this Agreement or any provision thereof or (ii) as a result of
the Company or any person contesting the validity or enforceability of
this Agreement or any provision thereof as aforesaid; provided that, if
and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal
therefrom have been exhausted or waived or have lapsed) that each of the
material assertions made by Indemnitee in such litigation or other legal
action was not made in good faith or was frivolous, the Company shall
not be obligated to pay any such costs, charges and expenses incurred by
Indemnitee in connection with such suit and shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company)
for all such amounts theretofore paid under this Section 5(c).
Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section
5(c), Indemnitee from time to time may retain counsel of his choice to
represent him.
6. NOTIFICATION AND DEFENSE OF PROCEEDING.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought
under this Agreement (for purposes of this Section 6, a "Claim").
Indemnitee shall also provide the Company such information and
cooperation as the Company from time to time may reasonably request and
as shall reasonably be within Indemnitee's power to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors'
and officers' liability insurance (or a similar policy covering key
employees, if applicable) in effect, the Company shall give prompt
notice of such Claim to the insurers in accordance with the procedures
set forth in the respective policies. The Company thereafter shall take
all necessary or desirable action to cause such insurers to pay, on
behalf of Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
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<PAGE> 28
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the
Company (for purposes of this Section 6, a "Proceeding"), the Company
will be entitled to participate in the Proceeding at its own expense and
except as otherwise provided below, to the extent the Company so wishes,
it may assume the defense thereof with counsel selected by the Company
and approved by Indemnitee, which approval shall not be unreasonably
withheld. After notice from the Company to Indemnitee of its election to
assume the defense of any Proceeding, the Company will not be liable to
Indemnitee under this Agreement or otherwise for any expenses
subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ his
own counsel in such Proceeding, but all expenses related thereto
incurred after notice from the Company of its assumption of the defense
shall be at Indemnitee's expense unless: (i) the employment of counsel
by Indemnitee has been authorized by the Company; (ii) Indemnitee has
reasonably determined and either the Company shall have agreed, or
disinterested counsel (as defined in this Section 6(c) shall have
determined, that there may be a conflict of interest between Indemnitee
and the Company in the defense of the Proceeding; (iii) after a Change
in Control, the employment of counsel by Indemnitee has been approved by
the Independent Counsel; or (iv) the Company shall not in fact have
employed counsel to assume the defense of such Proceeding, in each of
which case all expenses of the Proceeding shall be borne by the Company,
and Indemnitee's counsel shall have been approved by the Company (which
approval may not be unreasonably withheld) and any carrier of an
applicable insurance policy if required under the terms of that policy
or under applicable law. As used in this Section 6(c), "disinterested
counsel" shall mean counsel selected and compensated by the Company, and
approved by Indemnitee (which approval may not be unreasonably
withheld), to determine whether a conflict of interest may exist, which
counsel shall not represent the Company, Indemnitee or any other party
to the Proceeding for which indemnification is sought. Disinterested
counsel shall be selected promptly following the notice from Indemnitee
to the Company of Indemnitee's belief that a conflict of interest may
exist. The Company shall not be entitled to assume the defense of any
Proceeding as to which the determination provided for in (ii) above
shall have been made. Nothing herein shall limit the right of Indemnitee
to employ counsel at Indemnitee's sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to
indemnify Indemnitee under this Agreement or otherwise for any amounts
paid in settlement of any Proceeding effected without the Company's
written consent; provided, however, that if a Change in Control has
occurred, the Company shall be liable for indemnification of Indemnitee
for amounts paid in settlement if the Independent Counsel has approved
the settlement. The Company shall not settle any Proceeding in any
manner that would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Company nor Indemnitee will
unreasonably withhold its consent to any proposed settlement. The
Company shall not be liable to indemnify Indemnitee under this
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<PAGE> 29
Agreement with regard to any judicial award if the Company was not given
a reasonable and timely opportunity, at its expense, to participate in
the defense of such action; the Company's liability hereunder shall not
be excused if participation in the Proceeding by the Company was barred
by this Agreement.
7. ESTABLISHMENT OF A TRUST. Immediately upon the occurrence of a Change
in Control or a Potential Change in Control, the Company shall, upon written
request by Indemnitee, create a trust (a "Trust") for the benefit of Indemnitee
and from time to time upon written request of Indemnitee shall fund the Trust in
an amount sufficient to satisfy any and all amounts reasonably anticipated at
the time of each such request to be incurred in connection with any claim made
by Indemnitee. The amount or amounts to be deposited in the Trust pursuant to
the foregoing funding obligation shall be determined (i) prior to the occurrence
of a Change in Control or a Potential Change in Control, (a) by the Board by a
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding serving as the basis of a claim by Indemnitee, or (b)
if such a quorum of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided in Section 2(d)) in
a written opinion or (c) by the Stockholders, or (ii) after the occurrence of a
Change in Control or a Potential Change in Control, by Independent Counsel as
defined in Section 4(c) (for purposes of this Section 7, the "Reviewing
Party").The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded without the
written consent of Indemnitee, (ii) the trustee of the Trust (the "Trustee")
shall advance, within 20 business days of the request by Indemnitee, any and all
expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust
under the same circumstances for which Indemnitee would be required to reimburse
the Company under Section 4(b) of this Agreement), (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the Trustee shall promptly pay to Indemnitee all amounts
for which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any
litigation or other legal action initiated or brought voluntarily (and
not by way defense or counterclaim) by Indemnitee against the Company or
any agent of the Company unless (i) the
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<PAGE> 30
Company has joined in or the Board has consented to the initiation of
such litigation or other legal action, (ii) the litigation or other
legal action is brought to establish or enforce a right to
indemnification under Section 5 of this Agreement, or (iii) the
litigation or other legal action is instituted after a Change in Control
and Independent Counsel has approved its initiation; or
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has
otherwise actually received payment (under any insurance policy, bylaw
or otherwise) of the amounts otherwise indemnifiable hereunder.
9. SCOPE; NONEXCLUSIVITY.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the
Certificate, Bylaws, vote of its stockholders or disinterested directors
or applicable law. To the extent that a change in applicable law
(whether by statute, rule or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Certificate, Bylaws, applicable law or this Agreement, it is the intent
of the parties that Indemnitee enjoy by this Agreement the greater
benefits so afforded by such change.
(b) Non exclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the
Certificate, Bylaws, any agreement, any vote of stockholders or
disinterested directors, or otherwise, both as to actions in
Indemnitee's official capacity and as to actions in another capacity
while holding such office, and shall continue after Indemnitee has
ceased to be a director, officer, employee or agent.
10. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, federal or state law or applicable public policy may
prohibit the Company from indemnifying its directors, officers, employees or
other agents under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the U.S. Securities and Exchange Commission or applicable state
securities agencies to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
11. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
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<PAGE> 31
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
12. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as of
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was a director,
officer, employee or agent of the Company, or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
13. PERIOD OF LIMITATION. No legal action shall be brought and no cause
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors, or
personal or legal representatives after the expiration of two years from the
date of accrual of such causes of action, or such longer period as may be
required by state law under the circumstances (i.e., a minimum limitation period
that expressly may not be altered by agreement among the parties). Any claim or
cause of action of the Company or any of its affiliates shall be extinguished
and deemed released unless asserted by the timely filing of a legal action
within such period; provided, however, if any shorter period of limitation is
otherwise applicable to any such cause of action, the shorter period shall
govern.
14. RATIFICATION OF ACTS. None of the provisions contained in this
Agreement is intended to constitute, or shall be construed in any manner as
constituting, a ratification by the Company (or by any of its directors,
officers or other agents) of any action or inaction on the part of Indemnitee.
15. CONTINUED EMPLOYMENT. No provision contained herein shall be
construed as conferring upon Indemnitee any right with respect to continuance of
performance of services for the Company or a subsidiary of the Company, nor
shall any such provisions interfere in any way with the right of the Company to
terminate Indemnitee's services as an officer, employee or other agent at any
time with or without cause.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or
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<PAGE> 32
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and legal representatives. The Company shall require
and cause any successor (whether direct or indirect by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business and!or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. Nothing in this
Section 16 shall be construed to limit the protections afforded Indemnitee under
this Agreement which would occur upon a Change in Control or a Potential Change
in Control. The indemnification provided under this Agreement shall continue as
to Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any litigation or other legal action relating to events for which a
claim for indemnification is made by Indemnitee hereunder.
17. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
18. CHOICE OF LAW. This Agreement shall be governed by, and its
provisions construed in accordance with, the laws of the State of Delaware,
including without limitation, all matters of formation, construction, validity,
performance and enforcement and without giving effect to the principles of
conflicts of laws.
19. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 19. If this Agreement or any portion hereof shall be invalidated
or held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. AMENDMENT AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No
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<PAGE> 33
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver. Except as specifically
provided herein, no failure to exercise or any delay in exercising any right or
remedy hereunder shall constitute a waiver thereof.
21. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
22. FUTURE AGREEMENTS. The Company shall not adopt any amendment to its
Certificate or Bylaws the effect of which would be to deny, diminish or encumber
Indemnitee's rights to indemnity pursuant to the Certificate, the Bylaws, the
GCL or any other applicable law as applied to any act or failure to act
occurring in whole or in part prior to the date (the "Effective Date") upon
which the amendment was approved by the Board or the stockholders, as the case
may be. In the event that the Company shall adopt any amendment to its
Certificate or Bylaws the effect of which is to so deny, diminish or encumber
Indemnitee's rights to indemnity, such amendment shall apply only to acts or
failures to act occurring entirely after the Effective Date thereof unless the
Indemnitee shall have voted in favor of such adoption as a director or holder of
record of the Company's Voting Securities, as the case may be.
23. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which counterparts taken
together shall constitute one and the same document.
24. HEADINGS. Section headings herein are for reference purposes only
and shall not affect the meaning or interpretation of any provision of this
Agreement.
[Signature Page Follows]
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SRS LABS, INC.,
a Delaware corporation
By:
---------------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief Executive
Officer
Address: 2909 Daimler Street
Santa Ana, California 92705
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ----------------------------
Choi Yat Ming
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
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<PAGE> 35
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF______________)
) ss
COUNTY OF_____________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement, dated as of March 2, 1998, between SRS Labs, Inc.
(the "Company"), a Delaware corporation, and the undersigned.
2. I am requesting indemnification against charges, costs,
expenses (including attorneys' and others' fees and expenses), judgments, fines
and amounts paid in settlement, all of which have been or will be incurred by me
in connection with an actual or threatened action, suit, proceeding or claim to
which I am a party or am threatened to be made a party.
3. With respect to all matters related to any such action, suit,
proceeding or claim, I am entitled to be indemnified as herein contemplated
pursuant to the aforesaid Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I
am requesting indemnification against liabilities which have or may arise out of
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________.
_______________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
_______________________
[Seal]
My commission expires the ___ day of _______________, _____.
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<PAGE> 36
EXHIBIT 2
UNDERTAKING
STATE OF______________)
) ss
COUNTY OF_____________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of March 2, 1998, between SRS Labs, Inc. (the "Company"), a
Delaware corporation, and the undersigned.
2. I am requesting advancement of certain costs, charges and
expenses which I have incurred or will incur in defending an actual or pending
civil or criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it
shall ultimately be determined that I am not entitled to be indemnified by the
Company under the aforesaid Agreement or otherwise.
4. The costs, charges and expenses for which advancement is
requested are, in general, all expenses related to_____________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________.
___________________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
___________________________
[Seal]
My commission expires the ___ day of _______________, _____.
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<PAGE> 37
EXHIBIT B
CONFIDENTIALITY AGREEMENT
<PAGE> 38
EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY
In return for new or continued employment by SRS LABS, INC. (the
"Company"), I acknowledge and agree that:
1. DEFINITION. For purposes of this Agreement, unless otherwise
noted, all references to the "Company" shall include the Company and/or all of
its direct and indirect subsidiaries.
2. OBLIGATIONS OF CONFIDENTIALITY. I will maintain in confidence and
will not, either during or at any time after the term of my employment without
the prior express written consent of the Company, communicate or disclose to, or
use for the benefit of myself or any other person, firm, association or
corporation (including, without limitation, any subsequent employer) any
proprietary or confidential information, trade secret or know-how belonging to
the Company ("Proprietary Information"), whether or not it is in written or
permanent form, except to the extent required to perform duties on behalf of the
Company in my capacity as an employee. Such Proprietary Information includes,
but is not limited to, techniques, processes, plans or methods of the Company in
developing, marketing and licensing products and services, and technical and
business information relating to the Company's inventions or products, research
and development, production processes, manufacturing and engineering processes,
machines and equipment, finances, existing and potential customers and
suppliers, marketing and future business plans. However, such Proprietary
Information shall not include any materials, techniques, or information of the
type specified to the extent that such materials, techniques or information are
publicly known or generally utilized by others engaged in the same business or
activities as that in the course of which the Company utilized, developed or
otherwise acquired such materials, techniques, or information. Upon termination
of my employment or at the request of my supervisor before termination, I will
deliver to the Company all written and tangible material in my possession
belonging to the Company incorporating the Proprietary Information or otherwise
relating to the Company's Business. These obligations with respect to
Proprietary Information extend to information belonging to customers and
suppliers of the Company who may have disclosed such information to me as the
result of my status as an employee of the Company. The covenants made in this
Section 2 shall commence on the date hereof and shall be perpetual with respect
to any Proprietary Information.
3. POSSESSION OF INFORMATION IN TANGIBLE FORM. All Proprietary
Information consisting of records, reports, notes, compilations, computer
software programs or disks or other recorded matter, and copies or reproductions
thereof, relating to the Company's operations, activities or business, made or
received by me during any period of employment with the Company are and shall be
the Company's exclusive property, and I will keep the same at all times in the
Company's custody and subject to its control, and will surrender the same at the
termination of my employment if not before.
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<PAGE> 39
4. COMPANY'S REMEDIES FOR BREACH. I acknowledge that a breach by me
of this Agreement cannot reasonably or adequately be compensated in damages in
an action at law, and that a breach of any of the provisions contained in this
Agreement will cause the Company irreparable injury and damage. By reason
thereof, I agree that the Company shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to preliminary and
permanent injunctive and other equitable relief to prevent or curtail any breach
of this Agreement; provided, however, that no specification in this Agreement of
a specific legal or equitable remedy shall be construed as a waiver or
prohibition against the pursuing of other legal or equitable remedies in the
event of such a breach.
5. SEVERABILITY. In the event that any provision of this Agreement or
any word, phrase, clause, sentence or other portion thereof should be held to be
unenforceable or invalid for any reason, such provision or portion thereof shall
be modified or deleted in such a manner so as to make this Agreement as modified
legal and enforceable to the fullest extent permitted under applicable laws.
6. BINDING EFFECT. This Agreement shall be binding upon my heirs,
executors, administrators or other legal representatives or assigns and shall
inure to the benefit of and be enforceable by the Company and its successors and
assigns.
7. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
9. VENUE. The parties hereby irrevocably and unconditionally consent
to submit to the exclusive jurisdiction of the courts of the State of
California, County of Orange, and/or the United States District Court for the
Central District of California (Southern Division) for any actions, suits,
controversies or proceedings arising out of or relating to this Agreement and
the transactions contemplated hereby (and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts), and further
agree that service of any process, summons, notice or document by U.S.
registered mail to the respective addresses set forth above shall be effective
service of process for any action, suit or proceeding brought against the
parties in any such court. The parties hereby irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit, controversies or
proceeding arising out of this Agreement or the transactions contemplated
hereby, in the courts of the State of California, County of Orange and/or the
United States District Court for the Central District of California (Southern
Division), and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient or improper forum.
(signature page follows)
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<PAGE> 40
IN WITNESS WHEREOF, I have hereunto set my hand as of this 2nd day of
March, 1998.
---------------------------------------------
Choi Yat Ming
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology
Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
Accepted and agreed:
SRS LABS, INC.,
a Delaware corporation
- --------------------------------------------
Thomas C.K. Yuen
Chairman of the Board and
Chief Financial Officer
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<PAGE> 41
EXHIBIT C
SECTION 2870 OF THE CALIFORNIA LABOR CODE
<PAGE> 42
SECTION 2870 OF THE CALIFORNIA LABOR CODE
SECTION 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE> 1
EX-10.18
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of March 2, 1998, by and
between SRS Labs, Inc., a Delaware corporation (the "Company"), LEC Electronic
Components Limited, a Hong Kong company ("LEC"), and Wong Yin Bun, an individual
(the "Employee").
RECITALS
A. The Company develops, markets and licenses unique, leading-edge,
proprietary audio technologies and has need for management personnel.
B. The Employee, prior to the date hereof, has been an executive
officer and director of LEC.
C. Pursuant to two separate stock purchase agreements, the Company
has acquired 100% of the issued and outstanding share capital of Valence
Technology Inc., a British Virgin Islands company.
D. The Company desires to employ the Employee in the same or similar
capacity as that previously existing between the Employee and LEC upon the terms
and conditions set forth in this Agreement.
E. The Employee is willing to enter into this Agreement with respect
to the Employee's employment and services upon the terms and conditions set
forth in this Agreement.
AGREEMENT
In consideration of the provisions set forth in this Agreement, the
parties agree as follows:
1. Employment; Duties and Obligations
1.1 Employment. The Company and LEC hereby employ the Employee as
President of LEC for the term of this Agreement, and the Employee hereby accepts
such employment upon the terms and conditions hereinafter set forth.
Notwithstanding anything to the contrary herein, except with the consent of the
Employee, the Employee's principal place of employment during the term of this
Agreement or any renewal thereof shall be located in Hong Kong.
<PAGE> 2
1.2 Service to the Company and LEC. The Employee shall have
primary responsibility for, among other things, managing and directing the
day-to-day business of LEC, subject to applicable law and the policies of the
Company's Board of Directors and the Executive Committee of the Company's Board
of Directors and the Board of Directors of LEC.
1.3 Devotion of Time to the Business. The Employee shall devote
his entire professional time and best efforts to the business of the Company and
its subsidiaries, and shall not during the term of this Agreement engage in any
other business activities. This Agreement shall not be construed as preventing
the Employee from investing his assets in such form or manner as will not
require any services on the part of the Employee for or with respect to any of
the entities in which such investments are made, except as otherwise restricted
pursuant to Section 7 herein. This Agreement shall not be interpreted to
prohibit the Employee from making passive personal investments or conducting
private business affairs if those activities do not materially interfere with
the services required under this Agreement. The Employee shall not, directly or
indirectly, acquire, hold, or retain any interest in any business directly
competing with or similar in nature to the business of the Company or any of its
subsidiaries; provided however, that the Employee's beneficial ownership of debt
securities in an amount not exceeding U.S. $500,000 and/or publicly-traded
equity securities in an amount not exceeding 5% of the total outstanding number
of shares of the particular class of such equity securities, which are issued by
any entity engaged in activities which are competitive with the business of the
Company or any of its subsidiaries shall not be deemed to be a breach of any
duty or obligation owed by the Employee to the Company or any of its
subsidiaries hereunder.
2. Term. The initial term of this Agreement shall commence as of March
3, 1998 (Hong Kong time), and shall continue in effect until December 31, 2000
(Hong Kong time). On December 31, 2000 (Hong Kong time), and on the 31st day of
December (Hong Kong time) of each year thereafter (unless this Agreement shall
have been previously terminated), the term of this Agreement shall be
automatically extended for an additional term of one year unless either party
shall provide the other with at least 30-days written notice prior to such
December 31st of the party's intent to terminate this Agreement. In the event
that the Company shall provide written notice of termination to the Employee,
the Employee will be entitled to the severance benefits set forth in Section 4.3
herein. Upon the payment of such severance benefits, the Company and LEC shall
be relieved from any liability for the expired term of this Agreement.
3. Compensation
3.1 Base Salary. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with
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<PAGE> 3
the regular payroll practices of the Company (but at least once a month), at a
rate determined in accordance with this Agreement.
3.1.1 Initial Base Salary. The initial Base Salary
to be paid hereunder is H.K. $1,300,000 per year.
3.1.2 Adjustments to Base Salary. The Compensation
Committee of the Board (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall review the Base Salary of the Employee and determine whether
to adjust it; provided however that the Base Salary for any fiscal year shall
not be less than the initial Base Salary to be paid to the Employee hereunder.
The first such review shall occur prior to July 1, 1998 (California time);
thereafter, such reviews shall occur within three months of the end of each of
the Company's fiscal years, commencing with the Company's fiscal year ending
December 31, 1998.
3.2 Salary Deferral Plan. The Employee shall be eligible to
participate in the Company's voluntary salary deferral plan and such other
similar plans as the Company may adopt from time to time.
3.3 Performance Bonus.
3.3.1 Initial Bonus. Notwithstanding anything to the
contrary, Employee shall be eligible to receive a bonus relating to the fiscal
year of Valence Technology Inc., a British Virgin Islands company, ending March
31, 1998 based upon the performance formula submitted to and accepted by the
Compensation Committee.
3.3.2 Subsequent Bonuses. Irrespective of any other
bonus payment payable to the Employee pursuant to this Agreement, the
Compensation Committee (or in the absence of a compensation committee, the Board
committee performing equivalent functions or the entire Board of Directors of
the Company) shall evaluate the Employee's performance at the end of each fiscal
year commencing with the Company's fiscal year ending December 31, 1998 and
determine whether the Employee's performance merits payment of a performance
bonus to the Employee. The performance bonus is wholly discretionary.
3.4 Long-Term Incentive Compensation. The Employee shall be
eligible to participate in all of the Company's long-term incentive compensation
plans, including, but not limited to, any Company stock option, restricted stock
or SAR plan (with the exception of those plans only applicable to non-employee
directors).
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<PAGE> 4
3.5 Other Benefits. The Employee shall be eligible to participate
in, and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance (including tax gross up amounts), vacation and sick
leave.
3.6 No Prohibition as to Other Compensation. Nothing herein shall
be deemed to preclude the Company, or any of the Company's subsidiaries, if any,
from awarding additional compensation or benefits to the Employee during the
term of this Agreement, upon approval of the Compensation Committee (or in the
absence of a compensation committee, the Board committee performing equivalent
functions or the entire Board of Directors of the Company), whether in the form
of raises, bonuses, additional fringe benefits or otherwise.
3.7 Expenses. The Company, in accordance with its policy (which
may be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business of the Company,
including, without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.
3.8 Tax Withholding. The Company and, to the extent applicable,
any other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.
4. Termination
4.1 Termination for Cause. The Company or LEC may terminate this
Agreement and discharge the Employee for cause at any time upon written notice
specifying the reasons for such termination. For purposes of this Agreement,
"cause" shall mean (a) the failure to follow the reasonable instructions of the
Board of Directors of the Company or LEC, (b) the material breach of any term of
this Agreement and failure to cure such breach within ten (10) days after
written notice thereof from the Company or LEC, as the case may be, or (c) the
misappropriation of assets of the Company or any subsidiary of the Company by
the Employee resulting in a material loss to such entity. The Employee shall not
be entitled to receive any further payments or other benefits under this
Agreement after the expiration of 30 days from the date of such notice, other
than benefits which have previously vested in the Employee.
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<PAGE> 5
4.2 Termination Upon Death. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company and/or its subsidiaries, if any, as the case may be, shall pay to
the Employee's legal representative the full salary for the month in which he
dies and such legal representative shall be entitled to receive those benefits
which have previously vested in the Employee.
4.3 Termination by the Company or LEC Without Cause/Severance. In
the event the Company or LEC shall give written notice of its intent not to
extend the term of this Agreement for an additional term of one year, as
provided in Section 2 herein, or the Company or LEC otherwise gives written
notice of termination without cause during the then current term of this
Agreement, the Employee's term of employment shall terminate effective on the
last day of the month such notice is deemed effective. Thereafter, the Employee
shall be entitled to receive for the remainder of the then current term of this
Agreement, and for a period of twelve months following the end of such term, the
Base Salary then in effect, less the long-term service payment, if any,
referenced in the Employment Ordinance, Cap. 57, Laws of Hong Kong, and the
health, life, disability insurance benefits and the other employee benefits
which the Employee had prior to such termination including, but not limited to
those set forth in Sections 3.3 through 3.7 herein (collectively referred to
herein as the "Termination Benefits"). During the continuation period, the
Employee will provide advisory services from time to time to the Chairman of the
Board of the Company and the Chief Executive Officer of the Company, as
reasonably requested by such individuals and acceptable in timing and scope to
the Employee. The Company anticipates that such advisory services will he
limited to transitional or management continuity matters and market trends in
the Company's primary market segments. During the continuation period (a)
outstanding options shall continue to vest and vesting or performance
restrictions on any stock awards shall continue to lapse according to the
schedules set forth in the respective stock option or stock award agreements and
(b) any bonus amount earned pursuant to the annual incentive bonus plan or such
similar plan and payable during such continuation period shall be paid to the
Employee. If the Employee accepts employment from any other party during the
continuation period, the continuation period cash salary and Termination
Benefits will immediately terminate on the date on which such new employment
commences and the Employee will receive a lump sum severance payment equal to
80% of the balance of the continued salary payable under this Section 4.3. Any
cash bonus amount which would otherwise be payable within the twelve month
period, if not paid on or prior to such acceptance date shall not be paid. In
addition, for purposes of options or other awards pursuant to the Company's
employee benefit plans, such acceptance date shall be deemed the termination
date under such plans. For purpose of this Section 4.3 and subject to Section 5
herein, "employment" shall exclude (a) service as an officer or director of the
Employee's personal investment holding company, (b) service as a director on the
board of a corporation, (c) engagement as a bona fide part-time consultant, or
(d)
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<PAGE> 6
self-employment or engagement as an officer or director of an operating
corporation or enterprise (as opposed to a personal investment holding company)
founded or controlled by the Employee and which has revenues of less than
$5,000,000 per year.
4.4 Termination By the Employee. Notwithstanding anything to the
contrary herein, this Agreement may be terminated by the Employee upon 60 days
prior written notice.
5. Termination Following Change in Control.
5.1 Election. If either (a) the Company elects to terminate the
Employee without cause pursuant to Section 4.3 within 90 days before or one year
after a Change in Control (as hereinafter defined) or (b) the Employee elects to
resign with Good Reason (as hereinafter defined) within one year after a Change
in Control, then as a severance benefit and in lieu of all compensation or
damages, the Company or LEC shall (a) pay the Employee in one lump sum or in
equal monthly installments, at the sole election of the Employee, an aggregate
amount equal to the Base Salary in effect at the time of such termination or
resignation for the remainder of the then current term of the Agreement plus an
additional period of twelve months; (b) pay the Employee any bonus amount earned
pursuant to the Company's annual incentive bonus plan or such similar plan and
which would otherwise be paid if the Employee were employed by the Company, one
of its subsidiaries, if any, or successors thereto during the twelve month
period commencing on the day of such termination or resignation under this
Section 5 (the "Termination Period"); and (c) provide to the Employee all
Termination Benefits (as such term is defined in Section 4.3 herein).
5.2 Terms of Stock Options or Other Stock-Based Awards. Any stock
option agreement or other stock award agreement heretofore or hereafter granted
under the Company's stock based compensation plans shall have as a term and
condition of such grant or award (in addition to such other provisions and
whether inserted into the applicable agreement or not) the following provision:
"Notwithstanding anything to the contrary, if in connection
with or as a result of a Change in Control (as defined in the
Employment Agreement, hereinafter defined) the Company or LEC
elects to terminate the Employee or the Employee elects to
resign under Section 5 of the Employment Agreement by and
between the Company or LEC and the Employee dated as of March
2, 1998 (the "Employment Agreement"), then the date of
exercisability of each outstanding option, and the
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<PAGE> 7
date on which all vesting or performance restrictions lapse
on any award pursuant to the Company's employee benefit
plans, shall be immediately accelerated, allowing the
Employee to immediately acquire all of the outstanding
unvested options or to immediately hold such stock free and
clear of any vesting or performance restrictions, as the case
may be."
5.3 Definitions
5.3.1 For purposes of this Section 5 "Change in
Control" shall mean:
(a) The Company is merged, consolidated or
reorganized into or with another corporation or other
legal person and as a result of such merger, consolidation
or reorganization less than a majority of the combined
voting power of the then-outstanding securities of such
corporation or person immediately after such transaction
are held in the aggregate by the holders of Voting Stock
(as that term is defined in subsection (c) hereof) of the
Company immediately prior to such transaction;
(b) The Company sells all or substantially all
of its assets to any other corporation or other legal
person, less than a majority of the combined voting power
of the then-outstanding voting securities of which are
held directly or indirectly in the aggregate by the
holders of Voting Stock of the Company immediately prior
to such sale;
(c) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or
report), each as promulgated pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"), disclosing that
any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing 30% or more of the combined voting
power of the then-outstanding securities of the Company
entitled to vote generally in the election of directors of
the Company ("Voting Stock");
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<PAGE> 8
(d) The Company files a report or proxy
statement with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in, or in response
to, Form 8-K or Schedule 14A (or any successor schedule,
form or report or item therein) that a Change in Control
of the Company has or may have occurred or will or may
occur in the future pursuant to any then-existing contract
or transaction;
(e) If during any period of two consecutive
years, the individuals who constituted the Board at the
beginning of any such period cease for any reason to
constitute at least a majority thereof unless the election
(including, but not limited to, filling of a vacancy by
the remaining Board members), or the nomination for
election by the Company's stockholders, of new members of
the Board was approved by a vote of at least two-thirds of
the members of the Board still in office who were members
of the Board at the beginning of any such period; or
(f) Notwithstanding the foregoing provisions of
(i) subsections (c) or (d) hereof, a "Change in Control"
shall not be deemed to have occurred for purposes of this
Agreement solely because the Company, an entity in which
the Company directly or indirectly beneficially owns 50%
or more of the voting securities of such entity (an
"Affiliate"), any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the
Company either files or becomes obligated to file a report
or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it of
shares of voting securities of the Company, whether in
excess of 30% or otherwise, or because the Company reports
that a Change in Control of the Company has or may have
occurred or will or may occur in the future by reason of
such beneficial ownership or (ii) subsection (c) hereof, a
"Change in Control" shall not be deemed to have occurred
for purposes of this Agreement solely because a person who
is a holder of five percent (5%) or more of the Voting
Stock and who also is an officer and director of the
Company on the date of this Agreement acquires 30% or more
of the Voting Stock.
(g) Notwithstanding the foregoing provisions of
subsections (a) and (b) hereof, a "Change of Control"
shall not be
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<PAGE> 9
deemed to have occurred for purposes of this Agreement
solely because the Company engages in an internal
reorganization, which may include a transfer of assets to
one or more Affiliates, provided that such transaction has
been approved by at least two-thirds of the Directors of
the Company and as a result of such transaction or
transactions, at least 80% of the combined voting power of
the outstanding securities of the Company or its successor
are held in the aggregate by the holders of Voting Stock
immediately prior to such transactions.
5.3.2 For purposes of this Section 5, the Employee
shall be deemed to have resigned "with Good Reason" if he does so following a
Change in Control as a result of the Company or any or its subsidiaries, if any,
having done any or all of the following without the Employee's express written
consent: (a) assigned the Employee different duties or made changes in his
reporting responsibilities, title, or office that are substantially inconsistent
with the Employee's duties, responsibilities, titles, or offices immediately
prior to the Change in Control; (b) reduced the Employee's Base Salary from that
in effect at the time of the Change in Control; (c) failed to continue any bonus
plan in substantially the same form as it existed prior to the Change in
Control; (d) required the Employee to he based more than 50 miles from his
present office location, except for required travel consistent with the
Employee's present business travel obligations; (e) failed to continue any plan
or program for compensation, employee benefits, stock purchase or ownership,
life insurance, group medical, disability, or vacation in substantially the same
form as immediately prior to the Change in Control, or otherwise made any
material reduction in the Employee's fringe benefits including but not limited
to those described in Section 3 herein; or (f) failed to obtain the assumption
of this Agreement by any successor to the Company.
5.4 Relationship to Other Termination Sections. The Employee
shall not be entitled to the benefits of this Section 5 if this Agreement and
his employment are terminated pursuant to Sections 4.1, 4.2, 4.3 or 4.4.
5.5 Company's Sole Obligations. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to such termination and of the severance benefits
set forth in this Section 5 as applicable constitute the sole obligations of the
Company and are in lieu of any damages or other compensation that the Employee
may claim in connection with this Agreement.
6. Resignation as Director and Officer. In the event of any
termination or resignation pursuant to Sections 4.1, 4.3, 4.4 or 5, the Employee
shall be deemed to have
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<PAGE> 10
resigned voluntarily as an officer and director of the Company (and of any
subsidiaries of the Company) if he was serving in either of such capacities at
the time of termination.
7. Non-Competition. The Employee acknowledges that, in connection
with the acquisition of Valence by the Company and the Company's employment of
the Employee hereunder, the Employee has entered into a Non-Competition
Agreement with the Company bearing even date herewith.
8. Inventions and Improvements.
(a) The Employee hereby assigns to the Company (or, at the
discretion of the Company, any of its subsidiaries that is designates) an
exclusive right to all inventions, discoveries, ideas and improvements made by
him, whether alone or jointly with others, relevant to the subject matter of his
employment, prior to the date of his employment hereunder.
(b) In carrying out research, developmental and productive
activities for the Company and its subsidiaries, the Employee shall accurately
record the precise nature thereof and the data derived therefrom, and all such
data and records shall be and remain the sole and exclusive property of the
Company and its subsidiaries.
(c) The Employee hereby recognizes as the exclusive property of
the Company and hereby assigns to the Company (and, as appropriate, its
subsidiaries) without further consideration:
(i) all inventions, discoveries, ideas, copyright rights,
mask works, improvements and any other intellectual property made, conceived or
discovered, by the Employee during the term of this Agreement, whether by
himself or jointly with others (whether or not employees of the Company or its
subsidiaries) and whether or not made at the Company's premises or during
working hours, relating or pertaining in any way to the kind of business or any
tests, research or development carried on by the Company, or any subsidiary or
affiliate of the Company; and
(ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company or its subsidiaries), may hereafter file with respect to any such
invention, discovery, idea or improvement and each patent that may be issued
thereon.
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<PAGE> 11
(d) The Employee agrees to execute any assignments to the Company
or its nominee of his rights, title and interest in any such inventions,
discoveries, ideas, copyright rights, mask works, improvements and any other
intellectual property, and any other instruments and documents requisite or
desirable in applying for and obtaining patents at the cost of the Company with
respect thereto in the United States and all foreign countries as and when
requested by the Company. The Employee further agrees, whether in the employ of
the Company or its subsidiaries or not, to cooperate to the extent and in the
manner requested by the Company in the prosecution or defense of any patent
claims or any litigation or other proceedings involving any inventions,
discoveries or improvements covered by this Agreement, but all expenses thereof
shall be paid by the Company or one of its subsidiaries. Any invention,
discovery, idea or improvement within the scope of this Section 8 shall be
disclosed promptly in writing to the Board of Directors of the Company.
(e) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea or improvement, whether because of his physical or mental
incapacity or for any other reason whatsoever, the Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by him.
9. No conflict With Other Employment Agreements. The Employee
represents and warrants that there are no other agreements or duties on the
Employee's part now in existence to assign inventions, discoveries, ideas or
improvements to any party other than the Company or one of its subsidiaries. The
Employee will not disclose to the Company or one of its subsidiaries or induce
the Company or one of its subsidiaries to use any confidential information or
material that he is now or shall become aware of that belongs to a former
employer or any party other than the Company or one of its subsidiaries .
10. Indemnification. The parties hereto covenant and agree to
execute, contemporaneously herewith, an Indemnification Agreement substantially
in the form attached hereto as Exhibit A.
11. Confidential Information. The parties hereto covenant and agree
to execute, contemporaneously herewith, a Confidentiality Agreement
substantially in the form attached hereto as Exhibit B.
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12. Insurance. The Company shall purchase and keep in full force and
effect for the Employee a policy of directors' and officers' liability insurance
at coverage levels consistent with other executive officers of the Company.
13. Authority. The individual executing this Agreement on behalf of
the Company represents and warrants to the Employee that the performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized by all requisite action and that he has the power and authority
to execute this Agreement.
14. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, facsimile,
telecopy, overnight courier service, or by United States certified or registered
mail, return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by facsimile or telecopy, when such facsimile or telecopy is transmitted
to the facsimile or telecopy number specified in this Section and confirmation
is received; and (c) if given by certified or registered mail, ten days after
the mailing thereof.
Address for notices (unless and until written notice is given of
any other address):
If to the Company:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Attention: Ms. Janet M. Biski,
Chief Financial Officer and Secretary
Fax: (714) 852-1099
If to the Employee:
LEC Electronic Components Limited
Unit 413 4th Floor
Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon Ton, Hong Kong
Attention: Wong Yin Bun Kenneth, President
Fax: (852) 2776-7770
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15. Further Documents and Acts. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.
16. Financial Reporting. Any computation pertaining to the Company's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.
17. Attorneys' Fees. In any action, litigation or proceeding between
the parties arising out of or in relation to this Agreement, the prevailing
party in such action shall be awarded, in addition to any damages, injunctions
or other relief, and without regard to whether or not such matter be prosecuted
to final judgment, such party's costs and expenses, including reasonable
attorneys' fees.
18. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
19. Venue. The parties hereby irrevocably and unconditionally consent
to submit to the exclusive jurisdiction of the courts of the State of
California, County of Orange, and/or the United States District Court for the
Central District of California (Southern Division) for any actions, suits,
controversies or proceedings arising out of or relating to this agreement and
the transactions contemplated hereby (and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts), and further
agree that service of any process, summons, notice or document by U.S.
registered mail to the respective addresses set forth above shall be effective
service of process for any action, suit or proceeding brought against the
parties in any such court. The parties hereby irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit, controversies or
proceeding arising out of this agreement or the transactions contemplated
hereby, in the courts of the State of California, County of Orange and/or the
United States District Court for the Central District of California (Southern
Division), and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient or improper forum.
20. Amendments/Waiver. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which
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<PAGE> 14
such consent was required shall not be deemed to imply consent or waiver of the
necessity of obtaining such consent for the same or similar acts in the future.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
22. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.
23. Entire Agreement. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written have been fully merged herein and are
superseded hereby.
24. Remedies. All rights, remedies, undertakings, obligations,
options, covenants, conditions and agreements contained in this Agreement shall
be cumulative and no one of them shall be exclusive of any other.
25. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
26. Interpretation. The language in all parts of this Agreement shall
be in all cases construed simply according to its fair meaning and not strictly
for or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the Sections of this
Agreement are for convenience only and shall not affect the construction or
interpretation of any of the provision herein.
27. Arbitration of Certain Disputes. Any controversy or claim arising
out of or relating to (a) the location of the Employee's principal place of
employment as provided in Section 1.1, (b) the scope of the Employee's duties as
provided in Section 1.2, (c) the termination of the Employee for cause under
Section 4.1, or (d) the resignation of the Employee for Good Reason under
Section 5.3.2 shall be resolved by arbitration. Arbitration proceedings shall be
commenced by the delivery by any party to a dispute to the other of written
notice requesting arbitration. The matter shall be submitted to such
disinterested arbitrator as shall be agreed upon by the parties to the
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<PAGE> 15
dispute, which arbitrator shall determine the rules to govern the arbitration
proceedings. Each party shall bear its own costs and expenses incurred by it in
connection with the arbitration; all other costs, including arbitrators' fees
and expenses, shall be borne equally by the parties. Notwithstanding the
foregoing, if the arbitrator determines that one party acted unreasonably and
not in good faith, the arbitrator shall have authority to assess the costs and
expenses of the arbitration, including the arbitrator's fee and reasonable
attorneys' fees, against that party. In the event the parties are unable to
agree upon an arbitrator within ten (10) business days of the date a notice
requesting arbitration is delivered, the arbitration shall be conducted in
accordance with the Labor Arbitration Rules of the American Arbitration
Association ("AAA"). If arbitration is conducted pursuant to the rules of the
AAA, then the controversy or claim shall be decided by a board of three (3)
arbitrators. The Employee, on the one hand, and the Company and LEC, on the
other hand, shall select one (1) arbitrator within ten (10) business days of a
demand for arbitration being made or, in the event of a party's failure to so
select, an arbitrator shall be named for that party by the AAA. Within ten (10)
business days of their selection, the two (2) arbitrators so selected shall
select a third arbitrator from the National Panel of Arbitrators maintained by
the AAA or as they otherwise shall agree. All arbitrators, however selected,
shall possess such experience in, and knowledge of, the subject area of the
controversy or claim so as to qualify as an "expert" with respect to such
subject matter. Any arbitration hearing shall be held in Orange County,
California, unless the parties to the dispute agree otherwise. The governing law
for the purposes of any arbitration arising hereunder shall be as set forth in
Section 18 hereof. Any award rendered by arbitration shall be final and binding
on the parties, and judgment thereon may be entered in any court of competent
jurisdiction. Notwithstanding any arbitration rules to the contrary, the award
of the arbitrator must be made no later than three (3) months following the date
on which the arbitrator or arbitrators are appointed.
28. Miscellaneous. Each provision of this Agreement to be performed
by a party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents referenced in this Agreement are fully
incorporated into this Agreement by reference. Unless expressly set forth
otherwise, all references herein to a "day" shall be deemed to be a reference to
a calendar day. Unless expressly stated otherwise, cross-reference herein shall
refer to provisions within this Agreement, and shall not be deemed to be
references to the overall transaction or to any other document. Time is of the
essence in the performance of this Agreement.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT AND UNDERSTANDS
ITS CONTENTS. EMPLOYEE ALSO ACKNOWLEDGES THAT THE COMPANY HAS INFORMED HIM THAT
THIS AGREEMENT DOES NOT REQUIRE EMPLOYEE TO ASSIGN TO THE COMPANY ANY INVENTION
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<PAGE> 16
WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA
LABOR CODE, A COPY OF WHICH IS ATTACHED AS EXHIBIT C TO THIS AGREEMENT. BY
SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO BE BOUND BY ALL OF THE TERMS AND
CONDITIONS OF THIS AGREEMENT.
(signature page follows)
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<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY: SRS LABS, INC., a Delaware corporation
By: /s/ THOMAS C.K. YUEN
---------------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief
Executive Officer
By: /s/ JANET M. BISKI
---------------------------------------
Janet M. Biski
Vice President, Chief Financial
Officer and Secretary
LEC: LEC ELECTRONIC COMPONENTS LIMITED,
a Hong Kong Company
By: /s/ WONG YIN BUN
---------------------------------------
Wong Yin Bun
EMPLOYEE: /s/ WONG YIN BUN
---------------------------------------
Wong Yin Bun
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<PAGE> 18
EXHIBIT A
INDEMNIFICATION AGREEMENT
<PAGE> 19
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 2nd day
of March, 1998, by and between SRS LABS, INC., a Delaware corporation (the
"Company"), and Wong Yin Bun ("Indemnitee").
WHEREAS, Indemnitee is currently serving as an executive officer of
certain of the Company's subsidiaries and the Company desires Indemnitee to
continue in such capacities. The Indemnitee is willing, subject to certain
conditions including, without limitation, the execution and performance of this
Agreement by the Company, to continue in such capacities;
WHEREAS, in addition to the indemnification to which the Indemnitee is
or may be entitled under the Certificate of Incorporation of the Company (the
"Certificate") or the Bylaws of the Company (the "Bylaws"), the Company has
obtained at its sole expense insurance protecting its officers and directors
including Indemnitee against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or threatened to
be made parties. However, as a result of circumstances having no relation to,
and beyond the control of, the Company and Indemnitee, there can be no assurance
of the continuation or renewal of the insurance;
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees and other agents to expensive litigation risks;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers, employees and other agents of the Company and its subsidiaries; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued and
effective service to the Company and its subsidiaries, and in order to induce
Indemnitee to provide services to the Company and its subsidiaries as an
executive officer of certain of the Company's subsidiaries, the Company wishes
to provide in this Agreement for the indemnification of and the advancing of
expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the coverage of Indemnitee under the Company's
directors' and officers' liability insurance policies.
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<PAGE> 20
NOW, THEREFORE, in consideration of the above premises and of
Indemnitee's promise to continue to serve the Company directly or, at its
request, with another enterprise, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINED TERMS AND CONSTRUCTION OF CERTAIN PHASES. As used in this
Agreement:
(a) "Board" shall mean the Board of Directors of the Company.
(b) References to the "Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or other
agents, so that if Indemnitee is or was a director, officer, employee or
other agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(c) A "Change in Control" shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, a subsidiary of the Company, or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes
the "Beneficial Owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing 40% or
more of the total voting power represented by the Company's then
outstanding Voting Securities; (ii) during a two-year period,
individuals who at the beginning of such period' constitute the Board
and any new director whose nomination for election or election was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; (iii) the
stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by
the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company
(in one transaction or a series of transactions) of all or substantially
all of the Company's assets.
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<PAGE> 21
(d) "Independent Counsel" shall be the person or body appointed
in connection with Section 4 of this Agreement.
(e) "Other enterprises" shall include employee benefit plans.
(f) "Potential Change in Control" shall be deemed to have
occurred if (i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in
Control; (ii) any person (including the' Company) publicly announces an
intention' to take or to consider taking actions that, if consummated,
would constitute a Change in Control; (iii) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, a subsidiary
of the Company, a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, or a person who is a party to
an indemnification agreement (in a form similar to this Agreement) with
the Company, is or becomes the "Beneficial Owner" (as defined in Rule
l3d-3 under said Act), directly or indirectly, of securities of the
Company representing 15% or more of the total voting power represented
by the Company's then outstanding Voting Securities; or (iv) the Board
adopts a resolution to the effect that, for purposes of this Agreement,
a Potential Change in Control has occurred.
(g) "Serving at the request of the Company" shall include,
without limitation, any service as a director, officer, employee or
agent of the Company or one of its subsidiaries which imposes duties on,
or involves services by, Indemnitee with respect to an employee benefit
plan.
(h) "Voting Securities" shall mean any securities of the Company
that are entitled to vote generally in the election of directors.
2. INITIAL INDEMNITY.
(a) Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee when he was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, administrative, investigative or criminal
(other than an action by or in the right of the Company), by reason of
the fact that he is or was or had agreed to become a director, officer,
employee or agent of the Company, or is or was serving or had agreed to
serve at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against any and all costs, charges and
expenses (including without limitation attorneys' and others' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection therewith and any
appeal therefrom if the Indemnitee acted in good faith and in a manner
he reasonably believed to be in or not
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<PAGE> 22
opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption
that the Indemnitee did not satisfy the foregoing standard of conduct to
the extent applicable thereto.
(b) Indemnity in Proceedings By or In the Name of the
Corporation. The Company shall indemnify the Indemnitee when he was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by or in the right of
the Company to procure a judgment in its favor by reason of the fact
that he is or was or had agreed to become a director, officer, employee
or agent of the Company, or is or was serving or had agreed to serve at
the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise against costs, charges and expenses (including attorneys' and
others' fees and expenses) actually and reasonably incurred by him in
connection with the defense or settlement thereof or any appeal
therefrom if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any
claim, issue or matter as to which the Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that
the Court of Chancery or the court in which such action, suit or
proceeding was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall
deem proper.
(c) Indemnification of Expenses of Successful Party. To the
extent that the Indemnitee has been successful on the merits or
otherwise, including without limitation the dismissal of an action
without prejudice, in defense of any action, suit or proceeding referred
to in Sections 2(a) or 2(b) hereof or in defense of any claim, issue or
matter therein, he shall be indemnified against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by him in connection therewith.
(d) Determination of Right of Indemnitee to Indemnification. Any
indemnification under Sections 2(a) or 2(b) (unless ordered by a court)
shall be made by the Company only as authorized in the specific case
upon a determination in accordance with Section 4 hereof or any
applicable provision of the Certificate, Bylaws, other agreement,
resolution or otherwise. Such determination shall be made (i) by the
Board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding or (ii) if such a quorum
of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided below in
this subsection (d)) in a written opinion or (iii) by the stockholders
of the Company (the "Stockholders"). Independent legal counsel shall be
designated by vote of a majority of the disinterested directors;
provided, however, that
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<PAGE> 23
if the Board is unable or fails to so designate, such designation shall
be made by the Indemnitee subject to the approval of the Company (which
approval shall not be unreasonably withheld). Independent legal counsel
shall not be any person or firm who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest
in representing either the Company or the Indemnitee in an action to
determine the Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of such independent legal
counsel and to indemnify fully such counsel against costs, charges and
expenses (including attorneys' and others' fees and expenses) actually
and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(e) Advancement of Expenses. All expenses (including attorneys'
and others' fees and expenses) incurred by the Indemnitee in his
capacity as a director or officer of the Company in defending a civil or
criminal action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding in
the manner prescribed by Section 4(b) hereof.
3. ADDITIONAL INDEMNIFICATION.
(a) Right to Additional Indemnification. Pursuant to Section
145(f) of the General Corporation Law of the State of Delaware (the
"GCL"), without limiting any right which the Indemnitee may have
pursuant to Section 2 hereof, the Certificate, the Bylaws, the GCL, any
policy of insurance or otherwise, but subject to the limitations on the
maximum permissible indemnity which may exist under applicable law at
the time of any request for indemnity hereunder determined as
contemplated by this Section 3(a), the Company shall indemnify the
Indemnitee against any amount which he is or becomes legally obligated
to pay relating to or arising out of any claim made against him because
of any act, failure to act or neglect or breach of duty, including any
actual or alleged error, misstatement or misleading statement, which he
commits, suffers, permits or acquiesces in while acting in his capacity
as a director, an officer, an employee or agent of the Company, or, at
the request of the Company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, whether prior to or after the date of this Agreement and
whether or not the basis of the claim is alleged action or inaction in
an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent
of the Company. The payments which the Company is obligated to make
pursuant to this Section 3 shall include without limitation (i) damages,
judgments, settlements (in accordance with Section 6(d) of this
Agreement), fines and similar penalties, and excise taxes and penalties
assessed on a person with respect to an employee benefit plan, (ii)
charges, costs, expenses (including attorneys' and others' fees and
related disbursements), expenses of investigation, expenses of defense
of legal actions, suits, proceedings or claims and appeals therefrom,
expenses relating to serving as a witness and expenses of appeal,
attachment or similar bonds, and (iii) any interest, assessments, or
other charges imposed thereon and any federal, state, local or foreign
taxes imposed as a result of the
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<PAGE> 24
actual or deemed receipt of such payments under this Agreement.
Notwithstanding the foregoing, the Company shall not be obligated under
this Section 3(a) to make any payment in connection with any claim
against the Indemnitee:
(i) to the extent of any fine or similar governmental
imposition which the Company is prohibited by applicable law from
paying which results in a final, nonappealable order; or
(ii) to the extent based upon or attributable to the
Indemnitee gaining in fact a personal profit to which he was not
legally entitled, including without limitation profits made from
the purchase and sale by the Indemnitee of equity securities of
the Company which are recoverable by the Company pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended,
and profits arising from transactions in publicly traded
securities of the Company which were effected by the Indemnitee
in violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, including Rule l0b-5 promulgated thereunder.
The determination of whether the Indemnitee shall be entitled to indemnification
under this Section 3(a) shall be made in accordance with Section 4(d) hereof.
(b) Advancement of Expenses Relating to Additional
Indemnification. Expenses (including without limitation attorneys' and
others' fees and expenses) incurred by Indemnitee in defending any
actual or threatened civil or criminal action, suit, proceeding or claim
shall be paid by the Company in advance of the final disposition thereof
as authorized in accordance with Section 4(b) hereof.
4. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.
(a) General. Except as otherwise permitted or required by the
GCL, for purposes of pursuing his rights to indemnification under
Sections 2(a), 2(b) or 3(a) hereof, as the case may be, the Indemnitee
may, but shall not be required to, (i) submit to the Board a sworn
statement of request for indemnification substantially in the form of
Exhibit 1 attached hereto and made a part hereof (the "Indemnification
Statement") averring that he is entitled to indemnification hereunder;
and (ii) present to the Company reasonable evidence of all expenses for
which payment is requested. Submission of an Indemnification Statement
to the Board shall create a presumption that the Indemnitee is entitled
to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case
may be, and the Board shall be deemed to have determined that the
Indemnitee is entitled to such indemnification unless within 30 calendar
days after submission of the Indemnification Statement the Board shall
determine by vote of a majority of the directors at a meeting at which a
quorum is present, based upon clear and convincing evidence (sufficient
to rebut the foregoing presumption), and the Indemnitee shall have
received notice within such period in writing of such
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<PAGE> 25
determination that the Indemnitee is not so entitled to indemnification,
which notice shall disclose with particularity the evidence in support
of the Board's determination. The foregoing notice shall be sworn to by
all persons who participated in the determination and voted to deny
indemnification. The provisions of this Section 4(a) are intended to be
procedural only and shall not affect the right of the Indemnitee to
indemnification under this Agreement and any determination by the Board
that the Indemnitee is not entitled to indemnification and any failure
to make the payments requested in the Indemnification Statement shall be
subject to judicial review as provided in Section 5 hereof.
(b) Undertaking or Expense Request Regarding Advancement of
Expenses. For purposes of determining whether to authorize advancement
of expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit
to the Board a sworn statement of request for advancement of expenses
substantially in the form of Exhibit 2 attached hereto and made a part
hereof (the "Undertaking"), averring that (i) he has reasonably incurred
or will reasonably incur actual expenses in defending an actual civil or
criminal action, suit, proceeding or claim and (ii) he undertakes to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Company under this Agreement or
otherwise. For purposes of requesting advancement of expenses pursuant
to Section 3 (b) hereof, the Indemnitee (i) may, but shall not be
required to, submit an Undertaking or (ii) shall submit such other form
of request as he determines to be appropriate (an "Expense Request").
Upon receipt of an Undertaking or Expense Request, as the case may be,
the Board shall within 20 calendar days authorize immediate payment of
the expenses stated in the Undertaking or Expense Request, whereupon
such payments shall immediately be made by the Company. No security
shall be required in connection with any Undertaking or Expense Request
and any Undertaking or Expense Request shall be accepted without
reference to the Indemnitee's ability to make repayment.
(c) Independent Counsel. Notwithstanding anything to the contrary
contained in Sections 2(d) or 4(a) of this Agreement, after a Change of
Control and if requested by the Indemnitee at the time of making a claim
for indemnification, (i) any determination under Section 2(a) or 2(b)
(unless ordered by a court) shall be made by Independent Counsel (as
defined below), and (ii) after the submission of an Indemnification
Statement, the determination pursuant to Section 4(a) whether an
Indemnitee shall be entitled to indemnification under Sections 2(a),
2(b) or 3(a) hereof, as the case may be, shall be made by Independent
Counsel (as defined below) instead of by the Board. For purposes of this
Section 4(c) "Independent Counsel" shall be an attorney selected by
Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), (i) who has not otherwise performed services for
the Company or the Indemnitee (other than in connection with
indemnification matters) within the three years prior to the selection
of the Independent Counsel, and (ii) who shall not, under the applicable
standards of professional conduct then prevailing, have a conflict of
interest in representing either the Company or Indemnitee in an action
to determine Indemnitee's rights under this Agreement. Any determination
by
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<PAGE> 26
Independent Counsel as to whether and to what extent the Indemnitee
should be permitted to be indemnified under applicable law shall be
rendered by its written opinion to the Company and Indemnitee. The
Company agrees to pay the reasonable fees of the Independent Counsel and
to indemnify fully such counsel against any and all expenses (including
attorneys' and others' fees and expenses), claims, liabilities, loss,
and damages arising out of or relating to this Agreement, the engagement
of Independent Counsel pursuant hereto or the opinion of such counsel
pursuant hereto.
5. INDEMNIFICATION PROCESS AND APPEAL.
(a) Suit to Enforce Rights. If a claim for indemnification made
to the Company pursuant to Section 4 hereof is not paid in full by the
Company within 30 calendar days after a written claim has been received
by the Company, the Indemnitee may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim in any
court having subject matter jurisdiction thereof. The Company hereby
consents to service of process and to appear in any such proceeding. The
remedy provided for in this Section 5 shall be in addition to any other
remedies available to Indemnitee in law or equity.
(b) Defense to Indemnification, Burden of Proof and Presumptions.
In any action brought under Section 5(a) hereof, it shall be a defense
to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof
(other than an action brought to enforce a claim for expenses incurred
in defending any proceeding in advance of its final disposition where
the Undertaking, if any is required, has been tendered to the Company)
that the Indemnitee has not met the standards of conduct which make it
permissible under the GCL for the Company to indemnify the Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement that it is not
permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be
on the Company. Neither the failure of the Company (including its Board,
independent legal counsel or its stockholders) or Independent Counsel to
have made a determination prior to the commencement of such action by
Indemnitee that indemnification of the claimant is proper under the
circumstances because he has met the standard of conduct set forth in
applicable law, nor an actual determination by the Company (including
its Board, independent legal counsel or its stockholders) or Independent
Counsel that Indemnitee had not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that Indemnitee
has not met the applicable standard of conduct.
(c) Indemnification for Expenses Incurred in Enforcing Rights. It
is the intent of the Company that the Indemnitee not be required to
incur the expenses associated with the enforcement of his rights under
this Agreement by litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended
to be extended to the Indemnitee hereunder. Accordingly, if it
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<PAGE> 27
should appear to the Indemnitee that the Company has failed to comply
with any of its obligations under the Agreement or in the event that the
Company or any other person takes any action to declare the Agreement
void or unenforceable, or institutes any action, suit or proceeding
designed (or having the effect of being designed) to deny, or to recover
from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee
from time to time to retain counsel of his choice, at the expense of the
Company as hereafter provided, to represent the Indemnitee in connection
with the initiation or defense of any litigation or other legal action,
whether by or against the Company or any director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Regardless of the outcome thereof, the Company shall pay and be solely
responsible for any and all costs, charges and expenses (including
without limitation attorneys' and others' fees and expenses) reasonably
incurred by the Indemnitee (i) as a result of the Company's failure to
perform this Agreement or any provision thereof or (ii) as a result of
the Company or any person contesting the validity or enforceability of
this Agreement or any provision thereof as aforesaid; provided that, if
and to the extent that a court of competent jurisdiction determines (in
a final judicial determination as to which all rights of appeal
therefrom have been exhausted or waived or have lapsed) that each of the
material assertions made by Indemnitee in such litigation or other legal
action was not made in good faith or was frivolous, the Company shall
not be obligated to pay any such costs, charges and expenses incurred by
Indemnitee in connection with such suit and shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company)
for all such amounts theretofore paid under this Section 5(c).
Notwithstanding the procedure for selection of counsel in Section 6(c)
herein, in connection with the assertion of any claim under this Section
5(c), Indemnitee from time to time may retain counsel of his choice to
represent him.
6. NOTIFICATION AND DEFENSE OF PROCEEDING.
(a) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought
under this Agreement (for purposes of this Section 6, a "Claim").
Indemnitee shall also provide the Company such information and
cooperation as the Company from time to time may reasonably request and
as shall reasonably be within Indemnitee's power to provide.
(b) Notice to Insurers. If at the time of the receipt of a notice
of a Claim pursuant to Section 6(a) hereof the Company has directors'
and officers' liability insurance (or a similar policy covering key
employees, if applicable) in effect, the Company shall give prompt
notice of such Claim to the insurers in accordance with the procedures
set forth in the respective policies. The Company thereafter shall take
all necessary or desirable action to cause such insurers to pay, on
behalf of Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
-9-
<PAGE> 28
(c) Selection of Counsel. With respect to any litigation or other
legal action relating to a Claim as to which Indemnitee notifies the
Company (for purposes of this Section 6, a "Proceeding"), the Company
will be entitled to participate in the Proceeding at its own expense and
except as otherwise provided below, to the extent the Company so wishes,
it may assume the defense thereof with counsel selected by the Company
and approved by Indemnitee, which approval shall not be unreasonably
withheld. After notice from the Company to Indemnitee of its election to
assume the defense of any Proceeding, the Company will not be liable to
Indemnitee under this Agreement or otherwise for any expenses
subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ his
own counsel in such Proceeding, but all expenses related thereto
incurred after notice from the Company of its assumption of the defense
shall be at Indemnitee's expense unless: (i) the employment of counsel
by Indemnitee has been authorized by the Company; (ii) Indemnitee has
reasonably determined and either the Company shall have agreed, or
disinterested counsel (as defined in this Section 6(c) shall have
determined, that there may be a conflict of interest between Indemnitee
and the Company in the defense of the Proceeding; (iii) after a Change
in Control, the employment of counsel by Indemnitee has been approved by
the Independent Counsel; or (iv) the Company shall not in fact have
employed counsel to assume the defense of such Proceeding, in each of
which case all expenses of the Proceeding shall be borne by the Company,
and Indemnitee's counsel shall have been approved by the Company (which
approval may not be unreasonably withheld) and any carrier of an
applicable insurance policy if required under the terms of that policy
or under applicable law. As used in this Section 6(c), "disinterested
counsel" shall mean counsel selected and compensated by the Company, and
approved by Indemnitee (which approval may not be unreasonably
withheld), to determine whether a conflict of interest may exist, which
counsel shall not represent the Company, Indemnitee or any other party
to the Proceeding for which indemnification is sought. Disinterested
counsel shall be selected promptly following the notice from Indemnitee
to the Company of Indemnitee's belief that a conflict of interest may
exist. The Company shall not be entitled to assume the defense of any
Proceeding as to which the determination provided for in (ii) above
shall have been made. Nothing herein shall limit the right of Indemnitee
to employ counsel at Indemnitee's sole expense.
(d) Settlements. Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be liable to
indemnify Indemnitee under this Agreement or otherwise for any amounts
paid in settlement of any Proceeding effected without the Company's
written consent; provided, however, that if a Change in Control has
occurred, the Company shall be liable for indemnification of Indemnitee
for amounts paid in settlement if the Independent Counsel has approved
the settlement. The Company shall not settle any Proceeding in any
manner that would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Company nor Indemnitee will
unreasonably withhold its consent to any proposed settlement. The
Company shall not be liable to indemnify Indemnitee under this
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<PAGE> 29
Agreement with regard to any judicial award if the Company was not given
a reasonable and timely opportunity, at its expense, to participate in
the defense of such action; the Company's liability hereunder shall not
be excused if participation in the Proceeding by the Company was barred
by this Agreement.
7. ESTABLISHMENT OF A TRUST. Immediately upon the occurrence of a Change
in Control or a Potential Change in Control, the Company shall, upon written
request by Indemnitee, create a trust (a "Trust") for the benefit of Indemnitee
and from time to time upon written request of Indemnitee shall fund the Trust in
an amount sufficient to satisfy any and all amounts reasonably anticipated at
the time of each such request to be incurred in connection with any claim made
by Indemnitee. The amount or amounts to be deposited in the Trust pursuant to
the foregoing funding obligation shall be determined (i) prior to the occurrence
of a Change in Control or a Potential Change in Control, (a) by the Board by a
majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding serving as the basis of a claim by Indemnitee, or (b)
if such a quorum of disinterested directors is not available or so directs, by
independent legal counsel (designated in the manner provided in Section 2(d)) in
a written opinion or (c) by the Stockholders, or (ii) after the occurrence of a
Change in Control or a Potential Change in Control, by Independent Counsel as
defined in Section 4(c) (for purposes of this Section 7, the "Reviewing
Party").The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded without the
written consent of Indemnitee, (ii) the trustee of the Trust (the "Trustee")
shall advance, within 20 business days of the request by Indemnitee, any and all
expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust
under the same circumstances for which Indemnitee would be required to reimburse
the Company under Section 4(b) of this Agreement), (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above, (iv) the Trustee shall promptly pay to Indemnitee all amounts
for which Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify Indemnitee for
any amounts or to advance expenses to Indemnitee with respect to any
litigation or other legal action initiated or brought voluntarily (and
not by way defense or counterclaim) by Indemnitee against the Company or
any agent of the Company unless (i) the
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<PAGE> 30
Company has joined in or the Board has consented to the initiation of
such litigation or other legal action, (ii) the litigation or other
legal action is brought to establish or enforce a right to
indemnification under Section 5 of this Agreement, or (iii) the
litigation or other legal action is instituted after a Change in Control
and Independent Counsel has approved its initiation; or
(b) No Duplication of Payments. To make any payment in connection
with any claim made against Indemnitee to the extent Indemnitee has
otherwise actually received payment (under any insurance policy, bylaw
or otherwise) of the amounts otherwise indemnifiable hereunder.
9. SCOPE; NONEXCLUSIVITY.
(a) Scope. In accordance with Section 145(f) of the GCL, the
parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the
Certificate, Bylaws, vote of its stockholders or disinterested directors
or applicable law. To the extent that a change in applicable law
(whether by statute, rule or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Certificate, Bylaws, applicable law or this Agreement, it is the intent
of the parties that Indemnitee enjoy by this Agreement the greater
benefits so afforded by such change.
(b) Non exclusivity. Consistent with Section 145(f) of the GCL,
the indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the
Certificate, Bylaws, any agreement, any vote of stockholders or
disinterested directors, or otherwise, both as to actions in
Indemnitee's official capacity and as to actions in another capacity
while holding such office, and shall continue after Indemnitee has
ceased to be a director, officer, employee or agent.
10. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, federal or state law or applicable public policy may
prohibit the Company from indemnifying its directors, officers, employees or
other agents under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the U.S. Securities and Exchange Commission or applicable state
securities agencies to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
11. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of the Company with coverage for losses from wrongful acts, or to
ensure the Company's performance of its indemnification obligations under this
-12-
<PAGE> 31
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance (or such other similar
insurance policy covering key employees, if applicable), Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain such insurance if the Company determines in good faith that
such insurance is not reasonably available, if the premium costs for such
insurance are disproportionate to the amount of coverage provided, if the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
12. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as of
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was a director,
officer, employee or agent of the Company, or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
13. PERIOD OF LIMITATION. No legal action shall be brought and no cause
of action shall be asserted by or on behalf of the Company or any affiliate of
the Company against Indemnitee, Indemnitee's spouse, heirs, executors, or
personal or legal representatives after the expiration of two years from the
date of accrual of such causes of action, or such longer period as may be
required by state law under the circumstances (i.e., a minimum limitation period
that expressly may not be altered by agreement among the parties). Any claim or
cause of action of the Company or any of its affiliates shall be extinguished
and deemed released unless asserted by the timely filing of a legal action
within such period; provided, however, if any shorter period of limitation is
otherwise applicable to any such cause of action, the shorter period shall
govern.
14. RATIFICATION OF ACTS. None of the provisions contained in this
Agreement is intended to constitute, or shall be construed in any manner as
constituting, a ratification by the Company (or by any of its directors,
officers or other agents) of any action or inaction on the part of Indemnitee.
15. CONTINUED EMPLOYMENT. No provision contained herein shall be
construed as conferring upon Indemnitee any right with respect to continuance of
performance of services for the Company or a subsidiary of the Company, nor
shall any such provisions interfere in any way with the right of the Company to
terminate Indemnitee's services as an officer, employee or other agent at any
time with or without cause.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or
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<PAGE> 32
substantially all of the business and/or assets of the Company), assigns,
spouses, heirs and personal and legal representatives. The Company shall require
and cause any successor (whether direct or indirect by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business and!or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. Nothing in this
Section 16 shall be construed to limit the protections afforded Indemnitee under
this Agreement which would occur upon a Change in Control or a Potential Change
in Control. The indemnification provided under this Agreement shall continue as
to Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any litigation or other legal action relating to events for which a
claim for indemnification is made by Indemnitee hereunder.
17. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
18. CHOICE OF LAW. This Agreement shall be governed by, and its
provisions construed in accordance with, the laws of the State of Delaware,
including without limitation, all matters of formation, construction, validity,
performance and enforcement and without giving effect to the principles of
conflicts of laws.
19. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 19. If this Agreement or any portion hereof shall be invalidated
or held unlawful or unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated or held unlawful or unenforceable, the provision(s) so
held to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid and
legal and the balance of this Agreement shall be enforceable in accordance with
its terms. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void or
unenforceable.
20. AMENDMENT AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No
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<PAGE> 33
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar), nor
shall such waiver constitute a continuing waiver. Except as specifically
provided herein, no failure to exercise or any delay in exercising any right or
remedy hereunder shall constitute a waiver thereof.
21. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
22. FUTURE AGREEMENTS. The Company shall not adopt any amendment to its
Certificate or Bylaws the effect of which would be to deny, diminish or encumber
Indemnitee's rights to indemnity pursuant to the Certificate, the Bylaws, the
GCL or any other applicable law as applied to any act or failure to act
occurring in whole or in part prior to the date (the "Effective Date") upon
which the amendment was approved by the Board or the stockholders, as the case
may be. In the event that the Company shall adopt any amendment to its
Certificate or Bylaws the effect of which is to so deny, diminish or encumber
Indemnitee's rights to indemnity, such amendment shall apply only to acts or
failures to act occurring entirely after the Effective Date thereof unless the
Indemnitee shall have voted in favor of such adoption as a director or holder of
record of the Company's Voting Securities, as the case may be.
23. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which counterparts taken
together shall constitute one and the same document.
24. HEADINGS. Section headings herein are for reference purposes only
and shall not affect the meaning or interpretation of any provision of this
Agreement.
[Signature Page Follows]
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SRS LABS, INC.,
a Delaware corporation
By:
----------------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief Executive
Officer
Address: 2909 Daimler Street
Santa Ana, California 92705
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ----------------------------------
Wong Yin Bun
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
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<PAGE> 35
EXHIBIT 1
INDEMNIFICATION STATEMENT
STATE OF_______________)
) ss
COUNTY OF______________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Indemnification Statement is submitted pursuant to the
Indemnification Agreement, dated as of March 2, 1998, between SRS Labs, Inc.
(the "Company"), a Delaware corporation, and the undersigned.
2. I am requesting indemnification against charges, costs,
expenses (including attorneys' and others' fees and expenses), judgments, fines
and amounts paid in settlement, all of which have been or will be incurred by me
in connection with an actual or threatened action, suit, proceeding or claim to
which I am a party or am threatened to be made a party.
3. With respect to all matters related to any such action, suit,
proceeding or claim, I am entitled to be indemnified as herein contemplated
pursuant to the aforesaid Indemnification Agreement.
4. Without limiting any other rights which I have or may have, I
am requesting indemnification against liabilities which have or may arise out of
_______________________________________________________________________________
_______________________________________________________________________________
____________________________________________________________________________.
_______________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
_______________________
[Seal]
My commission expires the ___ day of _______________, _____.
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<PAGE> 36
EXHIBIT 2
UNDERTAKING
STATE OF_________________)
) ss
COUNTY OF________________)
I, ___________________________, being first duly sworn, do depose
and say as follows:
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of March 2, 1998, between SRS Labs, Inc. (the "Company"), a
Delaware corporation, and the undersigned.
2. I am requesting advancement of certain costs, charges and
expenses which I have incurred or will incur in defending an actual or pending
civil or criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it
shall ultimately be determined that I am not entitled to be indemnified by the
Company under the aforesaid Agreement or otherwise.
4. The costs, charges and expenses for which advancement is
requested are, in general, all expenses related to
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________________________.
______________________
Subscribed and sworn to before me, a Notary Public in and for
said County and State, this ___ day of ____________________, _____.
______________________
[Seal]
My commission expires the ___ day of _______________, _____.
-18-
<PAGE> 37
EXHIBIT B
CONFIDENTIALITY AGREEMENT
<PAGE> 38
EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY
In return for new or continued employment by SRS LABS, INC.(the
"Company"), I acknowledge and agree that:
1. DEFINITION. For purposes of this Agreement, unless otherwise
noted, all references to the "Company" shall include the Company and/or all of
its direct and indirect subsidiaries.
2. OBLIGATIONS OF CONFIDENTIALITY. I will maintain in confidence and
will not, either during or at any time after the term of my employment without
the prior express written consent of the Company, communicate or disclose to, or
use for the benefit of myself or any other person, firm, association or
corporation (including, without limitation, any subsequent employer) any
proprietary or confidential information, trade secret or know-how belonging to
the Company ("Proprietary Information"), whether or not it is in written or
permanent form, except to the extent required to perform duties on behalf of the
Company in my capacity as an employee. Such Proprietary Information includes,
but is not limited to, techniques, processes, plans or methods of the Company in
developing, marketing and licensing products and services, and technical and
business information relating to the Company's inventions or products, research
and development, production processes, manufacturing and engineering processes,
machines and equipment, finances, existing and potential customers and
suppliers, marketing and future business plans. However, such Proprietary
Information shall not include any materials, techniques, or information of the
type specified to the extent that such materials, techniques or information are
publicly known or generally utilized by others engaged in the same business or
activities as that in the course of which the Company utilized, developed or
otherwise acquired such materials, techniques, or information. Upon termination
of my employment or at the request of my supervisor before termination, I will
deliver to the Company all written and tangible material in my possession
belonging to the Company incorporating the Proprietary Information or otherwise
relating to the Company's Business. These obligations with respect to
Proprietary Information extend to information belonging to customers and
suppliers of the Company who may have disclosed such information to me as the
result of my status as an employee of the Company. The covenants made in this
Section 2 shall commence on the date hereof and shall be perpetual with respect
to any Proprietary Information.
3. POSSESSION OF INFORMATION IN TANGIBLE FORM. All Proprietary
Information consisting of records, reports, notes, compilations, computer
software programs or disks or other recorded matter, and copies or reproductions
thereof, relating to the Company's operations, activities or business, made or
received by me during any period of employment with the Company are and shall be
the Company's exclusive property, and I will keep the same at all times in the
Company's custody and subject to its control, and will surrender the same at the
termination of my employment if not before.
4. COMPANY'S REMEDIES FOR BREACH. I acknowledge that a breach by me
of this Agreement cannot reasonably or adequately be compensated in damages in
an action at law, and that
-1-
<PAGE> 39
a breach of any of the provisions contained in this Agreement will cause the
Company irreparable injury and damage. By reason thereof, I agree that the
Company shall be entitled, in addition to any other remedies it may have under
this Agreement or otherwise, to preliminary and permanent injunctive and other
equitable relief to prevent or curtail any breach of this Agreement; provided,
however, that no specification in this Agreement of a specific legal or
equitable remedy shall be construed as a waiver or prohibition against the
pursuing of other legal or equitable remedies in the event of such a breach.
5. SEVERABILITY. In the event that any provision of this Agreement or
any word, phrase, clause, sentence or other portion thereof should be held to be
unenforceable or invalid for any reason, such provision or portion thereof shall
be modified or deleted in such a manner so as to make this Agreement as modified
legal and enforceable to the fullest extent permitted under applicable laws.
6. BINDING EFFECT. This Agreement shall be binding upon my heirs,
executors, administrators or other legal representatives or assigns and shall
inure to the benefit of and be enforceable by the Company and its successors and
assigns.
7. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
conflicts of law principles thereof.
9. VENUE. The parties hereby irrevocably and unconditionally consent
to submit to the exclusive jurisdiction of the courts of the State of
California, County of Orange, and/or the United States District Court for the
Central District of California (Southern Division) for any actions, suits,
controversies or proceedings arising out of or relating to this Agreement and
the transactions contemplated hereby (and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts), and further
agree that service of any process, summons, notice or document by U.S.
registered mail to the respective addresses set forth above shall be effective
service of process for any action, suit or proceeding brought against the
parties in any such court. The parties hereby irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit, controversies or
proceeding arising out of this Agreement or the transactions contemplated
hereby, in the courts of the State of California, County of Orange and/or the
United States District Court for the Central District of California (Southern
Division), and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient or improper forum.
(signature page follows)
-2-
<PAGE> 40
IN WITNESS WHEREOF, I have hereunto set my hand as of this 2nd day of
March, 1998.
----------------------------------------
Wong Yin Bun
Address:
c/o Valence Technology Inc.
Unit 413, Hong Kong Industrial Technology
Centre
72 Tat Chee Avenue
Kowloon, Hong Kong
Accepted and agreed:
SRS LABS, INC.,
a Delaware corporation
- --------------------------------------------
Thomas C.K. Yuen
Chairman of the Board and
Chief Executive Officer
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<PAGE> 41
EXHIBIT C
SECTION 2870 OF THE CALIFORNIA LABOR CODE
<PAGE> 42
SECTION 2870 OF THE CALIFORNIA LABOR CODE
SECTION 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded from
being required to be assigned under subdivision (a), the provision is against
the public policy of this state and is unenforceable.
<PAGE> 1
EX-10.33
Dated this 1st day of September 1995
HONG KONG INDUSTRIAL TECHNOLOGY
CENTRE CORPORATION
and
VALENCE SEMICONDUCTOR DESIGN LIMITED
------------------------------------------------
TENANCY AGREEMENT
of
Unit 413 on the Fourth Floor of
Hong Kong Industrial Technology Centre
------------------------------------------------
DENTON HALL
10/F HUTCHISON HOUSE
10 HARCOURT ROAD
CENTRAL
HONG KONG
Ref.: RMSK/GPKL/H:4414
L:1158
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THIS TENANCY AGREEMENT is made the 1st day of September
One thousand nine hundred and ninety-five
Parties BETWEEN HONG KONG INDUSTRIAL TECHNOLOGY CENTRE CORPORATION whose
registered office is situate at 1st floor, Hong Kong Industrial
Technology Centre, 72 Tat Chee Avenue, Kowloon, Hong Kong (hereinafter
called "the Landlord" which expression shall include its successors in
title and assigns) of the one part and the party whose particulars are
set out in the First Schedule (hereinafter called "the Tenant") of the
other part.
NOW IT IS HEREBY AGREED as follows:
Premises 1. The Landlord shall let and the Tenant shall take ALL THOSE
PREMISES more particularly described in Part I of the Second
Schedule and for identification purposes only shown and coloured
pink on the plan annexed hereto ("the Premises") forming part of
HONG KONG INDUSTRIAL TECHNOLOGY CENTRE ("the Building"), situate
at the junction of Tat Chee Avenue and Fa Po Street, Kowloon,
Hong Kong and erected on all that piece or parcel of ground
registered in the Land Registry as New Kowloon Inland Lot No.
6128.
Term 2. The Tenant shall hold the Premises for the term set out in Part
II of the Second Schedule ("the Term") together with the right to
use in common with the Landlord and all others having the like
right the entrance(s) passages staircases landings accessways and
lifts (if any and whenever the same shall be operating) of the
Building without causing any obstruction thereto and so far as
the same is necessary for the proper enjoyment of the Premises
Subject To all easements and similar rights and privileges which
the Premises are or may be subject to.
Tenant's 3. The Tenant hereby covenants and agrees with the Landlord as
Obligations follows:
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Rent and 3.01 To pay to the Landlord or such person(s) as the Landlord
Management may direct the rent set out in Part I of the Third Schedule
Fees ("the Rent") and the management fees set out in Part II of
the Third Schedule ("the Management Fees") in advance
without any deduction on the first day of each and every
calendar month throughout the Term, the first and last of
such payments to be apportioned according to the number of
days in the calendar month in which the Term commence or
ends.
Cost-of 3.02 To pay to the Landlord or such person(s) as the Landlord
Additional may direct the costs of additional air-conditioning
Air- services (if any) and the cost of chilled water supply for
Conditioning the purpose of cooling the Tenant's equipment (if any) at
Services such time and in such manner as provided in clause 5.10
hereof.
Rates, etc. 3.03 To pay and discharge all rates taxes assessments duties
impositions charges and outgoings whatsoever now or
hereafter to be imposed or levied on the Premises or upon
the owner or occupier in respect thereof by the Government
of Hong Kong or other lawful authority (Crown Rent and
Property Tax alone excepted). Without prejudice to the
generality of this sub-clause the Tenant shall pay all
rates imposed on the Premises in the first place to the
Landlord who shall settle the same with the Hong Kong
Government and in the event of the Premises not yet having
been separately assessed to rates the Tenant shall until
such time as the Premises are assessed to rates pay to the
Landlord quarterly and in advance a sum equal to the rates
which would have been charged by the Hong Kong Government
for each quarter on the basis of a rateable value equal to
twelve months rent payable by the Tenant hereunder, any
overpayment or underpayment by the Tenant shall be
adjusted and credited to the account of the Tenant or (as
the case may be) paid by the Tenant to the Landlord
immediately upon the separate assessment in respect of the
Premises having been made in accordance with the Rating
Ordinance (Cap. 116).
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Utility 3.04 To pay and discharge all utility deposits and charges
Charges and including without limitation deposits and charges in
Deposits respect of gas water electricity facsimile and telephone
as may be shown by or operated from the Tenant's own
metered supplies or by accounts rendered to the Tenant by
the appropriate utility companies or otherwise in respect
of all such utilities consumed on or in the Premises.
House rules 3.05 To obey and comply with and to indemnify the Landlord
and against any breach of such house rules and regulations as
Regulations may from time to time be adopted by the Landlord or such
person as may from time to time be appointed by the
Landlord as the manager of the Building ("the Manager") in
accordance with Clause 5.17 hereof.
No Breach of 3.06 Not to do or permit or suffer to be done any act, deed,
Crown Grant matter or thing whatsoever which may amount to a breach of
or Deed of the covenants terms and conditions respectively contained
Mutual in Agreement and Conditions of Grant No.12221 (including
Covenants any modification or variation thereto) and the Deed of
Mutual Covenants (if any) and Sub-Deed of Mutual Covenants
(if any) affecting the Building and to fully indemnify the
Landlord against the consequences of any such breach.
Compliance 3.07 To obey and comply with all ordinances, regulations,
with bye-laws, rules and requirements of any Governmental or
Ordinances other competent authority relating to the use and
occupation of the Premises by the Tenant or to any other
act deed matter or thing done permitted suffered or
omitted therein or thereon by the Tenant or any employee,
agent or licensee of the Tenant, and without prejudice to
the foregoing to obtain any licence approval or permit
required by any Governmental or other competent authority
in connection with the Tenant's use and occupation of the
Premises and to maintain in force and observe and comply
with the terms of the same during the continuance of this
tenancy and to indemnify the Landlord against the
consequences of any breach of this provision.
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Fitting Out 3.08 (i) To fit out the Premises at its own costs and
Decoration expenses and before the commencement of any
Refurbishing fitting-out works or other decoration refurbishing
Renovation and or renovation works or repairs which are the
Repairs responsibility of the Tenant hereunder, at its own
costs and expenses to prepare and submit to the
Landlord for approval ten full sets of suitable
drawings plans and specifications of the works to
be carried out by the Tenant together with
schematic sketches showing the Tenant's design and
layout proposal (hereinafter collectively called
"the Tenant's Plans"). The Tenant's Plans shall,
without limitation:
(a) include detailed drawings, plans and
specifications of all partitionings and floor
coverings;
(b) include detailed drawings, plans and
specifications of all electrical
installations or (as the case may be) any
changes thereof;
(c) include detailed drawings, plans and
specifications of any proposed amendments,
additions or alterations;
(d) include details of all lighting fixtures;
(e) show in complete details the decorative
architectural mechanical and electrical
components; and
(f) comply with all relevant ordinances,
regulations and bye-laws from time to time
issued by the Government of Hong Kong.
The Landlord will consider the Tenant's Plans and
may in its absolute discretion accept reject or
require the Tenant to modify the Tenant's Plans or
any part of them as it thinks fit. The Landlord
will notify the Tenant of its decision within 30
days of receiving the Tenant's Plans.
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(ii) To modify amend and re-submit those plans as requested by the
Landlord within 30 days of receiving the Landlord's request.
(iii) Upon submission of the Tenant's Plans to pay to the Landlord a
vetting fee at the rate as specified in Part V of the Third
Schedule and if the Tenant's Plans are subsequently amended or
modified whether pursuant to the Landlord's request or
otherwise, to pay to the Landlord such further vetting fees as
may be demanded by the Landlord.
(iv) To be solely responsible for compliance with all applicable
codes ordinances and other regulations for all works performed
by or on behalf of the Tenant on the Premises, and the
Landlord's or the Landlord's agent's or representative's
approval of plans drawings specifications or calculations
contained in the Tenant's Plans shall not constitute any
implication representation or certification by the Landlord that
the Tenant's Plans are in compliance with the said codes
ordinances and other regulations and the Landlord's approval
thereof shall be without prejudice to the right of the Landlord
to require the Tenant to stop, remove, or dismantle at the cost
of the tenant any Tenant's works which, in the opinion of the
Landlord, may prejudice the safety or security of the Building
or any part thereof, or may contravene any ordinance,
regulation, rule or requirement of any governmental or competent
authority. In instances where more than one standard may be
applicable in approving the Tenant's Plans, the strictest
standard shall apply.
(v) Not to commence any fitting-out decoration refurbishing
renovation or repair works before receiving notice in writing
from the Landlord that such works may be commenced and
thereafter to commence such works as soon as practicable and
carry such works to completion expeditiously.
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(vi) Not to make any subsequent variation or modification to the
Tenant's Plans as approved by the Landlord without the previous
approval in writing of the Landlord.
(vii) To employ only such contractor(s) as may from time to time be
nominated by the Landlord to carry out any fitting-out
decoration refurbishing renovation or repair works on the
Premises. In the absence of such nominated contractor(s), the
Tenant shall, upon the Landlord's approval of the Tenant's
Plans and prior to the commencement of any of the proposed
works by the Tenant, submit to the Landlord a list of
contractors to be appointed for such proposed works. The
Landlord after receiving such list may in its absolute
discretion approve or reject the same or nominate such
contractor(s) in place of any of those listed in the said list
as the Landlord shall think fit. All such nominated or approved
contractors shall be employed directly by the Tenant and shall
for the purpose of this Agreement be treated as the servants
employees agents or contractors of the Tenant and the Landlord
shall not in any way be held responsible for any loss or damage
of whatsoever nature directly or indirectly caused by or
arising from such employments.
(viii) To ensure that all works are carried out strictly in accordance
with the Tenant's Plans as approved by the Landlord and in a
good and proper workmanlike fashion using good quality
materials and without causing any damage to any part of the
Building or any disturbance or annoyance to the Landlord or the
tenants or occupiers of adjacent or neighbouring premises and
observe all house rules and regulations and fitting-out guides
as may from time to time be made imposed adopted or amended by
the Landlord or the Manager and to ensure that all contractors
and workmen employed by him shall co-operate fully with the
Landlord, the Manager or their respective authorised
representatives.
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Installation 3.09 Further to and without prejudice to sub-clause 3.08 of this
of Wires Clause:-
Cables
and Services
(i) To install all wires pipes and cables and other
services serving the Premises in and through the ducts
trunkings and conduits in the Building provided by the
Landlord for such purposes and at all times in
accordance with the Landlord's directions and not to
install any such wires pipes cables or other services
without first providing the Landlord with full
particulars and fully detailed plans and drawings of
such intended installation and obtaining the Landlord's
prior written consent as provided in sub-clause 3.08.
(ii) To provide to the Landlord full coloured drawings of
all electrical wiring to be installed by the Tenant
within or serving or connected to the Premises and/or
within the ducts, trunkings or conduits provided by the
Landlord within the Building for the installation of
electrical and/or fibre-optical or other wires or
cables or means of passing receiving or transmitting
information and all telephone and other service wires
conduits and cables installed by or at the order of the
Tenant and to clearly label and in accordance with any
directions given by the Landlord colour-code all such
wires conduits and cables to identify the same as being
the Tenant's and if required by the Landlord at the
expiration or sooner determination of the Term at the
Tenant's expense to remove the same from all ducts
conduits or trunkings within the Building taking care
not to disturb damage or interfere with any wires
cables or other means of communication belong to the
Landlord or to other tenants or occupiers of any part
or parts of the Building that may have been installed
within any such ducts conduits or trunkings and making
good any damage caused by the Tenant in so doing and
the Tenant will indemnify and hold the Landlord
harmless against any claim action or demand that may be
brought by any person suffering any loss
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or damage or interference with business or
inconvenience directly or indirectly caused by or
arising from the Tenant's actions in complying with its
obligations under this sub-clause 3.09.
Installation 3.10 Subject to sub-clauses 3.08 and 3.09 of this Clause to
of Telephone make its own arrangements with regard to the
Cables installation of telephones or other communication
systems in the Premises, but the installation of
telephone and communication lines outside the Premises
must be in the common ducting provided in the Building
for that purpose and in all respects in accordance with
the Landlord's directions.
Good Repair of 3.11 At its own expenses to well and sufficiently paint
Interior maintain and keep in good clean tenantable substantial
and proper repair and condition (fair wear and tear
excepted) to the satisfaction of the Landlord the
non-structural interior of the Premises including
without limitation the flooring and interior plaster or
other finishing material or rendering to walls floors
and ceilings and all the Landlord's fixtures fittings
and additions therein or thereto including without
limitation all doors, windows, light fittings, fire
fighting apparatus, ducts, air-conditioning units and
fan coils and all waste drains, water and other pipes
and sanitary apparatus and fittings therein and all
painting papering and decoration thereof.
Repair of 3.12 To repair or replace such electrical wiring, piping
Electrical installations and fittings in the Premises and such
Wiring and wiring from the Tenant's meter(s) to the Premises as
Installations the same may become dangerous or be required to be
repaired or replaced by any appropriate utility company
or any governmental or other competent authority.
Permitting 3.13 To permit the Landlord its agents and all persons
Landlord to authorised by the Landlord with or without workmen or
Enter and View others and with or without appliances at all reasonable
times and upon prior notice (save in the case of an
emergency) to enter into the Premises to view the
condition thereof and to test the Tenant's electrical
wiring piping and/or other installations and to take
inventories of the
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Landlord's fixtures and fittings therein and to give or
leave notice in writing to the Tenant or upon the
Premises of all defects and want of repair there found
if such repair is the responsibility of the Tenant
hereunder or to carry out any work or repair required
to be done provided that in the event of an emergency
the Landlord its servants or agents may enter without
notice and forcibly if need be.
Execution of 3.14 At its own expenses, to make good all defects and wants
Repair on of repair to the Premises for which the Tenant may be
Receipt of liable upon receipt of written notice from the Landlord
Notice to repair and make good the same and within such period
as may be stipulated in the said written notice, and to
pay all reasonable costs (including fees of
professional consultants) incurred by the Landlord in
the preparation and service of such notice, and if the
Tenant shall fail to execute such works or repairs as
aforementioned to permit the Landlord to enter upon the
Premises and execute the same and the expenses thereof
shall be a debt due from the Tenant to the Landlord and
be recoverable forthwith by action.
Paying Cost of 3.15 To pay to or reimburse the Landlord the cost of
Replacing replacing all broken or damaged windows of the Premises
Broken Windows (or elsewhere if used exclusively by the Tenant)
whether the same be broken or damaged by the negligence
of the Tenant or otherwise.
To Reimburse 3.16 To pay or reimburse the Landlord immediately on demand
Landlord for the costs of repairing or making good any part of the
Making Good Building or any of the lifts or other services and
Damage to facilities installed therein or any property of the
Building Landlord that may be damaged by reason of any act
default or neglect on the part of the Tenant its agents
servants invitees licensees employees contractors
guests or visitors.
Giving Notice 3.17 To give notice in writing to the Landlord or the
to the Manager of any damage that the Premises may suffer and
Landlord on of any accident to or defects in the structure of the
Damage Premises, the water pipes, gas pipes, electrical wiring
or installations, fixtures, fittings or other utility
supply equipment provided by the Landlord directly once
the tenant becomes aware of any such damage accident or
defect.
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No Structural 3.18 Not to make any structural alterations to the
Alterations Premises or the Building or to erect, install or
alter any fixtures partitioning or make or carry
out any works to the Premises or the Building or
make any alterations, installations in or
additions to the air-conditioning system and/or
electrical wiring and/or gas piping and/or fire
fighting system and/or apparatus or any security
system or install any equipment apparatus or
machinery which requires any additional
electrical wiring gas mains piping without the
prior written consent of the Landlord which
consent the Landlord may grant or withhold at
its absolute discretion and if granted the
Landlord may impose such conditions as it shall
think fit.
Not to Maim or 3.19 Not without the prior written consent of the
Injure Landlord to cut, maim, injure, drill into, mark
or deface or permit or suffer to be cut,
maimed, injured, drilled into, marked or defaced
any doors, windows, walls, beams,
air-conditioner ducts, structural members or any
parts of the fabric of the Premises nor any of
the plumbing or sanitary apparatus or
installation included therein.
Not to Erect 3.20 Not without the prior written consent of the
Gates or Landlord to erect or install doors, gates,
Grilles grilles, shutters or other similar installation
whatsoever whether temporary or permanent at the
doorway or entrance to the Premises or at any of
the fire exits therefrom or erect any such door
or grille or shutter or gate that might in any
way contravene the regulations from time to time
in force of the Fire Services Department or
other competent authority concerned, nor in any
other respect to contravene the said
regulations.
No Additional 3.21 Not to alter the existing locks, bolts and
Locks fittings on the entrance of the Premises or
install any additional locks, bolts or fittings
thereon without obtaining the prior written
approval of the Landlord.
Installation 3.22 During the continuance of the Term, before
of Machinery installing any machinery in the Premises to
submit to a consultant appointed by the Landlord
for approval full particulars and information
regarding such
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machinery as intended to be installed in the Premise
including but without limitation the type and weight
thereof, together with a general layout plan of such
machinery showing the actual position at which each
article of machinery is intended to be placed and to
install such machinery in accordance with the layout
plans after written approval by the Landlord's
consultant has been obtained. The Tenant shall not
without the prior written approval of the Landlord's
consultant alter the position of any of the machinery
installed as previously approved by the Landlord's
consultant or replace any of such installed machinery
with another, unless the new machinery is in all
respects identical to the one to be substituted. The
Tenant shall bear and pay the vetting or approval fees
of the Landlord's consultant.
Anti-Vibration 3.23 (i) At its own expenses to mount and equip any
or Anti- machinery liable to produce vibration with
Dumping anti-vibration absorbers and anti-dumping
Absorbers for absorbers of such types and designs as first
Machinery approved of in writing by the Landlord's
consultant and shall at its own expenses comply
with all directions and orders of the Landlord for
eliminating and reducing vibrations and dumping
produced by the operation and running of any of
the machinery installed at the Premises.
Operation of (ii) In operating and running any machinery installed
Machinery in the Premises to do all acts and things required
by and conform with all ordinances, by-laws and
regulations applicable thereto and also all orders
and directions (if any) from time to time given by
the Urban Council and any other competent
authority.
Not to Exceed 3.24 Not without the prior written consent of the Landlord
Maximum Floor to install or permit or suffer to be installed upon the
Loading Premises or any part thereof any equipment, apparatus
Capacity or machinery which imposes a weight on any part of the
flooring in excess of that for which it is designed and
the Landlord shall be entitled to prescribe the maximum
weight and permitted location within the Premises of
safes
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and other heavy equipment, apparatus or machinery and to
require the same to stand on supports of such dimensions
and material to distribute the weight as the Landlord may
deem necessary.
Not to Cause 3.25 To duly observe and comply with all laws, rules and
Electro- regulations in relation to electro-magnetic interference
Magnetic from time to time in force including but without
Interference limitation to those laws, rules and regulations prescribed
by the Office Of Telecommunication Authority and not to
carry out or suffer or permit to be carried out any work
process or operation of whatsoever nature in the Premises
which may cause any electro-magnetic interference to the
Landlord or other tenants or occupiers of any adjoining or
neighbouring premises and the Tenant shall indemnify the
Landlord and such other tenants or occupiers for any
damage or loss suffered as a result of the Tenant's breach
of this sub-clause.
Anti-Nuisance 3.26 The Tenant shall not do or permit or suffer anything to be
done at any time in or upon the Premises or any part
thereof which may be or become a nuisance or annoyance or
which may cause damage or inconvenience to the Hong Kong
Government or to the owners or occupiers of any adjoining
or neighbouring lot or lots or premises. In particular,
the Tenant shall not cause or produce or suffer or permit
to be produced on or in the Premises any sound or noise
(including sound produced by broadcasting from
Television, Radio and any apparatus or instrument capable
of producing or reproducing music and sound) or any
vibration or resonance or other form of disturbance or
other acts or things in or on the Premises which is or are
or may be or become a nuisance or annoyance to the
Landlord or the tenants or occupiers of adjacent or
neighbouring premises and the Tenant shall take all such
necessary measures as may be required by and to the
satisfaction of the Director of Environmental Protection
to ensure that the operation of all plant and equipment
installed or used on the Premises will not make any noise
which causes disturbance or annoyance to the residents or
occupiers of any adjourning premises or lot or lots or to
the
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general public. The decision of the Director of
Environmental Protection as to whether any such plant and
equipment are causing disturbance or annoyance as
aforesaid shall be final and binding on the Tenant.
No Discharge 3.27 Except with the prior written consent of the Director of
or Pollutant Environmental Protection, not to, in or upon the Premises,
or Noxious, install any machinery, furnace or boiler or any other
Harmful or equipment or use any fuel or any method or process of
Corrosive manufacture or treatment that might in any circumstances
Matter result in the discharge or emission of any pollutant or
any noxious, harmful or corrosive matter, whether it be in
the form of gas, smoke, liquid, solid or otherwise.
Compliance 3.28 To comply with and observe all Ordinances, Bye-laws,
with Regulations and rules for the time being in force in Hong
Legislation Kong governing the control of any form of pollution,
Regarding including air, noise, water and waste pollution and the
Pollution protection of the environment and to comply with EPD
Advice Note 2/89 "Application of the environmental impact
assessment process to major private sector projects"
issued by the Environmental Protection Department and any
subsequent amendment thereto.
Discharge into 3.29 (i) Not to discharge directly or indirectly or cause or
Sewers, etc. permit or suffer to be discharged into any public
sewer, storm water drain, channel, streamcourse or sea
any trade effluent or foul or contaminated water or
cooling or hot water without the prior written consent
of the Director of Environmental Protection, who may
as a condition of granting his consent require the
Tenant to provide, operate and maintain at the
Tenant's own expense, within the Premises or otherwise
and to the satisfaction of the Director of
Environmental Protection suitable works for the
treatment and disposal of such trade effluent or foul
or contaminated or cooling or hot water.
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To Reimburse (iii) Not to pass or allow to pass into the drains pipes
Landlord for gutters ducts or watercourses channels of the
Cleaning Premises or the Building ("the conduits") any
Drains noxious or deleterious effluent or other substance
which may cause any obstruction or deposit in or
injury to the conduits and to pay on demand to the
Landlord the cost incurred by the Landlord in
repairing cleansing and clearing any of the
conduits damaged choked or stopped up owing to the
improper or careless use of any toilet or water or
sanitary or drainage equipment by the Tenant or its
employees invitees contractors or licensees.
Removal of 3.30 Not to permit any sewage, waste water or effluent
Waste Matters containing sand, cement, silt or any other suspended or
dissolved material to flow from the Premises onto any
adjoining land or allow any waste matter which is not
part of the final product from waste processing plants to
be deposited anywhere within the Building and/or the land
on which the Building stands and to have all such matter
removed from the Building and/or the land on which the
Building stands in a proper manner to the satisfaction of
the Director of Environmental Protection.
Disposal of 3.31 To be responsible for the removal of refuse and garbage
Garbage from the Premises to such location as shall be specified
by the Landlord from time to time and to use only such
type of refuse container as shall be specified by the
Landlord from time to time. In the event of the Landlord
providing a collection service for refuse and garbage the
same shall be used by the Tenant to the exclusion of any
other similar service and the Tenant shall bear an
appropriate proportion of the cost of such service.
Cleaning and 3.32 To keep the Premises including without limitation all
Cleaning windows at all times in a clean and sanitary state and
Contractors condition and for the better observance hereof the Tenant
shall only employ as cleaners of the Premises such persons
or firms as may be nominated or approved by the Landlord.
Such cleaners shall be employed by and at the expense of
the Tenant.
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Not to 3.33 Not to use or permit or suffer to be used any lavatory
Misuse facilities whether shared with other tenants or occupiers
Lavatories of the Building or reserved exclusively for the use of the
Tenant for any purpose other than that for which they are
intended and not to throw or permit or suffer to be thrown
into any W.C. pan, urinal, basin sink or other lavatory
fitting any foreign or deleterious substance of any kind
and to keep such lavatory facilities clean tidy and in a
hygienic condition at all times during the Term and in the
Landlord's absolute discretion either to make good any
breakage, blockage or damage of any such lavatory
facilities resulting from the breach by the Tenant of this
sub-clause or to pay to the Landlord on demand the cost of
making good such breakage, blockage or damage.
Infestation 3.34 At the Tenant's expenses to take all such steps and
precautions to the satisfaction of the Landlord as shall
be necessary to prevent the Premises or any part thereof
from becoming infested by termites rats mice roaches or
any other pests or vermin and for the better observance
hereof the Landlord may require the Tenant to employ at
the Tenant's cost such pest extermination contractors as
the Landlord may nominate at such intervals as the
Landlord may direct.
Fuel 3.35 The Tenant shall not use any fuel on the Premises other
than town gas, liquefied petroleum gas, natural gas,
kerosene or other conventional liquid fuel with a sulphur
content not exceeding 0.5% by weight and a viscosity of
not more than 6 centistokes at 40 degree Celsius, or a
conventional solid fuel with a sulphur content not
exceeding 1% by weight.
Storage of 3.36 Not to use the Premises for the manufacture of goods or
Merchandise merchandise or for the storage of goods or merchandise
and other than in small quantities consistent with the nature
Hazardous of the Tenant's trade or business by way of samples and
Goods exhibits and not to keep or store or cause permit or
suffer to be kept or stored any arms ammunitions gun-powder
salpetre petrol kerosene liquified petroleum gas butane
gas or other explosive or combustible substances or
dangerous hazardous or prohibited goods within the meaning
of the Dangerous
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Goods Ordinance (Cap.295) and the regulations
made thereunder or any statutory modification or
re-enactment thereof from time to time in force
(save those which are solely and exclusively for
the business of the Tenant and approved by the
Landlord and duly authorized by the Police
Department and any other government department
as may be necessary) or unlawful goods and shall
not at any time during the Term use or allow the
Premises or any part thereof to be used in any
way entailing a fine forfeiture or penalty
against the Landlord under any law in force in
Hong Kong.
Restriction on 3.37 Except with the prior written consent of the
Use of Water Water Authority, no water from Government mains
Supply and/or the mains maintained by the Landlord
shall be used for any heating, cooling or
humidification purpose.
User 3.38 Not to use the Premises for any purpose other
than for such purposes as stated in the Fourth
Schedule and unless with the prior written
consent of the Landlord not to change the use
thereof or to carry on any other trade or
business therein, and in particular but without
prejudice to the generality of the foregoing,
not to use or allow the Premises or any part
thereof to be used as domestic premises within
the meaning of any ordinance for the time being
in force or as sleeping quarters or for any
religious purpose or the performance of any
religious ceremony.
No Illegal or 3.39 Not to use or cause suffer or permit to be used
Immoral Use the Premises or any part thereof for any illegal
immoral or improper purposes.
Security 3.40 To ensure that its own security system within
System and at the entrance of the Premises (if any) is
at all times compatible with the security system
for the Building (if any) provided and operated
by the Landlord.
Protection 3.41 To take all necessary and appropriate
from Typhoon precautions to protect the interior of the
Premises from heavy rainfall storm or typhoon
damage.
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No Auction 3.42 Not to conduct or allow any auction to be held
on the Premises without the Landlord's prior
written approval.
No Pets or 3.43 Not to keep or permit or suffer to be kept any
Animals pets, livestock or animals in the Premises
without the prior written approval of the
Landlord.
No Preparation 3.44 Not to prepare or permit or suffer to be
of Food and prepared any food in the Premises or cause or
Prevention of permit any offensive or unusual odours to be
Odours produced upon, permeate through or emanate from
the Premises.
Signs 3.45 Not to paint affix display or exhibit any
writing sign signboard or other device whether
illuminated or not upon or outside the windows
or external walls of the Premises or inside the
Premises which may be visible from outside or in
at or above any common area landings or
corridors of the Building except the display of
a name plate of the Tenant in such form and size
as may be previously approved by the Landlord at
the entrance of the Premises.
Directory 3.46 To pay the Landlord immediately upon demand the
Boards cost of affixing repairing or replacing as
necessary the name of the Tenant in lettering to
the directory board (if any) at the entrance(s)
ton the Building and to the directory board (if
any) on the floor on which the Premises are
situated.
Obstructions 3.47 Not to block up, darken or obstruct or obscure
to Outside Windows any of the windows or lights belonging to the
Premises.
Obstructions 3.48 Not to place or leave or suffer or permit to be
in Passages placed or left by any contractor employee
invitee licensee or agent of the Tenant any
boxes furniture articles or rubbish in any
passage ways lift staircases landings entrances
exits of the Building used in common with other
tenants and occupiers and/or the Landlord or
otherwise obstruct or encumber the same, and if
any such obstruction or encumbrance shall happen
and the Tenant shall fail to remove the
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same immediately upon request by the Landlord either to
the Tenant or to the person then in charge of the
Premises on the Tenant's behalf the Landlord his
employee servant or agents may remove or dispose of the
same at the Tenant's expenses without incurring any
liability whether contractual or tortious to the Tenant
or any other person whomsoever.
Fire- 3.49 To install all necessary fire fighting equipments at
Prevention the Tenant's expenses and take all necessary fire
precautions and in general to comply with all
directives from time to time given by the Fire Services
Department.
Access for 3.50 (i) At his own expense and to the satisfaction of the
Fire Service Director of Fire Services to provide in the
Appliances Premises suitable means of access for the passage
and Personnel of fire service appliances and fire service
personnel to any part of the Building and at all
times permit such fire service personnel and fire
service appliances the free and uninterrupted use
of such means of access and shall maintain such
means of access and keep the same free from
obstruction.
(ii) To permit the Director of Fire Services, his
officers, servants or agents at all reasonable
times with or without notice to enter upon the
Premises or any part thereof for the purpose of
inspecting the same so as to ensure that the
relevant requirements referred to in sub-clause
(i) of this Clause have been complied with.
Parking 3.51 Not to park any vehicle or otherwise use or permit any
vehicle to be parked or otherwise used by any employee
agent licensee or contractor of the Tenant at any place
other than in accordance with the house rules and
regulations from time to time made by the Landlord or
the Manager.
Loading and 3.52 To load and unload furniture, machinery, goods,
Unloading of merchandise, raw materials or other large objects only
Goods at such places and at such times and through such
entrances and by such cargo/service lifts as
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shall be designated by the Landlord for the
purpose of loading and unloading and to use the
loading and unloading ares designated by the
Landlord only for the purpose of loading and
unloading. The Tenant shall not use the passenger
lifts for the conveyance of furniture, machinery,
goods, merchandise, raw materials or other large
objects or load or permit or suffer to be loaded
into any cargo/service lift or passenger lift in
the Building a weight greater than such lift is
designed or permitted to carry.
Not to Assign 3.53 Not to assign underlet or otherwise part with the
or Underlet possession of the Premises or any part thereof in
any way whether by way of sub-letting lending
sharing or other means whereby any person or
persons not a party to this Tenancy Agreement
obtains the use or possession of the Premises or
any part thereof irrespective of whether any
rental or other consideration is given for such
use or possession and in the event of any such
transfer sub-letting sharing assignment or parting
with the possession of the Premises (whether for
monetary consideration or not) this Tenancy
Agreement shall at the Landlord's discretion
absolutely determine and the Tenant shall
forthwith vacate the Premises on notice to that
effect from the Landlord. The tenancy hereby
created shall be personal to the Tenant named in
the First Schedule of this Tenancy Agreement and
without in any way limiting the generality of the
foregoing each of the following acts and events
shall unless approved in writing by the Landlord
be deemed to be a breach of this Clause:
(i) In the case of a tenant which is a
partnership the taking in of one or more new
partners whether on the death or retirement
of an existing partner or otherwise;
(ii) In the case of a tenant who is an individual
(including a sole surviving partner of a
partnership tenant) the death insanity or
disability of that individual to the intent
that no right to use possess occupy or enjoy
the Premises or any part thereof shall vest
in the executors administrators personal
representatives next of kin trustee or
committee of any such individual;
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(iii) In the case of a tenant which is a corporation any take-over
reconstruction amalgamation merger voluntary liquidation or change
in the person or persons who owns or own a majority of its voting
shares or who otherwise has or have effective control thereof;
(iv) The giving by the Tenant of a Power of Attorney or similar authority
whereby the donee of the Power of Attorney obtains the right to use
possess occupy or enjoy the Premises or any part thereof or does in
fact use possess occupy or enjoy the same; and
(v) The change of the Tenant's business name.
Yielding Up 3.54 To yield up the Premises with all the Landlord's
fixtures fittings and additions therein and
thereto at the expiration or sooner determination
of this Tenancy Agreement in good clean tenantable
substantial and proper repair and condition (fair
wear and tear excepted) together with all keys
giving access to all parts of the Premises
Provided that where the Tenant has made any
alterations or installed any fixtures fittings or
additions in or to the Premises and
notwithstanding that the Landlord's consent for so
doing may have been obtained or have been given or
be deemed to have been given at the Tenant's sole
cost and expense to reinstate or remove or do away
with all or any such alterations fixtures fittings
or additions or any part or portion thereof as
shall be directed by the Landlord and to make good
and repair in a proper and workmanlike manner any
damage to the Premises and the Landlord's fixtures
fittings and additions therein and thereto as a
result of such reinstatement or removal before
delivering up the Premises to the Landlord.
Injury or 3.55 To be wholly responsible for any loss damage or
Damage to injury or death caused to any person whomsoever or
Person and to any property whatsoever directly or indirectly
Property and through the defective or damaged condition or
Insurance operation of any part of the interior of the
Premises or any machinery plant fixtures or
fittings or wiring or piping therein
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<PAGE> 22
for the repair of which the Tenant is responsible
hereunder or in any way caused by or owing to the spread
of fire fumes or smoke or the leakage or overflow of water
of whatsoever origin from the Premises or any part thereof
as a result of the act default or neglect of the Tenant
its servants agents licensees contractors employees guests
invitees visitors or customers and to make good the same
by payment or otherwise and to indemnify the Landlord
against all losses damages costs claims demands actions
and legal proceedings whatsoever made upon or against the
landlord by any person in respect of any such loss damage
or injury or death and all costs and expenses incidental
thereto AND for the better observance of the Tenant's
obligations in regard to the foregoing TO INSURE or at the
discretion of the Landlord to permit the Landlord at the
Tenant's expense and in the name of the Tenant to effect
and maintain insurance cover to the satisfaction of the
Landlord with such reputable insurance company as shall be
nominated or approved by the Landlord in respect of all
such risks as aforesaid including without limitation
adequate fire, water and third party insurance in respect
of the Premises (including without limitation the full
replacement value of all furniture fixtures fittings goods
chattels samples personal effects contents and stock
therein) and the Policy of Insurance so effected to be
endorsed to show the interest of the Landlord therein and
to be in such amount as may be determined by the Landlord
and to contain a provision that the insurance cover
thereby effected and the terms and conditions thereof may
not be altered modified restricted or cancelled without
the express prior written consent of the Landlord and in
the event of such insurance being effected by the Tenant
itself in pursuance of its obligations hereunder whenever
required so to do by the Landlord to produce to the
Landlord as and when required by the Landlord such policy
of insurance together with a receipt for the last payment
of premium.
Tenant Liable 3.56 To be liable for any act default negligence or omission
for its of the Tenant's agents, contractors, employees, invitees,
Employees, guests, visitors, servants or licensees as if it were the
etc. act default negligence or omission of the Tenant and to
indemnify the Landlord
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<PAGE> 23
against all losses damages costs claims demand expenses or
liability arising directly or indirectly from the
aforesaid act default negligence or omission. For the
purpose of this Tenancy Agreement any act default neglect
or omission of any quest visitor servant contractor
employee agent invitee or licensee of the Tenant shall be
deemed to be the act default neglect or omission of the
Tenant.
Not to Render 3.57 Not to cause or suffer or permit to be done any act or
Insurance thing whereby the policy or policies of insurance on
Policy Void the Premises or the Building against damage by fire or
any other insured risks or liability to third parties for
the time being subsisting may become void or voidable or
whereby the rate of premium or premia thereon may be
increased, and to repay to the Landlord on demand all
sums paid by the Landlord by way of increased premium or
premia thereon and all expenses incurred by the Landlord
in and about any renewal of such policy or policies
arising from or rendered necessary by a breach of this
sub-clause by the Tenant.
4. The Landlord hereby agrees with the Tenant as follows :-
Quiet
Enjoyment 4.01 That the Tenant duly paying the rent rates management
fees and other payments hereby stipulated on the days and
in the manner herein provided for payment of the same and
performing and observing the Tenant's agreements,
covenants, stipulations, terms, conditions and
obligations herein contained may peaceably hold and enjoy
the Premises without any interruption by the Landlord or
any person lawfully claiming through under or in trust for
the Landlord.
Pay Crown Rent 4.02 To pay all Crown rent and property tax payable in respect
of the Premises.
Roof and 4.03 To maintain and keep the main structure roofs main
Main Structure electricity supply cables main drains water pipes main
walls and exterior window frames of the Building therein
and all concealed electrical installations and wirings
and pipings of the Landlord in the Premises in a proper
and substantial state of repair and condition
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<PAGE> 24
Provided that the Landlord shall not be liable for breach of
this sub-clause unless and until written notice of any defect or
want of repair thereof shall have been given to the Landlord by
the Tenant and the Landlord shall have failed to take
reasonable steps to repair or remedy the same within a
reasonable period after the service on it of such notice.
5. Provided Always that and it is hereby expressly agreed as follows:-
Default 5.01 If the Rent and/or the rates and/or the Management Fees and/or
any other moneys payable hereunder or any part thereof shall be
in arrear for fifteen (15) days after the same shall have become
payable (whether formally demanded or not) or if there shall be
any breach or non-performance or non-observance of any of the
stipulations conditions terms and agreements herein contained
and on the part of the Tenant to be observed or performed or if
the Tenant shall stop or suspend payment of its debts or be
unable to or admit inability to pay its debts as they fall due
or enter into any scheme of arrangement with its creditors or
have an encumbrancer taking possession of any of its assets in
circumstances in which the Landlord shall have reasonable
grounds for believing that the ability of the Tenant to pay the
rentals and other charges hereby reserved and to observe and
perform its obligations under this Tenancy Agreement shall have
been prejudiced or put at risk or have a receiving order made
against it or in such circumstance as aforesaid fail to satisfy
any judgement that may be given in any action against it after
final appeal or go into liquidation (save for the purposes of
amalgamation or reconstruction) or become bankrupt or if the
Tenant shall suffer execution to be levied upon the Premises or
otherwise on the Tenant's goods or if in such circumstances as
aforesaid the Tenant shall suspend or cease or threaten to
suspend or cease to carry on its business or should any event
occur or proceeding be taken with respect to the Tenant in any
jurisdiction to which the Tenant is subject which has an effect
equivalent or similar to any of the events or circumstances
described above then and in any such case it shall be lawful for
the Landlord at any time thereafter to
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<PAGE> 25
re-enter on and upon the Premises or any part thereof in the
name of the whole and thereupon this Tenancy Agreement shall
absolutely determine but without prejudice to any right of
action or other remedy of the Landlord against any breach,
non-observance or non-performance by the Tenant of any of
the terms of this Tenancy Agreement. A written notice served
by the Landlord on the Tenant in manner hereinafter provided
to the effect that the Landlord thereby exercises the power
of determination and/or re-entry hereinbefore contained
shall be a full and sufficient exercise of such power
without physical entry on the part of the Landlord
notwithstanding any statutory or common law provision to the
contrary. All costs and expenses incurred by the Landlord in
demanding payment of the Rent, rates, Management Fees and
other charges payable hereunder (if the Landlord elects to
demand) and in exercising its rights and/or remedies or in
attempting to do so shall be paid by the Tenant and shall be
recoverable from the Tenant as a debt.
Interest 5.02. Notwithstanding anything herein contained in the event of
default in payment of the Rent and/or rates and/or the
Management Fees and/or other monies payable by the Tenant
hereunder or any part thereof for a period of fifteen (15)
days from the date when such payment is due (whether
formally demanded or not) the Tenant shall pay to the
Landlord on demand daily interest on all such sums
outstanding at the monthly rate of two per cent (2%)
calculated from the date on which the same shall be due for
payment (in accordance with the provisions contained in
that behalf herein) until the date of payment as liquidated
damages and not as penalty provided that the demand
and/or receipt by the Landlord of interest pursuant to
this sub-clause shall be without prejudice to and shall not
affect the right of the Landlord to exercise any other
right or remedy hereof or otherwise (including but without
prejudice to the generality of the foregoing the right of
re-entry exercisable under the terms of this Tenancy
Agreement).
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Condonation 5.03 No condoning, excusing or overlooking by the Landlord of
Not a Waiver any default, breach or non-observance or non-performance
by the Tenant at any time or times of any of the
agreements stipulations terms and conditions herein
contained shall operate as a waiver of the Landlord's
rights hereunder in respect of any continuing or
subsequent default, breach or non-observance or
non-performance or so as to defeat or affect in any way
the rights and remedies of the Landlord hereunder in
respect of any such continuing or subsequent default or
breach and no waiver by the Landlord shall be inferred
from or implied by anything done or omitted by the
Landlord, unless expressed in writing and signed by the
Landlord. Any consent given by the Landlord shall operate
as a consent only for the particular matter to which it
relates and shall in no way be considered as a waiver or
release of any of the provisions hereof nor shall it be
construed as dispensing with the necessity of obtaining
the specific written consent of the Landlord in the
future, unless expressly so provided.
Acceptance of 5.04 The acceptance of any of the Rent by the Landlord shall
Rent not be deemed to operate as a waiver by the Landlord of
any right to proceed against the Tenant in respect of any
breach non-observance or non-performance by the Tenant of
any of the agreements stipulations terms and conditions
herein contained and on the part of the Tenant to be
observed and performed.
Distraint 5.05 For the purposes of Part III of the Landlord and Tenant
(Consolidation) Ordinance ((Cap. 7)) and of these
presents, the Rent payable in respect of the Premises
shall be and be deemed to be in arrear if not paid in
advance at the times and in the manner herein provided for
payment thereof.
Deposit 5.06 The Tenant shall on the signing hereof deposit with the
Landlord the sum or sums specified in Part III of the
Third Schedule hereto being the aggregate of THREE (3)
months' Rent and THREE (3) months' Management Fees to
secure the due observance and performance by the Tenant of
the agreements stipulations obligations terms and
conditions herein contained and on the part of the Tenant
to be
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observed and performed which said deposit shall be held by
the Landlord throughout the currency of this Tenant
Agreement free of any interest to the Tenant with the right
for the Landlord (without prejudice to any other right or
remedy hereunder or otherwise) to deduct therefrom the
amount of any Rent rates Management Fees and other charges
payable hereunder in case of default on the part of the
Tenant in making any of such payments and any costs expenses
loss or damage sustained by the Landlord as the result of
any non-observance or non-performance by the Tenant of any
of the said agreements, stipulations obligations terms and
conditions. In the event of any deduction being made by the
Landlord from the said deposit in accordance herewith during
the currency of this Tenancy Agreement the Tenant shall
forthwith on demand by the Landlord make a further deposit
with the Landlord equal to the amount so deducted and
failure by the Tenant so to do shall entitle the Landlord
forthwith to re-enter upon the Premises and to determine
this Tenancy Agreement as hereinbefore provided.
Increase 5.07 By reasons of any increase in the costs of providing the
of necessary services to the Premises and/or managing the
Management Building, the Landlord and/or the Manager shall be entitled
Fees at any time and from time to time to increase the
Management Fees after giving the Tenant one month's notice
of such increase. The Landlord's and/or the Manager's
assessment of any increase in the said costs shall be
conclusive.
Increase in 5.08 If and whenever the Management Fees shall be increased
Deposit pursuant to sub-clause 507 of this Clause, the amount of
the said deposit shall be increased accordingly following
such increase in the Management Fees so as to bring at all
times the amount of the said deposit equal to the aggregate
of THREE (3) months' Rent and THREE (3) months' Management
Fees for the time being payable by the Tenant hereunder and
the Tenant shall make payment to the Landlord of such
additional sum as shall be required to bring the said
deposit up to the appropriate amount within fifteen (15)
days from the date of the Tenant's receipt of the
Landlord's or the Manager's notice of increase of the
Management Fees as aforesaid.
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<PAGE> 28
Refund of 5.09 Subject as aforesaid the said deposit and any further
Deposit deposits paid shall be refunded to the Tenant by the
Landlord without interest within fifteen (15) days
after the expiration or sooner determination of this
Tenancy Agreement and delivery of vacant possession of
the Premises to the Landlord or after settlement of the
last outstanding claim by the Landlord against the
Tenant for any arrears of Rent rates Management Fees
and other charges and for any breach non-observance or
non-performance of any of the agreements stipulations
terms and conditions herein contained and on the part
of the Tenant to be observed or performed, whichever
shall be the later.
Air- 5.10 (i) The Landlord shall provide and maintain
conditioning air-conditioning for the Premises during the hours
referred to in Part IV of the Third Schedule
hereto ("the Normal Air-Conditioning Hours")
whenever the air-conditioning system shall be
operating. The costs of such air-conditioning
shall be included in the management fees payable
by the Tenant as set out in Part II of the Third
Schedule hereto. If the Tenant shall require a
supply of air-conditioning outside the Normal
Air-Conditioning Hours, the same will be supplied
by the Landlord on reasonable advance notice to
the Landlord and at such costs per hour and per
square feet of gross floor area of the Premises as
the Landlord may in its absolute discretion from
time to time charge.
(ii) If the Tenant shall require a supply of chilled
water for the purpose of cooling its equipment,
the same will be suppled by the Landlord on
reasonable advance notice to the Landlord and at
such costs as the Landlord may in its absolute
discretion from time to time charge based on the
Tenant's actual consumption of such chilled water.
(iii) The Tenant shall pay the costs of such additional
air-conditioning services and/or such chilled
water supply immediately upon receipt of the
demand note therefor which may be rendered at such
intervals as the Landlord may in its absolute
discretion decide.
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Exclusion of 5.11 The Landlord and/or the Manager shall not in any
Landlord's circumstances other than those arising from their
Liability respective gross negligence or wilful default be under
any liability whatsoever to the Tenant or the Tenant's
agents, contractors, servants, visitors, guests,
employees, licensees, invitees or any other person
whomsoever in respect of any loss of profit or of
business or loss of life or loss, injury or damage to
person or property or for any disruption or
inconvenience or for the security or safekeeping of the
Premises or any contents therein caused to or suffered
or sustained by the Tenant or any other person caused
by or through or in any way owing to or arising out of
or connected with anything whatsoever including
(without limitation) :-
(i) any failure breakdown malfunction defect
interruption of or in or to the operation of or
non-availability of any common services and
facilities fire-fighting equipment or system or
lifts or any other services rendered or to be
rendered to the Tenant or such other person;
(ii) any act neglect or default of the other tenants
and occupiers of the Building and their respective
visitors guests licensees invitees employees
contractors servants and agents;
(iii) any failure breakdown malfunction defect or
interruption of or in the supply of gas
electricity water or air-conditioning to the
Premises or any part of the Building;
(iv) any fire storm tempest flood typhoon heavy
rainfall landslide subsidence of the ground Act of
God or other inevitable accident escape of fire
smoke fumes or any other substance or thing or
overflow or leakage of water or electric current
from or through any part of the Premises or the
Building or otherwise or the dropping or falling
of any article or vibrations from any part of the
Building;
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<PAGE> 30
(v) any defective or damaged condition of the Premises
the Building or part(s) thereof or the Landlord's
fixtures and fittings and additions therein and
thereto;
(vi) any use of the Premises any designated car parking
space or other areas or parts of the Building; and
(vii) the provision by the Landlord or the Manager of
watchmen and caretakers (if any),
nor shall any of the Rent rates Management Fees and any
other sums reserved to be payable by the Tenant hereunder
abate or cease to be payable on account thereof.
Notice to be 5.12 The Landlord shall not in any event be liable to the
Given to Tenant in respect of any failure of the Landlord to
Landlord on perform any of its obligations to the Tenant hereunder
Failure to unless and until the Tenant has notified the Landlord
Perform such failure and the Landlord has failed within a
Obligations reasonable length of time to remedy the same and then
in such case the Landlord shall be liable to compensate
the Tenant only for loss or damage sustained by the
Tenant after such reasonable time shall have lapsed.
No compensation 5.13 The Tenant shall not be entitled to any compensation or
or Abatement abatement of the Rent if the light and/or air to the
of Rent Premises is in any way obstructed by adjoining
buildings or otherwise.
Power to Enter 5.14 In the event of fire, typhoon or any other
in Emergency contingencies or emergencies which in the opinion of
the Landlord may cause or threaten to cause damage or
injury to the Premises and/or any part of the Building,
the Landlord shall have power in the absence of the
Tenant to break open any doors or windows of the
Premises and to do such other things as may be
necessary to prevent the Premises and/or any part of
the Building from being damaged or injured or further
damaged or injured and in such event the Landlord shall
not be answerable to the Tenant for any loss or damage
which the Tenant may sustain thereby.
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<PAGE> 31
Abatement of 5.15 If the Premises or the Building or any part thereof
Rent and shall at any time during the Term be destroyed or
Management damaged or become inaccessible owing to fire water
Fees storm typhoon defective construction white ants
earthquake subsidence of the ground act of God force
majeure or any calamity beyond the control of the
Landlord so as to render the Premises unfit for use or
inaccessible and the same is in no way attributable
directly or indirectly to any act neglect or default of
the Tenant its agents guests invitees visitors servants
employees contractors or licensees or if at any time
during the continuance of this tenancy the Premises or
the Building or any part thereof shall be condemned as
a dangerous structure or a demolition order or closing
order shall become operative in respect of the Premises
or the Building or any part thereof then the Rent and
Management Fees hereby reserved or a fair proportion
thereof according to the nature and extent of the
damage sustained or order made shall be suspended until
the Premises shall again be rendered accessible and fit
for use PROVIDED THAT the Landlord shall be under no
obligation to repair or reinstate the Premises or the
Building if, in its opinion, it is not reasonably
economical or practicable so to do and PROVIDED FURTHER
THAT in circumstances when the whole or substantially
the whole of the Premises have been rendered
inaccessible or unfit for use and should the Premises
not have been reinstated in the meantime either the
Landlord or the Tenant may at any time after two (2)
months from the occurrence of such damage or
destruction or order give to the other of them notice
in writing to determine this Tenancy Agreement and
thereupon the same and everything herein contained
shall cease and be void as from the date of the
occurrence of such destruction or damage or order or of
the Premises becoming inaccessible or unfit for use but
without prejudice to the rights and remedies of either
party against the other in respect of any antecedent
claim or breach of the agreements stipulations terms
and conditions herein contained or of the Landlord in
respect of the Rent and Management Fees payable
hereunder prior to the coming into effect of the
suspension.
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<PAGE> 32
No Warranty as 5.16 The Landlord does not in any way warrant that the
to Fitness Premises are fit or suitable for the operation of the
trade business or activities of the Tenant and the
Tenant shall make his own investigation and enquiries
in this connection. In the event of any governmental
authority in any way prohibiting the use of the
Premises for the trade business or activities for the
time being carried on by the Tenant, the Landlord shall
have power to determine the Term hereby created at any
time by giving notice to the Tenant of a length and
effect equivalent to that of the notice (if any) given
by the relevant governmental authority (and if such
governmental notice is subsequently extended the
Landlord's said notice to the Tenant shall be extended
pro tanto). On the expiration of such notice by the
Landlord to the Tenant the Term of this tenancy shall
accordingly be determined and the Landlord shall not be
required to pay any compensation for the loss of profit
or goodwill or loss or damage of any kind to the Tenant
for such determination provided that nothing in this
sub-clause shall prejudice the continuation of the Term
granted hereunder if the prohibition aforesaid shall be
waived by the relevant governmental authority during
the notice period.
Introduction 5.17 (i) The Landlord and/or the Manager shall be entitled
of House from time to time and by notice to the Tenant to
Rules and make introduce and subsequently amend adopt or
Regulations abolish if necessary such house rules and
regulations as it may reasonably consider
necessary for the proper operation management and
maintenance of the Building.
Conflict (ii) Such rules and regulations shall be supplementary
to the terms and conditions contained in this
Tenancy Agreement and shall not in any way
derogate from such terms and conditions. In the
event of conflict between such rules and
regulations and the terms and conditions of this
Tenancy Agreement the terms and conditions of this
Tenancy Agreement shall prevail.
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Name of 5.18 The Landlord reserves the right to rename the Building
Building with any such name or style as it in its sole
discretion may determine and at any time and from time
to time to change, alter, substitute or abandon any
such name without thereby becoming liable to compensate
the Tenant for any loss expense or inconvenience caused
to the Tenant as a consequence thereof provided that
the Landlord shall give the Tenant and the Postal and
other relevant governmental authorities not less than
three months' notice of its intention to so do.
Alterations to 5.19 Without prejudice to any provisions herein contained
the Building the Landlord reserves the right from time to time to
improve extend add to or reduce the Building or in any
manner whatsoever and to alter or deal with the
Building (other than the Premises) Provided always
that in exercising such right the Landlord will
endeavour to cause as little inconvenience to the
Tenant as is practicable in the circumstances and make
good any damage caused to the Premises within a
reasonable period of time.
Letting or 5.20 During the three (3) months immediately preceding the
Sale Notices expiration or sooner determination of the Term the
and Entry Landlord shall be at liberty to affix and place
without interference upon any external part of the
Premises a notice or notices stating that the Premises
are to be let and/or sold and such other information
in connection therewith as the Landlord shall require
and the Tenant shall permit persons with written
authority from the Landlord or the Landlord's agents
at reasonable times of the day upon prior appointment
to enter and view the Premises or any part or parts
thereof.
Notice 5.21 Any notice required to be served under this Tenancy
Agreement shall be in writing and any notice to be
served on the Tenant shall be sufficiently served if
sent by pre-paid registered post to or left at the
Tenant's registered office or principal place of
business in Hong Kong or the Premises and any notice
to be served on the Landlord shall be sufficiently
served if sent to the Landlord by pre-paid registered
post to or left at the Landlord's registered office in
Hong Kong. A notice delivered by hand is duly served
at the time of delivery and a notice sent by
registered post shall be deemed to be duly served
forty-eight (48) hours after the date of posting.
- 32 -
<PAGE> 34
No Fine or 5.22 The Tenant hereby expressly declares that for
Premium or the grant of the Term no premium key money or
Key Money consideration money or other valuable
consideration other than the Rent and other
payments herein expressly reserved and expressed
to be payable has been paid or will be payable
by the Tenant to the Landlord or any other
person.
Costs and 5.23 (i) The Tenant shall bear half of Messrs. Denton
Stamp Duty Hall, the Landlord's solicitors' scale
charge as stipulated by the Law Society of
Hong Kong for the preparation and
completion of this Agreement.
Notwithstanding the above, it is expressly
declared by the parties that Messrs. Denton
Hall is acting as solicitors for the
Landlord only and the Tenant is advised to
seek independent legal advice on the
approval of this Agreement.
(ii) The stamp duty and registration fees
payable on this Agreement and their
counterparts shall be borne by the
Landlord and the Tenant in equal shares.
Special 5.24 The parties hereto shall respectively be bound
Conditions by and entitled to the benefit of the Special
Conditions (if any) set forth in the Fifth
Schedule.
Fixtures and 5.25 The Landlord shall provide those fixtures and
Fittings fittings details of which are listed in the
Sixth Schedule hereto.
Marginal Notes 5.26 The marginal notes, headings and index (if any)
are intended for guidance only and do not form a
part of this Tenancy Agreement nor shall any of
the provisions of this Tenancy Agreement be
construed or interpreted by reference thereto or
in any way affected or limited thereby.
Interpretation 5.27 In this Tenancy Agreement if the context permits
or requires words importing the singular number
shall include the plural number and vice versa
and words importing the masculine feminine or
neuter gender, shall include the others of them.
- 33 -
<PAGE> 35
Entire 5.28 This Tenancy Agreement sets out the full
Agreement agreement between the parties. No warranties or
representations express or implied of any kind
other than those set out herein (if any) are or
have been made or given by the Landlord or by
anybody on his behalf and if any such warranties
or representations express or implied have been
made, the same are withdrawn or deemed to have
been withdrawn immediately before the execution
of this Tenancy Agreement.
AS WITNESS the hands of the parties hereto the day and
year first above written.
- 34 -
<PAGE> 36
FIRST SCHEDULE
--------------
The Tenant
- ----------
Name : VALENCE SEMICONDUCTOR DESIGN LIMITED
Registered Office : Flat A, 13th Floor, Summit Industrial Building.
9 Sun Yip Street, Chai Wan, Hong Kong
Business Registration No.: 18907543-001-05-95-1
SECOND SCHEDULE
---------------
Part I
------
The Premises : Unit 413 on the Fourth Floor of the Hong Kong
Industrial Technology Centre
Part II
-------
The Term : Three (3) years starting on the 1st day of
September 1995 and ending on the 31st day of
August 1998 (both days inclusive)
-35-
<PAGE> 37
THIRD SCHEDULE
--------------
Part I
------
The Rent : HONG KONG DOLLARS NINETY THOUSAND THREE HUNDRED
AND FIFTY-FIVE AND CENTS FIFTY ONLY (HK$90,355.50)
per month exclusive of rates, management fees and
other outgoings
Part II
-------
Management Fees : HONG KONG DOLLARS SIXTEEN THOUSAND AND TWENTY-ONE
AND CENTS EIGHTY ONLY (HK$16,021.80) per month
Part III
--------
The Deposit : HONG KONG DOLLARS THREE HUNDRED AND NINETEEN
THOUSAND ONE HUNDRED AND THIRTY-ONE AND CENTS
NINETY ONLY (HK$319,131.90)
Part IV
-------
Normal Air-Conditioning : Monday - Friday : 8:00 a.m. - 6:00 p.m.
Hours Saturday : 8:00 a.m. - 2:00 p.m.
Sunday and : no air-conditioning will be
Public Holiday provided
Part V
------
Vetting Fee : HK$1.60 per square foot of the total gross floor
area of the Premises or HK$3,000.00 whichever is
the greater
-36-
<PAGE> 38
FOURTH SCHEDULE
---------------
(1) Subject to Paragraph (2) of this Fourth Schedule, to use
the Premises as an office only.
(2) To provided technical know-how, support, exhibitions and
seminars to local manufactures for Add-on-Cards,
Motherboards, MUC applications for telecommunication and
consumer products, and to provide full design services
for ASIC systems from specifications to prototype
delivery and to develop sophisticated ASICs for local OEM
and ODM electronic products manufacturers to improve
reliability, shorten manufacturing cycle and reduce
component handling and cost. The Tenant plans to employ
12 staff to begin with at the Premises. 7 of whom would
be involved in the abovementioned activities and the
remaining balance would be in marketing and
administration.
- 37-
<PAGE> 39
FIFTH SCHEDULE
Special Conditions
(1) Rent-free Period :-
The Tenant shall be entitled to a rent-free period of 45 days starting
from the commencement of the Term Provided Always that during the said
rent-free period, the Tenant shall be responsible for and shall pay all
the Management Fees, rates, utility charges, additional air-conditioning/
chilled water supply charges and all other outgoings payable in respect
of the Premises under the terms of this Agreement.
(2) Restriction of Gross Floor Area by Director of Industry :-
(a) The Tenant hereby declares that he is fully aware of the
existence and implications of Special Condition (12)(b) in the
Particulars and Conditions of Grant of New Kowloon Inland Lot
No.6128 which provides, inter alia, that the Director of Industry
may in his absolute discretion from time to time during the term
thereby granted restrict the proportion of the gross floor area
of the Building which may be underlet by the Landlord and in that
event may stipulate that any underletting by the Landlord shall
be for a term not exceeding three (3) years.
(b) In the event the Director of Industry shall exercise his power
under the said Special Condition (12)(b) to restrict the gross
floor area of the Building as aforesaid the Landlord shall be
entitled upon giving reasonable notice at any time after the date
of this Agreement and/or during the Term to require the Tenant to
vacate and surrender :-
(i) a part of the Premises - the Tenant shall then at the
direction of the Landlord vacate such part of the Premises
within a reasonable period and deliver vacant possession
of the same to the Landlord, this Agreement shall remain
in full force and effect with respect to that part of the
Premises not required to be surrendered by the Tenant. In
the event of a partial surrender the rent for the
remaining part of the Premises shall be reduced on a
pro-rata basis for the remainder of the Term and a
pro-rata refund of the rental deposit shall be made by the
Landlord to the Tenant; or
(ii) the whole of the Premises - the Tenant shall vacate the
whole of the Premises within a reasonable period and
deliver vacant possession of the same to the Landlord,
this Agreement shall become null and void but without
prejudice to either party's right of action against the
other for any breach of the terms and covenants of this
Agreement prior to termination.
-38-
<PAGE> 40
Provided Always that in the event of a requirement for the
Tenant to vacate a part of the Premises the Tenant shall at
its absolute discretion be entitled to surrender the whole
of the Premises in which event the provisions of sub-clause
(b)(ii) of this Condition shall apply.
(3) Debris Removal Charge :-
Upon the signing of this Agreement, the Tenant shall pay to the Landlord
a debris removal charge which shall be HK$1.00 per share foot of the
total gross floor area of the Premises or HK$2,000.00 whichever is the
greater. The debris removal charge shall not be refundable to the Tenant
in any circumstances.
-39-
<PAGE> 41
SIXTH SCHEDULE
Fixtures and Fittings
1. Screed floor finishing
2. Perimeter dry wall, mini-blind on windows (where applicable)
3. Ceiling tile in lay in grid
4. Fluorescence lighting fixture, main circuit control board
5. Air diffuser and fan coil unit(s)
The fixtures and fittings listed above will be in accordance with the standard
laid down by the Landlord for such items.
-40-
<PAGE> 42
<TABLE>
<S> <C>
SIGNED BY Dr. James Liu )
CEO ) For and on behalf of
for and on behalf of the Landlord in the) HONG KONG INDUSTRIAL TECHNOLOGY
presence of :- Stanley Au ) CENTRE CORPORATION
GM/FAD
/s/ James Liu
/s/ Stanley Au -------------------------------------
Authorized Signature
SIGNED BY WAN WAH TONG, THOMAS, ) For and on behalf of
MANAGING DIRECTOR ) VALENCE SEMICONDUCTOR DESIGN LIMITED
for and on behalf of the Tenant in the )
presence of :- ) /s/ Wan Wah Tong, Thomas
/s/ Cham Tze Kwong, Reivlin -------------------------------------
Authorized Signature
Received the day and year first above ) For and on behalf of
written of and from the Tenant the sum ) HONG KONG INDUSTRIAL TECHNOLOGY CENTRE
of HONG KONG DOLLARS THREE HUNDRED AND ) CORPORATION
NINETEEN THOUSAND ONE HUNDRED AND )
THIRTY-ONE AND CENTS NINETY ONLY ) /s/ James Liu
being the deposit payable herein ) -------------------------------------
Authorized Signature
HK$319,131.90
-------------------------------------
the Landord
</TABLE>
-41-
<PAGE> 43
[BLUEPRINT OF PROPERTY]
-42-
<PAGE> 1
EX - 10.34
Dated the day of 1997
----------------------------------------
JUGADA COMPANY LIMITED
(as Landlord)
AND
VALENCE SEMICONDUCTOR DESIGN LIMITED
(as Tenant)
----------------------------------------
TENANCY AGREEMENT
of
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, Kowloon, Hong
Kong
Term: A term of 3 years from 1st
January 1998 to 31st December
2000
Rental: HK$99,124.90 per month
exclusive of rates, management
fee and central chilled water
charges
Deposit: HK$359,979.90
----------------------------------------
JOHNSON STOKES & MASTER,
SOLICITORS, & C.,
HONG KONG SAR.
Ref: PPOH/782115/6/CH/gfs
PC/RTD21352.DOC (181157)
<PAGE> 2
SECTION I
AGREEMENT
Parties AN AGREEMENT made this day of One Thousand
Nine Hundred and Ninety-Seven
BETWEEN (i) the Company detailed as the Landlord in Part
I of the Schedule hereto (hereinafter called "the
Landlord" which expression shall include its successors
and assigns) of the one part and (ii) the person firm or
company detailed as the Tenant in Part I of the Schedule
hereto (hereinafter called "the Tenant" which expression
shall include its successors and permitted assigns) of
the other part.
WHEREBY IT IS AGREED as follows:
1. Agreement:
Premises 1.01 The Landlord shall let and the Tenant shall take
ALL THOSE the premises (hereinafter referred to as
"the Premises") forming part of the building now
known as APEC Plaza, No. 49 Hai Yuto Road, Kwun
Tong, Kowloon, Hong Kong (hereinafter referred to
as "the Building") erected on ALL that piece or
parcel of land registered in the Land Registry as
Kwun Tong Inland Lot No. 732 which said Premises
are more particularly described and set out in Part
II of the Schedule attached hereto Together with
the use in
<PAGE> 3
-2-
common with the Landlord and all others having the
like right of the entrances staircases landings
passages and public toilets in the Building in so
far as the same are necessary for the proper use
and enjoyment of the Premises and except in so far
as the Landlord may from time to time restricts
such use. And together with the use in common as
aforesaid of the escalators and air cooling
services in the Building (if any and whenever the
same shall be operating) for the term set forth in
Part III of the Schedule hereto(hereinafter "the
Term Rent Term") YIELDING AND PAYING therefor throughout the
and other Charges Term such rent and other charges as are from time
to time payable or ascertainable in accordance
with the provisions set out in Part IV and Part V
of the Schedule hereto and in this Agreement (all
of which payments are unless the context otherwise
requires or provides hereinafter included in the
term "the Rent") which sums shall be payable
exclusive of rates and other outgoings and in
advance clear of all deductions on the first day
of each calendar month the first and last of such
payments to be apportioned according to the number
User of days in the month included in the Term. The
Tenant agrees to use the Premises only for the
purpose set forth in Part VII of the
<PAGE> 4
- 3 -
Schedule hereto and not for any other
purpose and in the event that the user of
the Premises designated in Part VII of the
Schedule hereto shall specify the sale or
supply thereat of any particular class or
kind of goods or services the Tenant shall
not use the Premises for the sale or
provision of any other class or kind of
goods services or other purpose whatsoever
without the express permission of the
Landlord in writing.
SECTION II
RENT AND OTHER CHARGES
2. The Tenant agrees with the Landlord as
follows:
Rent 2.01 To pay throughout the Term on the days and
in the manner hereinbefore provided for
payment thereof and in banknotes if so
required by the Landlord such calendar
monthly rent as is payable in accordance
with the provisions of Part IV of the
Schedule hereto;
Management fee 2.02 To pay on the days and in the manner
and central chilled hereinbefore provided the management fee and
water charges central chilled water charges as
respectively set forth in Part V of the
Schedule for the
<PAGE> 5
- 4 -
provision of management services for the
Premises and for the supply of chilled water
for use by the Tenant in connection with its
air-conditioning installation Provided
always that the rate of the said management
fee and central chilled water charges shall
be subject to review by the Manager of the
Building in accordance with the provisions
in the Deed of Mutual Covenant and
Management Agreement relating to the
Building. The Manager's determination of the
new rate of the said management fee and
central chilled water charges shall (save in
the case of manifest error) be conclusive.
All running, operating, maintenance, cleaning
and repair costs associated with the use of
fan coil units or other air handling plant
installed at the Premises will be borne by
the Tenant in addition to the management fee
and central chilled water charges. The
electric power for such fan coil units or
other air handling plant installed within or
exclusively for the Premises shall be
connected to the Tenant's electricity supply
meter and the Tenant shall pay direct to the
supply authority or contractor for the
electric power thereby consumed.
<PAGE> 6
- 5 -
Rates 2.03 To pay and discharge all rates taxes and
assessments duties impositions charges and
outgoings of an annual or recurring nature
now or hereafter to be imposed or levied on
the Premises or upon the owner or occupier in
respect thereof by the Government of Hong
Kong or other lawful authority (Crown Rent
and Property Tax alone excepted). Without
prejudice to the generality of this clause
the Tenant shall within 15 days from the date
of receiving a demand in writing for the same
either from the Landlord or from the Hong
Kong Government pay all rates imposed on the
Premises in the first place to the Landlord
who shall settle the same with the Hong Kong
Government. In the event of the rates imposed
not being individually assessed in respect of
the Premises, the Tenant shall pay a part
thereof in the same proportion as the gross
floor area of the Premises bears to the gross
floor area of the Building or part thereof so
assessed, and in the event of the Premises
not yet having been assessed to rates, the
Tenant shall on the signing hereof and before
it shall be entitled to possession of the
Premises at the commencement of the Term and
thereafter on each of the usual quarter days
until the rates have been so assessed pay to
the Landlord on account of the
<PAGE> 7
- 6 -
Tenant's liability under this Clause a sum equal to the
rates for that quarter (or a proportionate part thereof)
which would be charged by the Hong Kong Government on the
basis of a rateable value equal to twelve months rent
payable by the Tenant (such estimated rates to be paid on
monthly basis in advance): Provided that upon assessment by
the Hong Kong Government of the rates payable in respect of
the Premises the total amount paid by the Tenant to the
Landlord shall be adjusted accordingly and any surplus
shall be refunded by the Landlord and any deficiency shall
be made good by the Tenant.
Utility 2.04 To pay and discharge all deposits and charges in respect of
Charges & gas water electricity air-conditioning and telephone as may
Deposits be shown by or operated from the Tenants own metered
supply or by accounts rendered to the Tenant in respect of
all such utilities consumed on or in the Premises
<PAGE> 8
- 7 -
SECTION III
TENANT'S OBLIGATIONS
3. The Tenant hereby covenants undertakes and agrees
with the Landlord as follows:
Compliance with 3.01 To obey observe and comply with and to
Ordinances indemnify the Landlord against the breach of all
ordinances, regulations, by-laws, rules and
requirements of any Governmental or other
competent authority relating to the use and
occupation of the Premises, or to any other act,
deed, matter or thing done, permitted, suffered
or omitted therein or thereon by the Tenant or
any employee, agent or licensee of the Tenant
and without prejudice to the foregoing to obtain
any licence approval or permit required by any
Governmental or other competent authority in
connection with the Tenant's use or occupation
of the Premises prior to the commencement of the
Tenant's business and to maintain the same in
force and in all respects comply with the terms
thereof during the currency of this tenancy and
to indemnify the Landlord against the
consequences of any breach of this provision.
Fitting Out the 3.02 (a) To fit out the interior of the Premises in
Interior of the accordance with such
<PAGE> 9
-8-
Premises plans and specifications including but not limited
to electrical and mechanical layout, P & D design,
etc. as shall have been first submitted by the
Tenant to and approved in writing by the Landlord
in a good and proper workmanlike fashion. Such
fitting out works must not be commenced before
such plans and specifications have been approved
by the Landlord.
(b) The Tenant shall pay to the Landlord on demand all
mechanical, engineering and structural engineering
consultant's fees incurred by the Landlord in
connection with the consideration and approval of
the Tenant's Plans or any modifications or
amendments thereof.
Installation of 3.03 To make its own arrangements with the Hong Kong
Telephone Cables Telephone Company Limited with regard to the
installation of telephones or other communications
systems within the Premises, but the installation
of telephone and communications lines outside the
Premises must be in the common ducting provided
for that purpose and in all respects be in
accordance with the Landlord's directions;
Good Repair of 3.04 To keep all the interior parts of the Premises
Interior including the flooring and interior plaster or
<PAGE> 10
-9-
other finishing material or rendering to walls
floors and ceilings and the shopfront external
grilles or shutters to the Premises and the
Landlord's fixtures and fittings therein and all
additions (whether of the Landlord or the Tenant)
thereto including (without limitation and wherever
the same shall be installed in or upon the
Premises) all escalators doors windows electrical
installations and wiring light fittings suspended
ceiling fire fighting apparatus and
air-conditioning plant and ducting exhaust ducts,
scrubber and carbon filters, grease traps and all
pipes plumbing and drainage facilities and all
painting, papering and decoration thereof in good
clean tenantable substantial and proper repair and
condition and as may be appropriate from time to
time properly painted and decorated cleansed
cleared or replaced and so to maintain the same at
the expense of the Tenant and to deliver up the
same and all fittings, fixtures and additions
therein and thereto other than tenant's fixtures
and fittings to the Landlord at the expiration or
sooner determination of the said term in like
condition and without prejudice to the generality
of the foregoing during the last year of the term
hereby reserved if reasonably required by the
Landlord
<PAGE> 11
-10-
to repaint and decorate the interior of the
Premises;
Cleaning of Grease 3.05 To clean and clear every grease trap (if any, and
Trap whether within or outside the Premises) serving
the Premises or used by the Tenant as often as is
necessary to ensure the free, uninterrupted and
efficient working of the drainage and sewage
facilities serving the Building. The Landlord
shall be entitled from time to time to require the
Tenant to do such cleaning and clearing at such
regular intervals as may be prescribed by the
Landlord. If default shall be made by the Tenant
in fulfilling its obligations under this Clause
the Landlord shall be entitled to do such cleaning
and clearing, entering the Premises whenever
necessary and the cost thereof shall be a debt due
from the Tenant to the Landlord and be recoverable
forthwith by action;
Installation of 3.06 To install all wires pipes and cables and other
wires, cables services serving the Premises and through the
services ducts trunkings and conduits in the Building
provided by the Landlord for such purposes and at
all times in accordance with the Landlord's
directions and not to install any such wires pipes
cables or other services without first providing
the Landlord with full particulars and a
<PAGE> 12
- 11 -
fully detailed plan and diagram of such
intended installation and obtaining the
Landlord's consent in regard thereto.
Replacement of 3.07 To pay to or reimburse the Landlord the
Windows cost of replacing all broken or damaged
windows or shopfront glass whether the
same be broken or damaged by the
negligence of the Tenant or owing to
circumstances beyond the control of the
Tenant;
Repair of Electrical 3.08 To repair or replace as so required by
Installations the appropriate utility company or
authority under the terms of the
Electricity Supply Ordinance or any
statutory modification or reenactment
thereof or Regulations made thereunder
by duly authorised contractor, statutory
undertaker or authority as the case may
be all the electricity wiring
installations and fittings within the
Premises and the wiring from the
Tenant's meter or meters to and within
the same;
Good Repair of Toilets 3.09 At the expense of the Tenant to maintain
and Water Apparatus all toilets and sanitary and water
apparatus as are located within the
Premises (or elsewhere if used
exclusively by the Tenant its employees
invitees and licensees) in good clean
and tenantable state and in proper
repair and condition at all times during
the said Term to the satisfaction of the
Landlord and
<PAGE> 13
- 12 -
in accordance with the Regulations of
the Public Health or Government
Authority concerned;
Cleaning & Cleaning 3.10 To keep the Premises including
Contractors external windows lights and shopfront
glass at all times in a clean and
sanitary state and condition, and for
the better observance hereof the Tenant
shall only employ as cleaners of the
Premises such persons or firms as shall
be nominated by the Landlord. Such
Cleaners shall be employed at the
expense of the Tenant;
Cleaning of Drains 3.11 To pay on demand to the Landlord the
cost properly incurred by the Landlord
in cleansing and clearing any of the
drains choked or stopped up owing to
improper or careless use by the Tenant
or his employees invitees or licensees;
To Permit Landlord 3.12 To permit the Landlord its agents and
To Enter & View all persons authorised by it with or
without workmen or others and with or
without appliances at all reasonable
times to enter upon the Premises to view
the condition thereof and upon prior
notice to the Tenant to take inventories
of the fixtures and fittings therein and
to carry out any work or repair required
to be done provided that in the event of
an emergency the Landlord its servants
or agents may
<PAGE> 14
- 13 -
enter without notice and forcibly if
need be;
To Execute Repair on 3.13 To make good all defects and wants of
Receipt of Notice repair to the Premises for which the
Tenant may be liable within the space of
one month from the receipt of written
notice from the Landlord to repair amend
and make good the same, and if the
Tenant shall fail to execute such works
or repairs as aforementioned to permit
the Landlord to enter upon the Premises
and execute the same and the cost
thereof shall be a debt due from the
Tenant to the Landlord and be
recoverable forthwith by action;
Inform Landlord 3.14 To give prompt notice to the Landlord or
of Damage its agent of any damage that may be
suffered to the Premises and of any
accident to or defects in the water and
gas pipes (if any) electrical wiring or
fittings fixtures or other services or
facilities within the Premises;
Protection from 3.15 To take all necessary and appropriate
Typhoon precautions to protect the interior of
the Premises from storm or typhoon
damage;
Indemnification of 3.16 To be wholly responsible for any loss
Landlord damage or injury caused to any person
whomsoever or to any property whatsoever
directly or indirectly through the
defective or damaged
<PAGE> 15
- 14 -
condition or operation of any part of
the interior of the Premises or any
machinery or plant or any fixtures or
fittings or wiring or piping therein for
the repair of which the Tenant is
responsible hereunder or in any way
caused by or owing to the spread of fire
smoke or fumes or the leakage or
overflow of water of whatsoever origin
from the Premises or any part thereof or
through the act default or neglect of
the Tenant his servants agents
contractors licensees partners or
customers and to make good the same by
payment or otherwise and to indemnify
the Landlord against all costs claims
demands actions and legal proceedings
whatsoever made upon the Landlord by any
person in respect of any such loss
damage or injury as aforesaid and all
costs and expenses incidental thereto;
Air-conditioning 3.17 Where any plant machinery or equipment
of Premises for cooling or circulating air is
installed in or about the Premises
(whether by the Landlord or the Tenant)
the Tenant will to the extent of the
Tenant's control over the same at all
times use and regulate the same to
ensure that the air-condition plant is
employed to best advantage in the
conditions from time to prevailing and
without prejudice to the generality of
the foregoing will operate and maintain
<PAGE> 16
- 15 -
such plant within the Premises as the
Landlord may reasonably determine to
ensure a reasonably uniform standard of
air cooling or conditioning throughout
the Building;
Refuse & Garbage 3.18 To be responsible for the removal of
Removal refuse and garbage from the Premises to
such location as shall be specified by
the Landlord from time to time and to
use only that type of refuse container
as is specified by the Landlord from
time to time. In the event of the
Landlord providing a collection service
for refuse and garbage the same shall be
used by the Tenant to the exclusion of
any other similar service and the use of
such service provided by the Landlord
shall be at the sole cost of the Tenant;
Service Entrance 3.19 To load and unload goods only at such
times and through such entrances and by
such service lifts (if any) as shall be
designated by the Landlord for this
purpose from time to time;
Common Areas 3.20 To pay to or reimburse to the Landlord
the cost of repairing any damage caused
to any part of the common areas of the
Building occasioned by the Tenant his
licensees employees agents or
contractors or any other person
<PAGE> 17
- 16 -
claiming through or under the Tenant;
Contractors Employees 3.21 To be liable for any act default
Invitees & Licensees negligence or omission of the Tenant's
contractors, employees invitees or
licensees as if it were the act default
negligence or omission of the Tenant and
to indemnify the Landlord against all
cost claims demands expenses or
liability to any third party in
connection therewith;
Directory Boards 3.22 To pay the Landlord immediately upon
demand the cost of affixing repairing or
replacing as necessary the Tenant's name
in lettering to the directory boards at
the Building;
Regulations 3.23 To obey and comply with such Regulations
as may from time to time be made or
adopted by the Landlord in accordance
with Section X hereof;
Security Systems 3.24 To ensure that its own security system
within and at the entrance of the
Premises is at all times compatible with
and linked up to the security system for
the Building provided and operated by
the Landlord (if any);
Yield Up Premises 3.25 To yield up the Premises with all
& Handover fixtures fittings and additions therein
and thereto at the
<PAGE> 18
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expiration or sooner determination of
this Agreement in good clean and
tenantable repair and condition in
accordance with the stipulations
hereinbefore contained together with all
keys giving access to all parts of the
Premises Provided That where the Tenant
has made any alterations or installed
any fixtures fittings or additions in or
to the Premises and notwithstanding
that the Landlord's consent for so doing
may have been obtained or have been
given or be deemed to have been given
the Landlord may at its sole discretion
require the Tenant at the Tenant's sole
cost and expense to reinstate or remove
or do away with all or any such
alterations fixtures fittings or
additions or any part or portion thereof
and to make good and repair in a proper
and workmanlike manner any damage to the
Premises and the Landlord's fixtures and
fittings therein as a result thereof
before delivering up the Premises to the
Landlord.
<PAGE> 19
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SECTION IV
LANDLORD'S OBLIGATIONS
4. The Landlord agrees with the Tenant as
follows:
Quiet Enjoyment 4.01 To permit the Tenant duly paying the
Rent rates and other charges and the
service charge hereby agreed to be paid
on the days and in manner herein
provided for payment of the same and
observing and performing the agreements
stipulations terms conditions and
obligations herein contained to have
quiet possession and enjoyment of the
Premises during the said term without
any interruption by the Landlord or any
person lawfully claiming under or
through or in trust for the Landlord;
Crown Rent 4.02 To pay the Crown Rent and Property Tax
attributable to or payable in respect of
the Premises;
Air-conditioning 4.03 To use reasonable endeavours to maintain
the escalators, fire services equipment,
security installations and
air-conditioning plant and water
chilling apparatus and other services
provided within the Building not within
the Premises in proper working order and
condition;
<PAGE> 20
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Chilled Water 4.04 (a) Subject to Section VI Sub-clause 6.01(i)
Supply hereof to provide a supply of chilled
water to the Premises for the purposes
of the Tenant's air-conditioning during
the normal business hours to be decided
by the Manager of the Building whose
decision shall be final and conclusive;
(b) Subject to Section VI Sub-clause 6.01(i)
hereof the Landlord shall, at the
absolute discretion of the Landlord,
supply the Tenant with a supply of
chilled water to the Premises for the
purposes of the Tenant's
air-conditioning during hours outside
the normal business hours upon request
being made by the Tenant to the
Landlord. The cost for such additional
hours of chilled water supply from time
to time shall be determined by the
Landlord or the building manager whose
decision shall be final and notified to
the Tenant from time to time and shall
be paid by the Tenant to the Landlord
with the rent and other charges payable
under this Tenancy Agreement and shall
be recoverable by the Landlord as part
of the air-conditioning and management
charges hereunder.
<PAGE> 21
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Obligation Where 4.05 In the event that the Landlord is not
Landlord not owner the owner of the whole of the Building,
of Whole Building the obligations of the Landlord under
Section IV Sub-Clauses 4.03 and 4.04
hereof shall be deemed to have been
modified so that the Landlord shall only
be under an obligation to use reasonable
endeavors to procure that the manager
appointed under the Deed of Mutual
Covenant or any Sub-Deed of Mutual
Covenant affecting the Building or the
incorporated owners of the Building
shall do the things referred to in such
Sub-Clauses to the extent that they are
within the power and duty of the manager
or incorporated owners and the Landlord
shall not be liable to the Tenant or any
other person for the failure on the part
of the manager or incorporated owners to
do any such things;
Rights Reserved 4.06 It is hereby agreed and expressly
to the Landlord confirmed that the following rights are
excepted and reserved to the Landlord
(its successors and assign and all
person having the like right) throughout
the said Term:
(a) the right of free and uninterrupted
passage and running of water, soil,
gas, drainage, electricity and all
other services or supplies through
such sewers,
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watercourses, conduits, pipes,
wires, cables and ducts as are now
or may hereafter be in, on or under
the Premises and serving or capable
of serving the Building or any
adjoining or neighbouring property
TOGETHER WITH the right to enter
upon the Premises to inspect repair
replace or maintain any such
sewers, watercourses conduits,
pipes, wires, cables and ducts
Provided That in the exercise of
this latter right the Landlord
shall cause as little damage or
inconvenience to the Tenant as
possible and forthwith make good
any damage caused;
(b) the full and free right and liberty
to enter upon the Premises in the
circumstances in which the
covenants by the Tenant contained
in these presents permit such entry
and in particular but without
prejudice to the generality of the
foregoing the right to enter into
and upon the Premises at all times
for the purpose of obtaining access
to and egress from any machinery or
switch rooms or the like remaining
under the control of the Landlord
and located on
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any of the floors of the Building
on which any portion of the
Premises is situated;
(c) the right from time to time on
giving reasonable notice to the
Tenant (such notice not to be
required in case of emergency or
breakdown) and causing as little
inconvenience to the Tenant as
reasonably possible to suspend the
air-conditioning system, lifts,
escalators, electric power, water
supply and any other building
service provided in or serving the
Building for the purpose of
servicing, maintaining, repairing,
renewing, improving or replacing
the same and any of them;
(d) the right from time to time and
without the necessity of joining
the Tenant or any other person to
enter into such Deed of Mutual
Covenant or Sub-Deed of Mutual
Covenant or Management Agreement
affecting the Building or any part
thereof as the Landlord shall deem
appropriate.
<PAGE> 24
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SECTION V
RESTRICTIONS AND PROHIBITIONS
5. The Tenant hereby agrees with the Landlord as
follows:
Installation & 5.01 (a) Not without the previous written consent of the
Alterations Landlord to erect install or alter any fixtures
partitioning or other erection or installation in
the Premises or to make suffer or permit to be
made any alterations or additions to the
electrical wiring installation air-conditioning
plant or ducting (if any) and lighting fixtures
or any part thereof or other Landlord's fixtures
nor without the like consent to install or permit
or suffer to be installed any plant equipment
apparatus or machinery including any safe or
other object which imposes a weight on any part
of the flooring in excess of that for which it
was designed. The Landlord shall be entitled to
prescribe the maximum weight and permitted
location of safes and other heavy equipment and
to require that the same stand on supports of such
dimensions and material to distribute the weight
as the Landlord may deem necessary. All
reasonable and proper fees incurred by the
Landlord in obtaining the approval of its
architects to the
<PAGE> 25
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location of heavy objects shall be borne by the
Tenant and payment therefor may be imposed as a
pre-requisite to the Tenant receiving such
consent;
(b) Not to install any air-conditioning plant or
equipment of any kind on or within or at any part
of the Premises without the prior consent of the
Landlord in writing AND the Tenant shall comply
with the directions and instructions of the
Landlord regarding installation and shall at its
own expense be responsible for their periodic
inspection maintenance and repair and for the
replacement of defective wiring and the Tenant
shall be strictly liable for any damage caused by
the installation operation defect or removal of
such units;
(c) Not to make or permit or suffer to be made any
alterations in or additions to the mechanical or
electrical installations in the Building nor to
install or permit or suffer to be installed any
equipment, apparatus or machinery which exceeds
the loading of the electrical installations in
the Building nor to install or permit or suffer
to be installed any equipment, apparatus or
machinery which exceeds the loading of the
electrical main or wiring or which
<PAGE> 26
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consumes electricity not metered through
the Tenant's separate meter;
(d) Not to make or permit or suffer to be
made any alterations to any installation
or fixture so as to affect or be likely
to affect the supply of water,
electricity or other utility or service
to or in the Building;
(e) In carrying out any approved work
hereunder the Tenant its servants,
agents, contractors and workmen shall
obey and comply with all reasonable
instructions and directions which may
be given by the Landlord, its Project
Manager or other authorised represen-
tatives in connection with the carrying
out of such work;
(f) Any fees or expenses incurred by the
Landlord in connection with the giving
of consents hereunder shall be borne by
the Tenant;
Injury to Main Walls 5.02 Not without the previous written
consent of the Landlord to cut maim
or injure or permit or suffer to be
cut maimed or injured any doors,
windows walls beams structural
members or other part of the fabric
of the Premises;
Alterations to 5.03 Not to affix anything or paint or make
Exterior any alteration whatsoever to the
exterior of the Premises save as
<PAGE> 27
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provided in Section V Clause 5.07 hereof;
Obstructions to 5.04 Not to block up darken or obstruct or
Outside Windows obscure any shop front window or any other
window or lights belonging to the Premises
without having obtained the express written
consent of the Landlord which consent may be
given subject to such conditions as the
Landlord may in its absolute discretion
consider to fit to impose;
Not to erect gates 5.05 Not without the prior written consent of the
or grilles Landlord to erect or install doors, gates,
metal grilles, shutters or other similar
installation whatsoever whether temporary or
permanent at the doorway or entrance to the
Premises or at any of the fire exits
therefrom or erect any such doors or metal
grille or shutter or gate that might in any
way contravene the regulations from time to
time in force of the Fire Services
Department or other competent authority
concerned, nor in any other respect to
contravene the said regulations;
Noise 5.06 Not to cause or produce or suffer or permit
to be produced on or in the Premises any
sound or noise (including sound produced by
broadcasting from Rediffusion, Television,
Radio and any apparatus
<PAGE> 28
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or instrument capable of producing or
reproducing music and sound) or any
vibration or resonance or other form of
disturbance or other acts or things in or on
the Premises which is or are or may be a
nuisance to the tenants or occupiers of
adjacent or neighbouring premises or to
users and customers of the same or to the
Landlord and in the event of the Tenant's
permitted business use of the Premises as
defined in Part VII of the Schedule hereto
requiring any sound or noise to be produced
or reproduced within the Premises or any
part thereof to install and maintain to the
satisfaction of the Landlord appropriate
and adequate sound absorbing and insulating
material so as to prevent such sound or
noise from escaping from the Premises and
from becoming a nuisance or annoyance to
other tenants or occupiers of the Building
or any part thereof or any adjoining or
adjacent premises.
Signs 5.07 Save as permitted pursuant to Clause 3.22
hereof not to exhibit or display on or affix
to the exterior of the Premises or on the
interior face of the curtain wall and window
of the Premises any writing sign signboard
or other device whether illuminated or not
nor to affix any writing sign signboard or
other device in at or above any common
<PAGE> 29
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area lobby landing or corridor of the
Building. Provided always that the Tenant
shall be entitled to have its name and
business displayed in lettering and/or
characters to a design and standard of
workmanship approved by the landlord (which
approval shall not be unreasonably withheld)
on a signboard upon the front of the
Premises.
If the Tenant carries on business under a
name other than its own name it shall be
entitled to have that name displayed
aforesaid but the Tenant shall not be
entitled to change the business name without
the previous written consent of the Landlord
(which consent shall not be unreasonably
withheld) and without prejudice to the
foregoing the Landlord may in connection
with any application for consent under this
clause require the Tenant to produce such
evidence as it shall think fit to show that
no breach of Section V Clause 5.21 hereof
has taken place or is about to take place;
Auction & Sales 5.08 Not to conduct or permit any auction fire
bankruptcy close-out or similar sale of
things or properties of any kind to take
place on the Premises Provided that this
provision shall not preclude the conduct of
genuine periodic seasonal or promotional
sales where the permitted user of
<PAGE> 30
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the Premises includes shop or retail uses;
Illegal Immoral or 5.09 Not to use or cause permit or suffer to be
Improper Use used any part of the Premises for gambling
or for any illegal immoral or improper
purposes or in any way so as to cause
nuisance or annoyance inconvenience or
damage or danger to the Landlord or the
tenants or occupiers of adjacent or
neighbouring Premises;
No Touting 5.10 Not to tout or solicit or procure or permit
any touting or soliciting for business or
the distribution of any pamphlets notices or
advertising matter outside the Premises or
anywhere within the Building by any of the
Tenant's servants agents or licensees;
Sleeping or 5.11 Not to use the Premises or any part thereof
Domestic Use as sleeping quarters or as domestic premises
within the meaning of any ordinance for the
time being in force or to allow any person
to remain on the Premises overnight unless
with the Landlord's prior permission in
writing;
Storage of 5.12 Not to keep or store or cause or permit or
Dangerous Goods suffer to be kept or stored any extra
hazardous or dangerous goods within the
meaning of the Dangerous Goods Ordinance and
the regulations thereunder or any
<PAGE> 31
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Statutory modification or reenactment thereof;
User 5.13 Not to use the Premises for any purpose other than the
purpose specified in Part VII of the Schedule hereto;
Obstructions 5.14 Not to place or leave or suffer or permit to be placed or
in Passages left by any contractor employee invitee or licensee of the
Tenant any boxes furniture articles or rubbish in the
entrances or any of the staircases passages or landings
of the Building used in common with other tenants or the
Landlord or otherwise encumber the same;
Parking & 5.15 Not to park in obstruct or otherwise use nor permit to be
Loading parked in obstructed or otherwise used by any employee
agent or licensee of the Tenant those areas of the
Building allocated to parking the movement of or access
for vehicles or designated as loading/unloading areas
other than in accordance with the Regulations made from
time to time by the Landlord;
Goods & 5.16 Not to place expose or leave or permit to be placed
Merchandise exposed or left for display sale or otherwise any goods
Outside the or merchandise whatsoever upon or over the ground outside
Premises the Premises;
<PAGE> 32
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Free Standing Signs 5.17 Not to place expose or leave or permit to be
placed exposed or left any free standing signs
upon or over the ground outside the Premises or in
any of the staircases passages or landings of the
Building used in common with other Tenants or the
Landlord;
Preparation of Food & 5.18 Not to cause or permit any offensive or unusual
Prevention of Odours odours arising out of the preparation of food upon
the Premises (if so permitted under the terms of
Part VII of the Schedule) to emanate from the
Premises so as to cause in the Landlord's opinion
a nuisance to other occupiers or users of the
Building;
Food by Serviceways 5.19 Not to permit or allow any food stuffs or food
containers to be brought onto or removed from the
Premises except by way of service entrances
service exits and (if any) service lifts or
otherwise as may be directed by the Landlord from
time to time;
Animals, Pets & 5.20 Not to keep or permit or suffer to be kept any
Infestation pets animals or livestock inside the Premises and
to take all such reasonable steps and precautions
to the satisfaction of the Landlord as shall be
necessary to prevent the Premises or any part
thereof from becoming infested by termites rats
mice roaches or any
<PAGE> 33
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other pests or vermin and for the better observance
hereof the Landlord may require the Tenant at the
Tenant's cost to employ such pest extermination
contractors as the Landlord may nominate and at such
intervals as the Landlord may direct;
Alienation 5.21 Not to assign underlet or otherwise part with the
possession of the Premises or any part thereof in
any way whether by way of subletting lending
sharing or other means whereby any person or
persons not a party to this Agreement obtains the
use or possession of the Premises or any part
thereof irrespective of whether any rental or
other consideration is given for such use or
possession and in the event of any such transfer
sub-letting sharing assignment or parting with the
possession of the Premises (whether for monetary
consideration or not) this Agrement shall
absolutely determine and the Tenant shall
forthwith vacate the Premises on notice to that
effect from the Landlord. The Tenancy shall be
personal to the Tenant named in the Schedule to
this Agreement and without in any way limiting the
generality of the foregoing the following acts and
events shall unless approved in writing by the
<PAGE> 34
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Landlord be deemed to be breaches of this clause:-
(i) In the case of a tenant which is a partnership the
taking in of one or more new partners whether on
the death or retirement of an existing partner or
otherwise;
(ii) In the case of a tenant who is an individual
(including a sole surviving partner of a
partnership tenant) the death insanity or
disability of that individual to the intent that
no right to use possess occupy or enjoy the
Premises or any part thereof shall vest in the
executors administrators personal representatives
next of kin trustee or committee of any such
individual;
(iii) In the case of a tenant which is a corporation any
take-over reconstruction amalgamation merger
voluntary liquidation or change in the person or
persons who owns or own a majority of its voting
shares or who otherwise has or have effective
control thereof;
(iv) The giving by the Tenant of a Power of Attorney or
similar authority whereby the donee of
<PAGE> 35
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the Power obtains the right to use possess
occupy or enjoy the Premises or any part
thereof or does in fact use possess occupy or
enjoy the same;
(v) The change of the Tenant's business name
without the previous written consent of the
Landlord which consent the Landlord may give
or withhold at its discretion;
Breach of Crown Lease 5.22 Not to cause suffer or permit any
contravention of the negative or restrictive
provisions of the Crown Lease or Conditions
of Grant under which the Landlord holds the
Premises or any Deed of Mutual Covenant or
any Sub-Deed of Mutual Covenant affecting the
Building and to indemnify the Landlord
against any such breach;
Breach of Insurance 5.23 Not to cause or suffer or permit to be done
Policy any act or thing whereby the policy or
policies of insurance on the Premises against
damage by fire or liability to Third Parties
for the time being subsisting may become void
or voidable or whereby the rate of premium or
premiums thereon may be increased, and to
repay to the Landlord on demand all sums paid
by the Landlord by way of increased premium
or premiums thereon and all
<PAGE> 36
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expenses incurred by the Landlord in and about any
renewal of such policy or policies arising from or
rendered necessary by a breach of this Clause;
Prohibited Names 5.24 Not without the previous written consent of the
Landlord to name or include in the name of the
business or company operated by the Tenant the
name of the Building or any name similar thereto
and not at any time to change the name of the
business or company to include any such name as
aforesaid.
Locks 5.25 Not without the previous written consent of the
Landlord (such consent not to be unreasonably
withheld) to alter the existing locks, bolts and
fittings on the entrance doors to the Premises nor
to install any additional locks, bolts or fittings
thereon.
Tenant's Association 5.26 Not to form or organise or attempt or make any
effort to form or organise any tenant's
association or union jointly with any tenants of
the Building for whatever objects or purposes
during the continuance of the tenancy.
Overload 5.27 Not to place on any part of floors of the Premises
any article, machinery, goods or merchandise which
may cause the maximum floor
<PAGE> 37
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loading-bearing capacity thereof to be
exceeded.
SECTION VI
EXCLUSIONS
6. IT IS HEREBY FURTHER EXPRESSLY
AGREED AND DECLARED that the Landlord shall
not in any circumstances be liable to the
Tenant or any other person whomsoever :-
Breakdown of 6.01 (1) In respect of any loss of profit or of
Lifts, Air-Conditioning, business or loss of life or loss, injury or
Utilities damage to person or property or for any
disruption or inconvenience caused to or
suffered or sustained by the Tenant or any
other person caused by or through or in any
way owing to or arising out of or connected
with any defect in or breakdown or suspension
of service of the lifts air-conditioning
system, electric power or water supplies, or
any other building service provided in or
serving the Building, or
Fire and overflow (ii) In respect of any loss of profit or of
of water business or loss of life or loss injury or
damage to person or property or for any
disruption or inconvenience caused to or
suffered or sustained by the Tenant or any
other person caused by or through or
<PAGE> 38
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in any way owing to or arising out of or
connected with any escape of fumes smoke fire
or any other substance or thing or the
overflow of water from anywhere within the
Building, or
Security (iii) For the security or safekeeping of the
Premises or any contents therein and in
particular but without prejudice to the
generality of the foregoing the provision by
the Landlord of watchmen and caretakers or
any mechanical or electrical systems of alarm
of whatever nature shall not create any
obligation on the part of the Landlord as to
the security of the Premises or any contents
therein and the responsibility for the safety
of the Premises and the contents thereof
shall at all times rest with the Tenant,
nor shall the rent hereinbefore mentioned or other
charges payable hereunder or any part thereof
abate or cease to be payable on account of any of
the foregoing.
SECTION VII
ABATEMENT OF RENT
Suspension of Rent 7.01 If the Premises or the Building or any part
in case of Fire thereof shall at any time during the tenancy
be destroyed or
<PAGE> 39
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damaged or become inaccessible owing to fire
water storm typhoon defective construction
white ants earthquake subsidence of the
ground or any calamity beyond the control of
the Landlord so as to render the Premises
unfit for commercial use or inaccessible and
the policy or policies of insurance effected
by the Landlord shall not have been vitiated
or payment of policy monies refused in whole
or in part in consequence of any act or
default of the Tenant or if at any time
during the continuance of this Tenancy the
Premises or the Building shall be condemned
as a dangerous structure or a demolition
order or closing order shall become operative
in respect of the Premises or the Building
then the rent hereby reserved or a fair
proportion thereof according to the nature
and extent of the damage sustained or order
made shall be suspended until the Premises or
the Building shall again be rendered
accessible and fit for commercial use
Provided that should the Premises or the
Building not have been reinstated in the
meantime either the Landlord or the Tenant
may at any time after six months from the
occurrence of such damage or destruction or
order give to the other of them notice in
writing to determine this present tenancy and
thereupon the same and
<PAGE> 40
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everything herein contained shall cease and
be void as from the date of the occurrence of
such destruction or damage or order or of the
Premises becoming inaccessible or unfit for
commercial use but without prejudice to the
rights and remedies of either party against
the other in respect of any antecedent claim
or breach of the agreements stipulations
terms and conditions herein contained or of
the Landlord in respect of the rent payable
hereunder prior to the coming into effect of
the suspension.
SECTION VIII
DEFAULT
8. It is hereby expressly agreed and declared as
follows:
Default 8.01 If the Rent and/or the management fee and/or
the central chilled water charges and/or any
other sums payable hereunder or any part
thereof shall be in arrear for fifteen (15)
days after the same shall become payable
(whether formally demanded or not) or if
there shall be any breach or non-performance
of any of the stipulations conditions or
agreements herein contained and on the part
of the Tenant to be
<PAGE> 41
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observed or performed which the Tenant shall
fail to rectify or take all necessary steps
towards rectification within a period of 15
days of being advised in writing of the
breach or if the Tenant shall stop or suspend
payment of its debts or be unable to or admit
inability to pay its debts as they fall due
or enter into any scheme of arrangements with
its creditors or have any encumbrancer take
possession of any of its assets in
circumstances in which the Landlord shall
have reasonable grounds for believing that
the ability of the Tenant to pay the rentals
and other charges hereby reserved and to
observe and perform its obligations under
this Agreement shall have been prejudiced or
put at risk or have a receiving order made
against it or in such circumstances as
aforesaid fail to satisfy any judgment that
may be given in any action against it after
final appeal or if the Tenant shall become
bankrupt or being a corporation go into
liquidation (save for the purposes of
amalgamation or reconstruction) or if the
Tenant shall suffer any execution to be
levied upon the Premises or otherwise on the
Tenant's goods or if in such circumstances as
aforesaid the Tenant shall suspend or cease
or threaten to suspend or cease to
<PAGE> 42
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carry on its business or should any
event occur or proceedings be taken with
respect to the Tenant in any
jurisdiction to which the Tenant is
subject which has an effect equivalent
or similar to any of the events or
circumstances described above then and
in any such case it shall be lawful for
the Landlord at any time thereafter to
re-enter on and upon the Premises or any
part thereof in the name of the whole
and thereupon this Agreement shall
absolutely determine but without
prejudice to any right or action by the
Landlord in respect of any outstanding
breach or non-observance or
non-performance by the Tenant of any of
the terms of this Agreement. A written
notice served by the Landlord on the
Tenant in manner hereinafter provided to
the effect that the Landlord thereby
exercises the power of determination
and/or re-entry hereinbefore contained
shall be a full and sufficient exercise
of such power without physical entry on
the part of the Landlord notwithstanding
any statutory or common law provision to
the contrary. All costs and expenses
including any legal costs and fees
incurred by the Landlord in demanding
payment of the rent and other charges
aforesaid (if the Landlord elects to
demand) or the extent of any loss to the
Landlord
<PAGE> 43
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arising out of this Clause shall be
paid by the Tenant and shall be
recoverable from the Tenant as a debt or
be deductable by the Landlord from any
deposit held by the Landlord hereunder;
Interest 8.02 Notwithstanding anything herein
contained in the event of default in
payment of rent or other monies payable
by the Tenant hereunder for a period of
14 days from the date when payment is
due (whether formally demanded or not)
the Tenant shall pay to the Landlord on
demand daily interest on all such sums
outstanding at the rate of 1.5% per
calendar month calculated from the date
on which the same shall be due for
payment (in accordance with the
provisions contained in that behalf
herein) until the date of payment as
liquidated damages and not as penalty
provided that the demand and/or receipt
by the Landlord of interest pursuant to
this Clause shall be without prejudice
to and shall not affect the right of the
Landlord to exercise any other right or
remedy hereof (including but without
prejudice to the generality of the
foregoing the right of re-entry)
exercisable under the terms of this
Agreement;
Acceptance of Rent 8.03 The acceptance of any rent by the
Landlord hereunder shall not be
<PAGE> 44
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deemed to operate as a waiver by the
Landlord of any right to proceed against the
Tenant in respect of any breach
non-observance or non-performance by the
Tenant of any of the agreements stipulations
terms and conditions herein contained and on
the part of the Tenant to be observed and
performed;
Acts of Employees 8.04 For the purpose of these presents any act
Invitees & Licensees default neglect or omission of any guest,
visitor, servant, contractor, employee,
agent, invitee or licensee of the Tenant
shall be deemed to be act default neglect or
omission of the Tenant;
Distraint 8.05 For the purpose of Part III of the Landlord
and Tenant (Consolidation) Ordinance
(Chapter 7) and of this Agreement, the Rent
payable in respect of the Premises shall be
and be deemed to be in arrear if not paid in
advance at the times and in the manner
hereinbefore provided for payment thereof.
SECTION IX
DEPOSIT
Deposit 9.01 The Tenant shall on the signing hereof
deposit with the Landlord the sum or sums
specified in Part VI of the Schedule hereto
(being the equivalent of three months' rent
and
<PAGE> 45
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management fee and central chilled water
charges at the rates payable therefor at the
commencement of the Term) to secure the due
observance and performance by the Tenant of
the agreements stipulations terms and
conditions herein contained and on the part
of the Tenant to be observed and performed
which said deposit shall be held by the
Landlord throughout the currency of this
Agreement free of any interest to the Tenant
with the right for the Landlord (without
prejudice to any other right or remedy
hereunder) to deduct therefrom the amount of
any Rent rates and other charges payable
hereunder and any costs expenses loss or
damage sustained by the Landlord as the
result of any non-observance or
non-performance by the Tenant of any of the
said agreements stipulations obligations or
conditions. In the event of any deduction
being made by the Landlord from the said
deposit in accordance herewith during the
currency of this Agreement the Tenant shall
forthwith on demand by the Landlord make a
further deposit equal to the amount so
deducted and failure by the Tenant so to do
shall entitle the Landlord forthwith to
re-enter upon the Premises and to determine
this Agreement as hereinbefore provided.
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Increase in Deposit 9.02 The amount of the deposit shall be increased
following each and any increase in rent or
the management fee and central chilled water
charges provided for herein to a sum equal
to three (3) months' rent and management fee
and central chilled water charges at the
rates payable therefor at the date or dates
of such increase becoming effective, and the
Tenant shall make payment accordingly and
the provisions of this Section IX shall
apply to such further deposits.
Repayment of Deposit 9.03 Subject as aforesaid the said deposit and
any further deposits paid shall be refunded
to the Tenant by the Landlord without
interest within thirty days after the
expiration or sooner determination of this
Agreement and delivery of vacant possession
to the Landlord and after settlement of the
last outstanding claim by the Landlord
against the Tenant for any arrears of Rent
rates and other charges and for any breach
non-observance or non-performance of any of
the agreements stipulations terms and
conditions herein contained and on the part
of the Tenant to be observed or performed
whichever shall be the later.
<PAGE> 47
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SECTION X
REGULATIONS
Introduction of 10.01 The Landlord shall be entitled from time to
Regulations time and by notice in writing to the Tenant
to make introduce and subsequently amend
adopt or abolish if necessary such
Regulations as it may consider necessary for
the proper operation and maintenance of the
Building.
Conflict 10.02 Such Regulations shall be supplementary to
the terms and conditions contained in this
Agreement and shall not in any way derogate
from such terms and conditions. In the event
of conflict between such Regulations and the
terms and conditions of this Agreement the
terms and conditions of this Agreement shall
prevail.
Exclusion of Liability 10.03 The Landlord shall not be liable for any loss
or damage howsoever caused arising from any
non-enforcement of the Regulations or
non-observance thereof by any third party.
SECTION XI
INTERPRETATION AND MISCELLANEOUS
Name of Building 11.01 The Landlord reserves the right to name the
Building with any such name
<PAGE> 48
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or style as it in its sole discretion may
determine and at any time and from time to
time to change alter substitute or abandon
any such name without thereby becoming liable
to compensate the Tenant for any loss expense
or inconvenience caused to the Tenant as a
consequence thereof provided that the
Landlord shall give the Tenant and the Postal
and other relevant Government Authorities not
less than three months notice of its
intention so to do.
Alterations to the 11.02 The Landlord reserves the right from time to
Building time to improve extend add to or reduce the
Building or in any manner whatsoever alter or
deal with the Building (other than the
Premises) Provided always that in exercising
such right the Landlord will endeavor to
cause as little inconvenience to the Tenant
as it is practicable in the circumstances and
make good any damage caused to the Premises
within a reasonable period of time.
Functions & Display 11.03 Notwithstanding anything herein contained or
implied to the contrary the Landlord may
permit any person or organization to hold any
functions or exhibitions or display any
merchandise in any part or parts of the
common areas of the Building at such times
and upon such terms
<PAGE> 49
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and conditions as the Landlord may in its
absolute discretion think fit.
Public Address System 11.04 Notwithstanding anything herein contained or
implied to the contrary the Landlord may
provide and install a public address system
throughout the common areas of the Building
and may play relay or broadcast or permit any
other person to play relay or broadcast
recorded music or public announcements
thereon.
Condonation Not A 11.05 No condoning excusing or overlooking by the
Waiver Landlord of any default breach or
non-observance or non-performance by the
Tenant at any time or times of any of the
agreements stipulations terms and conditions
herein contained shall operate as a waiver of
the Landlord's right hereunder in respect of
any continuing or subsequent default breach
or non-observance or non-performance or so as
to defeat or affect in any way the rights and
remedies of the Landlord hereunder in respect
of any such continuing or subsequent default
or breach and no waiver by the Landlord shall
be inferred from or implied by anything done
or omitted by the Landlord, unless expressed
in writing and signed by the Landlord. Any
consent given by the Landlord shall operate
as a
<PAGE> 50
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consent only for the particular matter
to which it relates and shall in no way
be considered as a waiver or release of
any of the provisions hereof nor shall
it be construed as dispensing with the
necessity of obtaining the specific
written consent of the Landlord in the
future, unless expressly so provided.
Letting Notices & 11.06 During the three months immediately
Entry before the expiration or sooner
determination of the said Term of
tenancy the Tenant shall permit all
persons having written authority to
enter and view the Premises and every
part thereof at all reasonable times
PROVIDED FURTHER that the Landlord shall
be at liberty to affix and maintain
without interference upon any external
part of the Premises a notice stating
that the Premises are to be let and such
other information in connection
therewith as the Landlord shall
reasonably require during the
aforementioned period of 3 months.
Service of Notice 11.07 Any notice required to be served on the
Tenant shall be sufficiently served if
delivered to or despatched by registered
post or left at the Premises or at the
last known address of the Tenant. Any
notice required to be served on the
Landlord shall be sufficiently
<PAGE> 51
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served if delivered or despatched by
registered post to its registered office
from time to time. A notice sent by
registered post shall be deemed to be
given at the time and date of posting.
Gender 11.08 In this Agreement if the context
otherwise permits or requires words
importing the singular number shall
include the plural number and vice versa
and words importing the masculine
feminine or neuter gender shall include
the other of them and references to
person shall include bodies corporate or
unincorporate.
Marginal Notes, 11.09 The Marginal Notes Headings and index
Headings & Index are intended for guidance only and do
not form part of this Agreement nor
shall any of the provisions of this
Agreement be construed or interpreted
by reference thereto or in any way
affected or limited thereby.
Stamp Duty & Costs 11.10 The legal costs of and incidental to the
preparation execution and completion of
this Agreement shall be borne by the
Landlord and the Tenant in the manner
stipulated in Part VIII of the Schedule
hereto. The stamp duty and registration
fee (if any) on this Agreement shall be
borne by the parties hereto in equal
shares.
<PAGE> 52
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Deed of Mutual 11.11 The Tenant shall observe and comply with
Covenant and Management and perform all the covenants terms and
Agreement provisions in the Deed of Mutual
Covenant or Sub-Deed of Mutual Covenant
or Management Agreement (if any)
relating to the Building so far as they
relate to the Premises and shall
indemnify the Landlord against the
breach non-observance or non-performance
thereof.
In the event that under any such Deed of
Mutual Covenant or Sub-Deed of Mutual
Covenant or Management Agreement the
supply of chilled water and/or the
operation and/or the management of the
Building or the right, power or duty
thereto shall be controlled by or vested
in a manager the Tenant shall pay all
air-conditioning and service charge and
all management and maintenance charges
relating to the Premises as may be
payable under such Deed of Mutual
Covenant or Sub-Deed of Mutual Covenant
or Management Agreement.
No Fine 11.12 The Tenant acknowledges that no fine
premium key money construction money or
other consideration has been paid or
will be payable by the Tenant to the
Landlord for the grant of this tenancy.
Exclusion of 11.13 This Agreement sets out the full
<PAGE> 53
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Warranties the agreement reached between the
parties and no other representations
have been made or warranties given
relating to the Building or the
Premises.
Joint & Several 11.14 Where more than one person is included
Liability in the expression "the Tenant" all such
persons shall be jointly and severally
liable for the performance and
observance of the terms, conditions and
agreements contained herein and on the
part of the Tenant to be performed and
observed.
Special Conditions 11.15 The parties hereto further agree that
they shall respectively be bound by and
entitled to the benefit of the Special
Conditions set out in Part IX of the
Schedule hereto.
AS WITNESS the hands of the parties hereto the day and year first above written.
<PAGE> 54
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THE SCHEDULED ABOVE REFERRED TO
PART I
The Landlord : JUGADA COMPANY LIMITED whose registered office is
situate at 45th Floor, Sun Hung Kai Centre, 30 Harbour
Road, Hong Kong.
The Tenant : VALENCE SEMICONDUCTOR DESIGN LIMITED
[CHINESE IDEOGRAMS] whose registered office is situate
at Flat A, 13th Floor, Summit Industrial Building, 9
Sun yip Street, Chai Wan, Hong Kong.
PART II
The Premises
All Those WORKSHOP NOS.1, 2, 3, 4, 5, 6, 7 and 8 on the NINETEENTH FLOOR of
APEC PLAZA, No.49 Hoi Yuen Road, Kwun Tong, Kowloon erected on All That piece
or parcel of land registered in the Land Registry as Kwun Tong Inland Lot
No.731.
PART III
The Term
A term of 3 years commencing on the 1st day of January 1998 and expiring on the
31st day of December 2000.
PART IV
The Calendar Monthly Rent
HONG KONG DOLLARS NINTY NINE THOUSAND ONE HUNDRED TWENTY FOUR AND CENTS NINETY
ONLY (HK$99,124.90) payable in advance on the first day of each and every
calendar month clear of all deductions exclusive of rates, management fee and
central chilled water charges.
<PAGE> 55
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PART V
The Management Fee
HONG KONG DOLLARS ELEVEN THOUSAND ONE HUNDRED SEVENTY NINE AND CENTS FIFTY ONLY
(HK$11,179.50) per calendar month, payable monthly in advance on the first day
of each and every calendar month.
The Central Chilled Water Charges
HONG KONG DOLLARS NINE THOUSAND SIX HUNDRED EIGHTY EIGHT AND CENTS NINETY ONLY
(HK$9,688.90) per calendar month, payable monthly in advance on the first day
or each and every calendar month.
PART VI
The Deposit
HONG KONG DOLLARS THREE HUNDRED FIFTY NINE THOUSAND NINE HUNDRED SEVENTY NINE
AND CENTS NINETY ONLY (HK$359,979.90) being the equivalent of three (3)
calendar months' rent, management fee and central chilled water charges.
PART VIII
User
Restricted to use for industrial purpose provided that the Tenant shall obtain
all necessary licences and approval required by any Government Authority in
connection with such use and provided that the Landlord does not warrant that
the Premises are fit to be used for such purpose or any particular purpose.
<PAGE> 56
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PART VIII
Legal Costs
The legal costs of and incidental to the preparation execution and completion
of this Agreement shall be borne by the Landlord and the Tenant in equal shares.
PART IX
Special Conditions
1. Not withstanding anything herein contained, it is hereby agreed that
a portion of the deposit required to be paid by the Tenant to the Landlord
pursuant to Clause (9.01) of Section IX and Part VI of the Schedule to this
Agreement, in the sum of HK$238,404.00 shall be transferred from the existing
deposit held by the Landlord from the Tenant under a Tenancy Agreement of
Workshops Nos.1, 2, 3, 4, 5, 6 and 7 on the Nineteenth Floor of the Building
dated the 7th day of February 1996 ("the existing Tenancy Agreement") on the
commencement of the term hereby created, provided always that if for any reason
the said existing deposit shall be less than HK$238,404.00, then the shortfall
shall be paid by the Tenant to the Landlord on or before such commencement.
2. Provided always that if the existing Tenancy Agreement shall be
determined under the proviso for re-entry therein contained or by reason of any
breach of any of the terms and conditions therein contained and on the Tenant's
part to be observed and performed, then the Landlord shall have the right to
forthwith determine this Agreement and the term hereby created whereupon this
Agreement shall become absolutely null and void but without prejudice to any
right of remedy of the Landlord under the existing Tenancy Agreement or to any
right or remedy of the Landlord in respect of any antecedent breach by the
Tenant.
<PAGE> 57
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3. The Landlord reserves its right of free and uninterrupted passage
egress from and ingress to the common services of the Building in or under
above or through Workshops Nos.1, 2, 3, 4, 5, 6 and 7 on the Nineteenth Floor
of the Building. In particular, but without affecting the generality of the
aforesaid, the Landlord shall have the right to install, affix, erect or permit
to be installed, affixed or erected any ariel, transmitter or other
telecommunication cable wiring or equipment on or above the false ceiling or
otherwise over or under Workshops Nos.1, 2, 3, 4, 5, 6 and 7 on the Nineteenth
Floor of the Building and the Tenant shall permit the Landlord or its
authorized agent or contractor to enter Workshops Nos.1, 2, 3, 4, 5, 6 and 7 on
the Nineteenth Floor of the Building to install affix erect maintain or repair
such ariel transmitter cable wiring or equipment at all reasonable time upon
prior appointment and shall not remove, alter or otherwise cause damage to such
ariel transmitter cable wiring or equipment at Workshops Nos.1, 2, 3, 4, 5, 6,
7 and 8 on the Nineteenth Floor of the Building and shall indemnify the
Landlord against all claims demands actions proceeding loss or damages costs
and expenses arising from the breach of this provision by the Tenant.
4. Vacant possession of Workshop No. 8 on the Nineteenth Floor of the
Building will be delivered to the Tenant with its current conditions and with
all fittings and fixtures upon commencement date of the term.
<PAGE> 58
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SIGNED by )
)
)
)
for and on behalf of Jugada )
)
Company Limited in the presence )
)
of/whose signature is verified by:- )
SIGNED by Wan Wah Tong, Thomas ) For and on behalf of
) VALENCE SEMICONDUCTOR DESIGN LIMITED
for and on behalf of the Tenant in )
) /s/ Wan Wah Tong, Thomas
the presence of :- ) ------------------------------------
Authorized Signature(s)
/s/ Cham Tze Kwong, Reivlin
- ----------------------------------
Cham Tze Kwong, Reivlin
E849233(2)
RECEIVED on or before the day and year )
)
first above written of and from the Tenant )
)
the above mentioned deposit of HONG KONG ) HK$359,979.90
) -------------
DOLLARS THREE HUNDRED FIFTY NINE THOUSAND )
)
NINE HUNDRED SEVENTY NINE AND CENTS NINETY )
)
ONLY (of which a sum of HK$238,404.00 is )
)
transferred from the existing Tenancy )
)
Agreement as aforesaid). )
SIGNATURE(S) is/are verified by :-
<PAGE> 1
Ex-10.37
SRS LABS, INC.
REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of January 28, 1998, by and between SRS Labs,
Inc., a California corporation (the "Company") and R.G.A. & Associates, Ltd.,
d/b/a ToteVision and VIP Labs(R) ("RGA") and William S. Taraday, an individual
(together with RGA, the "Holder").
RECITAL
The Company desires to provide the Holder certain registration rights
and state in this Agreement the obligations with respect to registration rights.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the Company and the Holder agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
(a) "Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the Securities
Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "Holder" shall mean the Holder as defined in the preamble to
this Agreement or anyone who holds outstanding Registrable Securities to whom
the registration rights conferred by this Agreement have been transferred in
compliance with this Agreement.
(d) "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement, and compliance with applicable
state securities laws of such states in which Holders notify the Company of
their intention to offer Registrable Securities.
(e) "Registrable Securities" shall mean all of the following to
the extent the same have not been sold to the public (i) any and all shares of
Common Stock of the Company originally issued by the Company to Holder pursuant
to the terms of the Asset Purchase Agreement between the Holder and the Company,
of even date herewith, (ii) stock issued to the Holder by the Company upon the
exercise of the warrant of even date herewith issued by the Company to the
Holder; or (iii) stock issued in respect of stock referred to in (i) or (ii)
above in any reorganization; or (iv) stock issued in respect of the stock
referred to in (i), (ii) or (iii) above as a result of a stock split, stock
dividend, recapitalization or combination. Notwithstanding the foregoing,
Registrable Securities shall not include otherwise Registrable Securities (i)
sold by a person in a transaction in which his rights under this Agreement are
not properly assigned; or (ii) (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or (B)
sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions, and restrictive legends with respect thereto, if any, are
removed upon the consummation of such sale, (C) if the registration rights
associated with such securities have been terminated pursuant to Section 13 of
this Agreement or (D) saleable in accordance with Rule 144 during any
consecutive ninety (90) day period.
(f) "Rule 144" shall mean Rule 144 under the Securities Act or
any successor or similar rule as may be enacted by the Commission from time to
time, but shall not include Rule 144A.
<PAGE> 2
(g) "Rule 144A" shall mean Rule 144A under the Securities Act or
any successor or similar rule as may be enacted by the Commission from time to
time, but shall not include Rule 144.
(h) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
2. RESTRICTIONS ON TRANSFERABILITY.
The Registrable Securities shall not be sold, assigned,
transferred or pledged except upon the conditions specified in this Agreement,
which conditions are intended to ensure compliance with the provisions of the
Securities Act. Each Holder will cause any proposed purchaser, assignee,
transferee, or pledgee of the Registrable Securities held by a Holder to agree
to take and hold such securities subject to the provisions and upon the
conditions specified in this Agreement.
3. RESTRICTIVE LEGEND.
Each certificate representing Registrable Securities shall
(unless other permitted by the provisions of Section 4 below) be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required under applicable state securities laws or
otherwise):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE
SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENTS COVERING THE
PURCHASE OF THESE SHARES AND RIGHTS TO REGISTER THESE SHARES AND RESTRICTING
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY.
Each Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Registrable
Securities in order to implement the restrictions on transfer established in
this Agreement.
4. NOTICE OF PROPOSED TRANSFER.
The Holder of each certificate representing Registrable
Securities, by acceptance thereof, agrees to comply in all respects with the
provisions of this Section 4. Each such Holder agrees not to make any
disposition of all or any portion of any Registrable Securities unless and
until:
(a) There is in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) Such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(ii) If reasonably requested by the Company, such Holder
shall furnish the Company with an opinion of counsel, reasonably satisfactory to
the Company that such disposition shall not require registration of such shares
under the Securities Act.
5. PIGGYBACK REGISTRATION.
(a) If at any time or from time to time the Company shall
determine to register any of its securities, for its own account or the account
of any of its shareholders, other than a registration relating solely to
employee benefit plans, or a registration relating solely to an SEC Rule 145
transaction, a
2
<PAGE> 3
transaction relating solely to the sale of debt or convertible debt instruments
or a registration on any form (other than Form S-1, S-2 or S-3, or their
successor forms) which does not include substantially the same information as
would be required to be included in a registration statement covering the sale
of Registrable Securities, the Company will:
(i) give to each Holder written notice thereof as soon as
practicable prior to filing the registration statement; and
(ii) include in such registration and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within ten (10) days after receipt of such written notice from
the Company, by any Holder or Holders, except as set forth in subsection (b)
below.
(b) If the registration is for a registered public offering
involving an underwriting, the Company shall so advise the Holders as a part of
the written notice given pursuant to subsection 5(a)(i). In such event, the
right of any Holder to registration pursuant to Section 5 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of the
Agreement, if the underwriter determines in good faith that marketing factors
require a limitation of the number of shares to be underwritten, the number of
shares that may be included in the underwriting shall be allocated, first, to
the Company, second, to any stockholder of the Company with superior
registration rights to those of the Holder, on a pro rata basis and then to the
Holder.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 5 prior to the effectiveness of
such registration whether or not the Holder has elected to include securities in
such registration. All registration expenses (as provide in Section 6 below) of
such withdrawn registration shall be borne by the Company.
6. EXPENSES OF REGISTRATION.
In addition to the fees and expenses contemplated by Section 7
hereof, all expenses incurred in connection with registrations pursuant to
Section 5 hereof, including without limitation all registration, filing and
qualification fees, printing expenses, fees and disbursements of counsel for the
Company and expenses of any special audits of the Company's financial statements
incidental to or required by such registration, shall be borne by the Company,
except that the Company shall not be required to pay underwriters' fees,
discounts or commissions relating to Registrable Securities.
7. REGISTRATION PROCEDURES.
In the case of each registration effected by the Company pursuant
to this Agreement, the Company will keep each Holder participating therein
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense the Company will:
(a) keep such registration effective for a reasonable period as
necessary to permit the Holder or Holders to complete the distribution described
in the registration statement relating thereto, but in no event longer than 270
days;
(b) promptly prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act, and to keep such registration statement effective for that
period of time specified in Section 7(a) above;
3
<PAGE> 4
(c) furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(d) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practical moment;
(e) register or qualify such Registrable Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the managing
underwriter reasonably requires, and keep such registration or qualification
effective during the period set forth in Section 7(a) above, provided that the
Company shall not be required to qualify to business or file a general consent
to service of process in any such jurisdictions in connection therewith or as a
condition thereto;
(f) cause all Registrable Securities covered by such
registrations to be listed on each securities exchange, including Nasdaq, on
which similar securities issued by the Company are then listed or, if no such
listing exists, use reasonable best efforts to list all Registrable Securities
on one of the New York Stock Exchange, the American Stock Exchange or Nasdaq;
and
(g) in an underwritten public offering, cause its accountants to
issue to the underwriter or the Holders comfort letters and updates thereof, in
customary form and covering matters of the type customarily covered in such
letters with respect to underwritten offerings;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
underwriters, if any, reasonably, request in order to expedite or facilitate the
disposition of such Registrable Securities (including, without limitation,
effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement; provided,
that any records, documents and other information made available to such persons
under this Section 7(i) shall be kept confidential by such persons and such
persons, if requested by the Company, shall execute a confidentially agreement
in a form provided by the Company;
(j) notify each Holder, at any time a prospectus covered by such
registration statement is required to be delivered under the Securities Act, of
the happening of any event of which it has knowledge as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
8. INDEMNIFICATION.
(a) In the event of a registration of any of the Registrable
Securities under the Securities Act, the Company will indemnify and hold
harmless each Holder of such Registrable Securities thereunder, each underwriter
of such Registrable Securities thereunder and each other person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
such Holder, underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Registrable Securities were
registered under the Securities Act, any final prospectus contained therein, or
any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
4
<PAGE> 5
any violation by the Company of any rule or regulation promulgated under the
Securities Act or any state securities law applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, and will reimburse each such Holder, each of its officers,
directors and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage or liability arises out of or is based
on any untrue statement or omission based upon information furnished to the
Company by such Holder or underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration is being effected, indemnify and hold harmless the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company and each underwriter within the meaning of the Securities Act, and
each other such Holder, each of its officers, directors and partners and each
person controlling such Holder, against all claims, losses, expenses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, partners, persons or underwriters for any reasonable legal or any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with information furnished to the Company by such Holder specifically
for use therein.
(c) Each party entitled to indemnification under this Section 8
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claims as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in actual detriment to
the Indemnifying Party. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation.
(d) If the indemnification provided for in Section 8(a) or 8(b)
is held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, claim, damage, expense or liability referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, claim, damage, expense or liability
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss, claim,
damage, expense or liability as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification contained in the underwriting agreements entered
into among the selling Holders, the Company and the
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<PAGE> 6
underwriters in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall be controlling as to the Registrable Securities included in the public
offering.
(f) The indemnification provided by this Section 8 shall be a
continuing right to indemnification and shall survive the registration and sale
of any securities by any Person entitled to indemnification hereunder and the
expiration or termination of this Agreement.
9. INFORMATION BY HOLDER.
The Holder or Holders of Registrable Securities included in any
registration shall promptly furnish to the Company such information regarding
such Holder or Holders and the distribution proposed by such Holder or Holders
as the Company may request in writing and as shall be required in connection
with any registration referred to herein.
10. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities of a Holder and keep information available
granted to a Holder by the Company under Sections 5, 6 and 7 may be assigned by
a Holder to any partner or shareholder of such Holder, to any other Holder, or
to a transferee or assignee who receives at least [50,000] shares of Registrable
Securities (as adjusted for stock splits and the like); provided, that the
Company is given written notice by the Holder at the time of or within a
reasonable time after said transfer, stating the name and address of said
transferee or assignee and identifying the securities with respect to which such
registration rights are being assigned.
11. TERMINATION OF RIGHTS. The rights of any particular Holder to cause
the Company to include the Holder's Shares in any registration under Sections 5
shall terminate with respect to such Holder at such time as such Holder is able
to dispose of all of his Registrable Securities in one three-month period
pursuant to the provisions of Rule 144.
12. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Holders as follows:
(a) The execution, delivery and performance of this Agreement by
the Company have been duly authorized by all requisite corporate action and will
not violate any provision of law, any order of any court or other agency of
government, the Articles of Incorporation or Bylaws of the Company or any
provision of any indenture, agreement or other instrument to which it or any or
its properties or assets is bound, conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to:
(i) applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance and moratorium laws and other laws of general application
affecting enforcement of creditors' rights generally and
(ii) the availability of equitable remedies as such
remedies may be limited by equitable principles of general applicability
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
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<PAGE> 7
13. MISCELLANEOUS.
(a) Amendments. This Agreement may be amended only by a writing
signed by the Company and the Holders of more than fifty percent (50%) of the
Registrable Securities, as constituted from time to time. The Holders hereby
consent to future amendments to this Agreement that permit future investors,
including without limitation employees, officers or directors of the Company, to
be made parties hereto and to become Holders of Registrable Securities;
provided, however, that no such future amendment may materially impair the
rights of the Holders hereunder without obtaining the requisite consent of the
Holders, as set forth above.
(b) Counterparts. This Agreement may be executed in any number of
counterparts, all of which shall constitute a single instrument.
(c) Notices, Etc. All notices, requests, consents and other
communications required or provided for herein to any party shall be deemed to
be sufficient if contained in a written instrument, and shall be deemed to be
given when: (a) delivered in person; (b) delivered by overnight receipted
courier service; or (c) sent by facsimile transmission with delivery confirmed
and followed by delivery pursuant to Subsection (b) hereof, which notice is
addressed to the party at the address set forth below, or such other address as
may hereafter be designated in writing by the party.
If to the Company: SRS Labs, Inc.
2909 Daimler Street
Santa Ana, CA 92705
Attention: Janet M. Biski,
Vice President and Chief Financial Officer
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attention: Nick E. Yocca, Esq.
If to Holder:
VIP Labs(R)
969 Thomas Street
Seattle, WA 98109-5212
Attention: William S. Taraday
with a copy to:
Van Valkenberg Furber Law Group P.L.L.C. 1325
4th Avenue, Suite 1200
Seattle, Washington 98101
Attention: William E. Van Valkenberg, Esq.
(d) Nonpublic Information. Any other provisions of this Agreement
to the contrary notwithstanding, the Company's obligation to file a registration
statement, or cause such registration statement to become and remain effective,
shall be suspended during the period in which there exists at the time material
non-public information relating to the Company which, in the reasonable opinion
of the Company, should not be disclosed.
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<PAGE> 8
(e) Delay of Registration. No Holder shall have the right to take
any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
(f) Severability. If any provision of this Agreement shall be
held to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
(g) Dilution. If, and as often as, there is any change in the
Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the rights and privileges granted hereby shall
continue with respect to the Common Stock as so changed.
(h) Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Delaware without regard to principles
of conflict of law.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY: SRS LABS, INC.
a California corporation
/s/ STEPHEN V. SEDMARK
-----------------------------------
Stephen V. Sedmak, President
HOLDER: R.G.A. & ASSOCIATES, LTD.
a Washington corporation
/s/ WILLIAM S. TARADAY
-----------------------------------
William S. Taraday, President
/s/ WILLIAM S. TARADAY
-----------------------------------
William S. Taraday, an individual
8
<PAGE> 1
EX-10.38
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant to Purchase
94,000 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
SRS LABS, INC.
This is to certify that, for value received, R.G.A. & Associates,
Ltd., d/b/a ToteVision and VIP Labs(R), or registered assigns (in each case, the
"Holder"), is entitled to purchase, subject to the provisions of this Warrant
(the "Warrant"), from SRS Labs, Inc. (the "Company"), having its principal place
of business at 2909 Daimler Street, Santa Ana, California 92705, at any time
during the period from the date hereof (the "Commencement Date") to 5:00 p.m.,
California time, until December 31, 2001 (the "Expiration Date"), at which time
this Warrant shall expire and become void, Ninety-Four Thousand (94,000) shares
("Warrant Shares") of the Company's Common Stock (the "Common Stock"). This
Warrant shall be exercisable at $9.467 per share (the "Exercise Price"). The
number of shares of Common Stock to be received upon exercise of this Warrant
and the Exercise Price shall be adjusted from time to time as set forth below.
This Warrant also is subject to the following terms and conditions:
1. Exercise of Warrant.
1.1 This Warrant may be exercised in full at any time from
and after the date hereof and before the Expiration Date, but if such date is a
day on which federal or state chartered banking institutions located in the
State of California are authorized to close, then on the next succeeding day
which shall not be such a day. Exercise shall be by presentation and surrender
to the Company at its principal office, or at the office of any transfer agent
designated by the Company, of (i) this Warrant, (ii) the attached exercise form
properly executed, and (iii) a bank check for the Exercise Price for the number
of Warrant Shares specified in the exercise form. If this Warrant is exercised
in part only, the Company or its transfer agent shall, upon surrender of the
Warrant, execute and deliver a new Warrant evidencing the rights of the Holder
to purchase the remaining number of Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant in proper form for exercise, accompanied
by payment as aforesaid, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered by the
Holder.
<PAGE> 2
1.2 Exercise by Exchange. In addition to and without
limiting the rights of the holder under the terms hereof, at the holder's option
this Warrant may be exercised during the term specified above by being exchanged
in whole or in part prior to its expiration for a number of shares of Common
Stock having an aggregate fair market value on the date of such exercise equal
to the difference between (x) the fair market value of the number of shares of
Common Stock subject to this Warrant designated as being exercised by the holder
hereof on the date of the exercise and (y) the aggregate Exercise Price for such
shares in effect at such times. The following diagram illustrates how many
shares would then be issued upon exercise pursuant to this Section 1.5:
Let: FMV = Fair market value per share at date of exercise.
PSP = Per share Exercise Price at date of exercise.
N = Number of shares desired to be exercised.
X = Number of shares issued after exercise.
Therefore: X = (FMV)(N)-(PSP)(N)
------------------
FMV
Upon any such exercise, the number of shares of Common Stock
purchasable upon exercise of this Warrant shall be reduced by such designated
number of shares of Common Stock and, if a balance of purchasable shares Common
Stock remains after such exercise, the Company shall execute and deliver to the
holder hereof a new warrant for such balance of shares of Common Stock.
No payment of any cash or other consideration to the Company
shall be required from the holder of this Warrant in connection with any
exercise of this Warrant by exchange pursuant to this Section 1.2 or otherwise.
Such exchange shall be effective upon the date of receipt by the Company of the
original Warrant surrendered for cancellation and a written request from the
holder hereof that the exchange pursuant to this section be made, or at such
later date as may be specified in such request. No fractional shares arising out
of the above formula for determining the number of shares issuable in such
exchange shall be issued, and the Company shall in lieu thereof make payment to
the holder hereof of cash in the amount of such fraction multiplied by the fair
market value of a share of Common Stock on the date of the exchange.
For the purposes of this Warrant, the "fair market value" of
any number of shares of Common Stock shall mean such number of shares multiplied
by the Market Price Per Share, as determined pursuant to Section 3 below.
Notwithstanding the foregoing, the holder of this Warrant shall
only be entitled to exercise this Warrant in the manner provided in this Section
1.2, an aggregate of four (4) times during the term specified herein.
2. Reservation of Shares. The Company shall, at all times until
the expiration of this Warrant, reserve for issuance and delivery upon exercise
of this Warrant the number of Warrant Shares which shall be required for
issuance and delivery upon exercise of this Warrant. The Company covenants that
the shares of Common Stock issuable on exercise of the Warrant shall be duly and
validly issued and fully paid and non-assessable and free of liens, charges and
all taxes
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<PAGE> 3
with respect to the issue thereof, and that at such time as the Warrant Shares
may be sold, without registration, pursuant to the provisions of Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), such shares shall be
listed on each national securities exchange and/or NASDAQ, if any, on which the
other shares of outstanding Common Stock of the Company are then listed.
3. Fractional Interests. The Company shall not issue any fractional
shares or scrip representing fractional shares upon the exercise or exchange of
this Warrant. With respect to any fraction of a share resulting from the
exercise or exchange hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current fair market value per
share of Common Stock (herein, the "Market Price Per Share"), determined as
follows:
3.1 If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on three (3) trading days
prior to the date of exercise of this Warrant, or if no such sale is made on any
of those days, the mean of the closing bid and asked prices for such days on
such exchange or NASDAQ;
3.2 If the Common Stock is not so listed or admitted to
unlisted trading privileges or quoted on NASDAQ, the current fair market value
shall be the mean of the last bid and asked prices reported on the three trading
days prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
3.3 If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current fair market value shall be an amount, not less than book value,
determined in such reasonable manner as may be prescribed by the Company's Board
of Directors in good faith.
4. No Rights as Stockholders. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company, either at law or in
equity. The rights of the Holder are limited to those expressed in this Warrant
and are not enforceable against the Company except to the extent set forth
herein.
5. Adjustments.
5.1 Subdivision or Combination of Shares. If the Company is
recapitalized through the subdivision or combination of its outstanding shares
of Common Stock into a larger or smaller number of shares, the number of Warrant
Shares shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
3
<PAGE> 4
5.2 Dividends in Common Stock or Securities Convertible into
Common Stock. If the Company declares a dividend or distribution on Common Stock
payable in Common Stock or securities convertible into Common Stock, the number
of shares of Common Stock for which this Warrant may be exercised shall be
increased, as of the record date for determining which holders of Common Stock
shall be entitled to receive such dividend, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of Common Stock
as a result of such dividend or distribution, and the Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all the
Warrant Shares issuable hereunder immediately after the record date for such
dividend or distribution shall equal the aggregate amount so payable immediately
before such record date.
5.3 Distributions of Other Securities or Property.
(a) Other Securities. If the Company distributes to
holders of its Common Stock, other than as part of its dissolution or
liquidation or the winding up of its affairs, any of its securities (other than
Common Stock or securities convertible into Common Stock) or any evidence of
indebtedness, then in each case, the number of Warrant Shares thereafter
purchasable upon exercise of this Warrant shall be determined by multiplying the
number of Warrant Shares theretofore purchasable by a fraction, of which the
numerator shall be the then Market Price Per Share of Common Stock (as
determined pursuant to Section 3) on the record date mentioned below in this
Section 5.3(a), and of which the denominator shall be the then Market Price Per
Share of Common Stock on such record date, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the shares of the Company's capital stock or evidences of
indebtedness distributable with respect to each share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective retroactively as of the record date for the determination of
stockholders entitled to receive such distribution.
(b) Property. If the Company distributes to the holders
of its Common Stock, other than as a part of its dissolution or liquidation or
the winding up of its affairs, any of its assets (including cash), the Exercise
Price per Warrant Share shall be reduced, without any further action by the
parties hereto, by the Per Share Value (as hereinafter defined) of the dividend
or distribution. For the purposes of this Section 5.3(b), the "Per Share Value"
of any dividend or distribution other than cash shall be equal to the fair
market value of such non-cash distribution on each share of Common Stock as
determined in good faith by the Board of Directors of the Company; for dividends
or distributions of cash, the Per Share Value thereof shall be the cash
distributed per share of Common Stock.
5.4 Rights Offering. If the Company offers rights or warrants
to persons which entitle them to subscribe to or purchase Common Stock or
securities convertible into Common Stock, the Company shall give written notice
of any such proposed offering to the Holder at least fifteen days prior to the
proposed record date in order to permit the Holder to exercise this Warrant on
or before such record date. There shall be no adjustment in the number of shares
of Common Stock for which this Warrant may be exercised, or in the Exercise
Price, by virtue of any such distribution pursuant to this Section 5.4.
4
<PAGE> 5
5.5 Merger, Sale of Assets. If at any time while this Warrant,
or any portion thereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 5. The foregoing provisions of this Section 5.5 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
5.6 Reclassification. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, shall change
any of the securities as to which purchase rights under this Warrant exist, by
reclassification of securities or otherwise, into the same or a different number
of securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 5.
5.7 Liquidation, etc. If the Company shall, at any time before
the expiration of this Warrant, dissolve, liquidate or wind up its affairs, or
otherwise declare a dividend, or make a distribution to the holders of its
Common Stock generally, whether in cash, property or assets of any kind,
including any dividend payable in stock or securities of any other issuer owned
by the Company (excluding regularly payable cash dividends declared from time to
time by the Company's Board of Directors or any dividend or distribution
referred to in Section 5.2 or Section 5.3), the Exercise Price shall be reduced,
without any further action by the parties hereto, by the Per Share Value (as
hereinafter defined) of the dividend. For purposes of this Section 5.7, the "Per
Share Value" of a cash dividend or other distribution shall be the dollar amount
of the distribution on each share of Common Stock and the "Per Share Value" of
any dividend or distribution other than cash shall be equal to the fair market
value of such non-cash distribution on
5
<PAGE> 6
each share of Common Stock as determined in good faith by the Board of Directors
of the Company.
5.8 Adjustment of Exercise Price. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted, the
Exercise Price with respect to the Warrant Shares shall be adjusted by
multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
5.9 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant or the Exercise Price of the
Warrant Shares is adjusted as provided herein, the Company shall mail to the
Holder a notice of such adjustment or adjustments, prepared and signed by the
Chief Financial Officer or Secretary of the Company, which sets forth the number
of Warrant Shares purchasable upon the exercise of the Warrant and the Exercise
Price of such Warrant Shares after such adjustment, a brief statement of the
facts requiring such adjustment, and the computation by which such adjustment
was made.
6. Notices to Holder. So long as this Warrant shall be outstanding
(a) if the Company shall pay any dividends or make any distribution upon the
Common Stock otherwise than in cash or (b) if the Company shall offer generally
to the holders of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
similar rights or (c) if there shall be any capital reorganization of the
Company in which the Company is not the surviving entity, recapitalization of
the capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or other transfer of all or substantially
all of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company, then in such event, the
Company shall cause to be mailed to the Holder, at least twenty days prior to
the relevant date described below (or such shorter period as is reasonably
possible if twenty days is not reasonably possible), a notice containing a
description of the proposed action and stating the date or expected date on
which a record of the Company's stockholders is to be taken for the purpose of
any such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up is to take place, the effect of the
action, to the extent such effect may be known on the date of such notice, on
the Exercise Price and the kind and amount of shares of stock or other
securities or property deliverable on the exercise of the Warrant, and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event. All such notices shall
be deemed to have been received (i) in the case of personal delivery, on the
date of such delivery, and (ii) in the case of mailing, on the third business
day following the date of such mailing.
7. Transfer or Loss of Warrant.
7.1 Transfer. This Warrant may be transferred, exercised,
exchanged or assigned ("transferred"), in whole or in part, subject to the
provisions of this Section 7.1. The Holder shall have the right to transfer all
or a part of this Warrant and all or part of the Warrant Shares. The Company
shall register on its books any transfer of the Warrant, upon surrender of
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<PAGE> 7
same to the Company with a written instrument of transfer duly executed by the
registered Holder or by a duly authorized attorney. Upon any such registration
of a transfer, new Warrant(s) shall be issued to the transferee(s) and the
surrendered Warrant shall be cancelled by the Company. A Warrant may also be
exchanged, at the option of the Holder, for one or more new Warrants
representing the aggregate number of Warrant Shares evidenced by the Warrant
surrendered. This Warrant and the Warrant Shares or any other securities ("Other
Securities") received upon exercise of this Warrant or the conversion of the
Warrant Shares shall be subject to restrictions on transferability unless
registered under the Securities Act, or unless an exemption from registration is
available. Until this Warrant and the Warrant Shares are so registered, this
Warrant and any certificate for Warrant Shares issued or issuable upon exercise
of this Warrant shall contain a legend on the face thereof, in form and
substance satisfactory to counsel for the Company, stating that this Warrant or
the Warrant Shares may not be sold, transferred or otherwise disposed of unless,
in the opinion of counsel satisfactory to the Company, which may be counsel to
the Company, that the Warrant or the Warrant Shares may be transferred without
such registration. This Warrant and the Warrant Shares may also be subject to
restrictions on transferability under applicable state securities or blue sky
laws. Until the Warrant and the Warrant Shares are registered under the
Securities Act, the Holder shall reimburse the Company for its expenses,
including attorneys' fees, incurred in connection with any transfer or
assignment, in whole or in part, of this Warrant or any Warrant Shares.
7.2 Compliance with Laws. Until this Warrant or the Warrant
Shares are registered under the Securities Act, the Company may require, as a
condition of transfer of this Warrant or the Warrant Shares that the transferee
(who may be the Holder in the case of an exchange) represent that the securities
being transferred are being acquired for investment purposes and for the
transferee's own account and not with a view to or for sale in connection with
any distribution of the security. The Company may also require that the
transferee provide written information adequate to establish that the transferee
is an "accredited investor" within the meaning of Regulation D issued under the
Securities Act, or otherwise meets all qualifications necessary to comply with
exemptions to the Securities Act, all as determined by counsel to the Company.
7.3 Loss of Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to it of loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, of reasonable
satisfactory indemnification, or, in the case of mutilation, upon surrender of
this Warrant, the Company will execute and deliver, or instruct its transfer
agent to execute and deliver, a new Warrant of like tenor and date, any such
lost, stolen or destroyed Warrant thereupon shall become void.
8. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or otherwise, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times, in
good faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. Notices and other communications to be given to the
Holder shall be deemed sufficiently given if delivered by hand, or three (3)
business days after mailing if mailed by registered or certified mail, postage
prepaid, addressed in the name and at the address of such Holder appearing on
the records of the Company. Notices or other communications to the Company shall
be deemed to have been sufficiently given if delivered by hand or three (3)
business
7
<PAGE> 8
days after mailing if mailed by registered or certified mail, postage
prepaid, to the Company at:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Either party may change the address to which notices shall be given by notice
pursuant to this Section 9.
10. Registration Rights. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith between the Purchaser and the Seller.
11. Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of Delaware.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this Warrant as of February
26, 1998.
SRS LABS, INC.,
a Delaware corporation
/s/ STEPHEN V SEDMARK
-----------------------------------
Stephen V. Sedmak, President
9
<PAGE> 10
Annex A
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase______ shares of Common
Stock and herewith tenders payment for such shares of Common Stock in the amount
of $__________ by bank check made payable to "SRS Labs, Inc." The undersigned
requests that a certificate for such shares of Common Stock be registered in the
name of _____________________, whose address is ____________________________. If
such number of shares of Common Stock is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of the shares of Common Stock be
registered in the name of , whose address is _______________________, and that
such Warrant Certificate be delivered to _____________________, whose address is
.
- ----------------------------
Dated:
Signature:
--------------------------------------
(Signature must conform in all respects
to name of Holder as specified on the
face of the Warrant Certificate.)
- -----------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE> 1
EX-10.39
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant to Purchase
2,500 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
SRS LABS, INC.
This is to certify that, for value received, Herbert H. Wax, or
registered assigns (in each case, the "Holder"), is entitled to purchase,
subject to the provisions of this Warrant (the "Warrant"), from SRS Labs, Inc.
(the "Company"), having its principal place of business at 2909 Daimler Street,
Santa Ana, California 92705, at any time during the period from the date hereof
(the "Commencement Date") to 5:00 p.m., California time, until December 31, 2001
(the "Expiration Date"), at which time this Warrant shall expire and become
void, Two Thousand Five Hundred (2,500) shares ("Warrant Shares") of the
Company's Common Stock (the "Common Stock"). This Warrant shall be exercisable
at $9.467 per share (the "Exercise Price"). The number of shares of Common Stock
to be received upon exercise of this Warrant and the Exercise Price shall be
adjusted from time to time as set forth below. This Warrant also is subject to
the following terms and conditions:
1. Exercise of Warrant.
1.1 This Warrant may be exercised in full at any time from and
after the date hereof and before the Expiration Date, but if such date is a day
on which federal or state chartered banking institutions located in the State of
California are authorized to close, then on the next succeeding day which shall
not be such a day. Exercise shall be by presentation and surrender to the
Company at its principal office, or at the office of any transfer agent
designated by the Company, of (i) this Warrant, (ii) the attached exercise form
properly executed, and (iii) a bank check for the Exercise Price for the number
of Warrant Shares specified in the exercise form. If this Warrant is exercised
in part only, the Company or its transfer agent shall, upon surrender of the
Warrant, execute and deliver a new Warrant evidencing the rights of the Holder
to purchase the remaining number of Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant in proper form for exercise, accompanied
by payment as aforesaid, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered by the
Holder.
<PAGE> 2
1.2 Exercise by Exchange. In addition to and without limiting
the rights of the holder under the terms hereof, at the holder's option this
Warrant may be exercised during the term specified above by being exchanged in
whole or in part prior to its expiration for a number of shares of Common Stock
having an aggregate fair market value on the date of such exercise equal to the
difference between (x) the fair market value of the number of shares of Common
Stock subject to this Warrant designated as being exercised by the holder hereof
on the date of the exercise and (y) the aggregate Exercise Price for such shares
in effect at such times. The following diagram illustrates how many shares would
then be issued upon exercise pursuant to this Section 1.5:
Let: FMV = Fair market value per share at date of
exercise.
PSP = Per share Exercise Price at date of
exercise.
N = Number of shares desired to be exercised.
X = Number of shares issued after exercise.
Therefore: X = (FMV)(N)-(PSP)(N)
-----------------
FMV
Upon any such exercise, the number of shares of Common
Stock purchasable upon exercise of this Warrant shall be reduced by such
designated number of shares of Common Stock and, if a balance of purchasable
shares Common Stock remains after such exercise, the Company shall execute and
deliver to the holder hereof a new warrant for such balance of shares of Common
Stock.
No payment of any cash or other consideration to the
Company shall be required from the holder of this Warrant in connection with any
exercise of this Warrant by exchange pursuant to this Section 1.2 or otherwise.
Such exchange shall be effective upon the date of receipt by the Company of the
original Warrant surrendered for cancellation and a written request from the
holder hereof that the exchange pursuant to this section be made, or at such
later date as may be specified in such request. No fractional shares arising out
of the above formula for determining the number of shares issuable in such
exchange shall be issued, and the Company shall in lieu thereof make payment to
the holder hereof of cash in the amount of such fraction multiplied by the fair
market value of a share of Common Stock on the date of the exchange.
For the purposes of this Warrant, the "fair market value"
of any number of shares of Common Stock shall mean such number of shares
multiplied by the Market Price Per Share, as determined pursuant to Section 3
below.
Notwithstanding the foregoing, the holder of this Warrant
shall only be entitled to exercise this Warrant in the manner provided in this
Section 1.2, an aggregate of four (4) times during the term specified herein.
2. Reservation of Shares. The Company shall, at all times until the
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant. The Company covenants that the
shares of Common Stock issuable on exercise of the Warrant shall be duly and
validly issued and fully paid and non-assessable and free of liens, charges and
all taxes
2
<PAGE> 3
with respect to the issue thereof, and that at such time as the Warrant Shares
may be sold, without registration, pursuant to the provisions of Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), such shares shall be
listed on each national securities exchange and/or NASDAQ, if any, on which the
other shares of outstanding Common Stock of the Company are then listed.
3. Fractional Interests. The Company shall not issue any fractional
shares or scrip representing fractional shares upon the exercise or exchange of
this Warrant. With respect to any fraction of a share resulting from the
exercise or exchange hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current fair market value per
share of Common Stock (herein, the "Market Price Per Share"), determined as
follows:
3.1 If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on three (3) trading days
prior to the date of exercise of this Warrant, or if no such sale is made on any
of those days, the mean of the closing bid and asked prices for such days on
such exchange or NASDAQ;
3.2 If the Common Stock is not so listed or admitted to unlisted
trading privileges or quoted on NASDAQ, the current fair market value shall be
the mean of the last bid and asked prices reported on the three trading days
prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
3.3 If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
fair market value shall be an amount, not less than book value, determined in
such reasonable manner as may be prescribed by the Company's Board of Directors
in good faith.
4. No Rights as Stockholders. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company, either at law or in
equity. The rights of the Holder are limited to those expressed in this Warrant
and are not enforceable against the Company except to the extent set forth
herein.
5. Adjustments.
5.1 Subdivision or Combination of Shares. If the Company is
recapitalized through the subdivision or combination of its outstanding shares
of Common Stock into a larger or smaller number of shares, the number of Warrant
Shares shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
3
<PAGE> 4
5.2 Dividends in Common Stock or Securities Convertible into
Common Stock. If the Company declares a dividend or distribution on Common Stock
payable in Common Stock or securities convertible into Common Stock, the number
of shares of Common Stock for which this Warrant may be exercised shall be
increased, as of the record date for determining which holders of Common Stock
shall be entitled to receive such dividend, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of Common Stock
as a result of such dividend or distribution, and the Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all the
Warrant Shares issuable hereunder immediately after the record date for such
dividend or distribution shall equal the aggregate amount so payable immediately
before such record date.
5.3 Distributions of Other Securities or Property.
(a) Other Securities. If the Company distributes to
holders of its Common Stock, other than as part of its dissolution or
liquidation or the winding up of its affairs, any of its securities (other than
Common Stock or securities convertible into Common Stock) or any evidence of
indebtedness, then in each case, the number of Warrant Shares thereafter
purchasable upon exercise of this Warrant shall be determined by multiplying the
number of Warrant Shares theretofore purchasable by a fraction, of which the
numerator shall be the then Market Price Per Share of Common Stock (as
determined pursuant to Section 3) on the record date mentioned below in this
Section 5.3(a), and of which the denominator shall be the then Market Price Per
Share of Common Stock on such record date, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the shares of the Company's capital stock or evidences of
indebtedness distributable with respect to each share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective retroactively as of the record date for the determination of
stockholders entitled to receive such distribution.
(b) Property. If the Company distributes to the holders
of its Common Stock, other than as a part of its dissolution or liquidation or
the winding up of its affairs, any of its assets (including cash), the Exercise
Price per Warrant Share shall be reduced, without any further action by the
parties hereto, by the Per Share Value (as hereinafter defined) of the dividend
or distribution. For the purposes of this Section 5.3(b), the "Per Share Value"
of any dividend or distribution other than cash shall be equal to the fair
market value of such non-cash distribution on each share of Common Stock as
determined in good faith by the Board of Directors of the Company; for dividends
or distributions of cash, the Per Share Value thereof shall be the cash
distributed per share of Common Stock.
5.4 Rights Offering. If the Company offers rights or warrants to
persons which entitle them to subscribe to or purchase Common Stock or
securities convertible into Common Stock, the Company shall give written notice
of any such proposed offering to the Holder at least fifteen days prior to the
proposed record date in order to permit the Holder to exercise this Warrant on
or before such record date. There shall be no adjustment in the number of shares
of Common Stock for which this Warrant may be exercised, or in the Exercise
Price, by virtue of any such distribution pursuant to this Section 5.4.
4
<PAGE> 5
5.5 Merger, Sale of Assets. If at any time while this Warrant, or
any portion thereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 5. The foregoing provisions of this Section 5.5 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
5.6 Reclassification. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, shall change
any of the securities as to which purchase rights under this Warrant exist, by
reclassification of securities or otherwise, into the same or a different number
of securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 5.
5.7 Liquidation, etc. If the Company shall, at any time before
the expiration of this Warrant, dissolve, liquidate or wind up its affairs, or
otherwise declare a dividend, or make a distribution to the holders of its
Common Stock generally, whether in cash, property or assets of any kind,
including any dividend payable in stock or securities of any other issuer owned
by the Company (excluding regularly payable cash dividends declared from time to
time by the Company's Board of Directors or any dividend or distribution
referred to in Section 5.2 or Section 5.3), the Exercise Price shall be reduced,
without any further action by the parties hereto, by the Per Share Value (as
hereinafter defined) of the dividend. For purposes of this Section 5.7, the "Per
Share Value" of a cash dividend or other distribution shall be the dollar amount
of the distribution on each share of Common Stock and the "Per Share Value" of
any dividend or distribution other than cash shall be equal to the fair market
value of such non-cash distribution on
5
<PAGE> 6
each share of Common Stock as determined in good faith by the Board of Directors
of the Company.
5.8 Adjustment of Exercise Price. Whenever the number of Warrant
Shares purchasable upon the exercise of the Warrant is adjusted, the Exercise
Price with respect to the Warrant Shares shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Warrant Shares purchasable upon the exercise of
the Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares so purchasable immediately thereafter.
5.9 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant or the Exercise Price of the
Warrant Shares is adjusted as provided herein, the Company shall mail to the
Holder a notice of such adjustment or adjustments, prepared and signed by the
Chief Financial Officer or Secretary of the Company, which sets forth the number
of Warrant Shares purchasable upon the exercise of the Warrant and the Exercise
Price of such Warrant Shares after such adjustment, a brief statement of the
facts requiring such adjustment, and the computation by which such adjustment
was made.
6. Notices to Holder. So long as this Warrant shall be outstanding (a)
if the Company shall pay any dividends or make any distribution upon the Common
Stock otherwise than in cash or (b) if the Company shall offer generally to the
holders of Common Stock the right to subscribe to or purchase any shares of any
class of Common Stock or securities convertible into Common Stock or any similar
rights or (c) if there shall be any capital reorganization of the Company in
which the Company is not the surviving entity, recapitalization of the capital
stock of the Company, consolidation or merger of the Company with or into
another corporation, sale, lease or other transfer of all or substantially all
of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company, then in such event, the
Company shall cause to be mailed to the Holder, at least twenty days prior to
the relevant date described below (or such shorter period as is reasonably
possible if twenty days is not reasonably possible), a notice containing a
description of the proposed action and stating the date or expected date on
which a record of the Company's stockholders is to be taken for the purpose of
any such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up is to take place, the effect of the
action, to the extent such effect may be known on the date of such notice, on
the Exercise Price and the kind and amount of shares of stock or other
securities or property deliverable on the exercise of the Warrant, and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event. All such notices shall
be deemed to have been received (i) in the case of personal delivery, on the
date of such delivery, and (ii) in the case of mailing, on the third business
day following the date of such mailing.
7. Transfer or Loss of Warrant.
7.1 Transfer. This Warrant may be transferred, exercised,
exchanged or assigned ("transferred"), in whole or in part, subject to the
provisions of this Section 7.1. The Holder shall have the right to transfer all
or a part of this Warrant and all or part of the Warrant Shares. The Company
shall register on its books any transfer of the Warrant, upon surrender of
6
<PAGE> 7
same to the Company with a written instrument of transfer duly executed by the
registered Holder or by a duly authorized attorney. Upon any such registration
of a transfer, new Warrant(s) shall be issued to the transferee(s) and the
surrendered Warrant shall be cancelled by the Company. A Warrant may also be
exchanged, at the option of the Holder, for one or more new Warrants
representing the aggregate number of Warrant Shares evidenced by the Warrant
surrendered. This Warrant and the Warrant Shares or any other securities ("Other
Securities") received upon exercise of this Warrant or the conversion of the
Warrant Shares shall be subject to restrictions on transferability unless
registered under the Securities Act, or unless an exemption from registration is
available. Until this Warrant and the Warrant Shares are so registered, this
Warrant and any certificate for Warrant Shares issued or issuable upon exercise
of this Warrant shall contain a legend on the face thereof, in form and
substance satisfactory to counsel for the Company, stating that this Warrant or
the Warrant Shares may not be sold, transferred or otherwise disposed of unless,
in the opinion of counsel satisfactory to the Company, which may be counsel to
the Company, that the Warrant or the Warrant Shares may be transferred without
such registration. This Warrant and the Warrant Shares may also be subject to
restrictions on transferability under applicable state securities or blue sky
laws. Until the Warrant and the Warrant Shares are registered under the
Securities Act, the Holder shall reimburse the Company for its expenses,
including attorneys' fees, incurred in connection with any transfer or
assignment, in whole or in part, of this Warrant or any Warrant Shares.
7.2 Compliance with Laws. Until this Warrant or the Warrant
Shares are registered under the Securities Act, the Company may require, as a
condition of transfer of this Warrant or the Warrant Shares that the transferee
(who may be the Holder in the case of an exchange) represent that the securities
being transferred are being acquired for investment purposes and for the
transferee's own account and not with a view to or for sale in connection with
any distribution of the security. The Company may also require that the
transferee provide written information adequate to establish that the transferee
is an "accredited investor" within the meaning of Regulation D issued under the
Securities Act, or otherwise meets all qualifications necessary to comply with
exemptions to the Securities Act, all as determined by counsel to the Company.
7.3 Loss of Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to it of loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, of reasonable
satisfactory indemnification, or, in the case of mutilation, upon surrender of
this Warrant, the Company will execute and deliver, or instruct its transfer
agent to execute and deliver, a new Warrant of like tenor and date, any such
lost, stolen or destroyed Warrant thereupon shall become void.
8. No Impairment. The Company will not, by amendment of its Certificate
of Incorporation or otherwise, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times, in good
faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. Notices and other communications to be given to the Holder
shall be deemed sufficiently given if delivered by hand, or three (3) business
days after mailing if mailed by registered or certified mail, postage prepaid,
addressed in the name and at the address of such Holder appearing on the records
of the Company. Notices or other communications to the Company shall be deemed
to have been sufficiently given if delivered by hand or three (3) business
7
<PAGE> 8
days after mailing if mailed by registered or certified mail, postage prepaid,
to the Company at:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Either party may change the address to which notices shall be given by notice
pursuant to this Section 9.
10. Registration Rights. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith between the Purchaser and the Seller.
11. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this Warrant as of February
26, 1998.
SRS LABS, INC.,
a Delaware corporation
/s/ STEPHEN V SEDMARK
-----------------------------------
Stephen V. Sedmak, President
9
<PAGE> 10
Annex A
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase______ shares of Common
Stock and herewith tenders payment for such shares of Common Stock in the amount
of $__________ by bank check made payable to "SRS Labs, Inc." The undersigned
requests that a certificate for such shares of Common Stock be registered in the
name of _____________________, whose address is ____________________________. If
such number of shares of Common Stock is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of the shares of Common Stock be
registered in the name of ______________________, whose address is
_______________________, and that such Warrant Certificate be delivered to
_____________________, whose address is _________________________.
Dated:
Signature:
------------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the Warrant
Certificate.)
- ---------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE> 1
EX - 10.40
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant to Purchase
2,500 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
SRS LABS, INC.
This is to certify that, for value received, Steven E. Loyd, or
registered assigns (in each case, the "Holder"), is entitled to purchase,
subject to the provisions of this Warrant (the "Warrant"), from SRS Labs, Inc.
(the "Company"), having its principal place of business at 2909 Daimler Street,
Santa Ana, California 92705, at any time during the period from the date hereof
(the "Commencement Date") to 5:00 p.m., California time, until December 31, 2001
(the "Expiration Date"), at which time this Warrant shall expire and become
void, Two Thousand Five Hundred (2,500) shares ("Warrant Shares") of the
Company's Common Stock (the "Common Stock"). This Warrant shall be exercisable
at $9.467 per share (the "Exercise Price"). The number of shares of Common Stock
to be received upon exercise of this Warrant and the Exercise Price shall be
adjusted from time to time as set forth below. This Warrant also is subject to
the following terms and conditions:
1. Exercise of Warrant.
1.1 This Warrant may be exercised in full at any time from and
after the date hereof and before the Expiration Date, but if such date is a day
on which federal or state chartered banking institutions located in the State of
California are authorized to close, then on the next succeeding day which shall
not be such a day. Exercise shall be by presentation and surrender to the
Company at its principal office, or at the office of any transfer agent
designated by the Company, of (i) this Warrant, (ii) the attached exercise form
properly executed, and (iii) a bank check for the Exercise Price for the number
of Warrant Shares specified in the exercise form. If this Warrant is exercised
in part only, the Company or its transfer agent shall, upon surrender of the
Warrant, execute and deliver a new Warrant evidencing the rights of the Holder
to purchase the remaining number of Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant in proper form for exercise, accompanied
by payment as aforesaid, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered by the
Holder.
1.2 Exercise by Exchange. In addition to and without limiting
the rights of the
1
<PAGE> 2
holder under the terms hereof, at the holder's option this Warrant may be
exercised during the term specified above by being exchanged in whole or in part
prior to its expiration for a number of shares of Common Stock having an
aggregate fair market value on the date of such exercise equal to the difference
between (x) the fair market value of the number of shares of Common Stock
subject to this Warrant designated as being exercised by the holder hereof on
the date of the exercise and (y) the aggregate Exercise Price for such shares in
effect at such times. The following diagram illustrates how many shares would
then be issued upon exercise pursuant to this Section 1.5:
Let: FMV = Fair market value per share at date of exercise.
PSP = Per share Exercise Price at date of exercise.
N = Number of shares desired to be exercised.
X = Number of shares issued after exercise.
Therefore: X = (FMV)(N)-(PSP)(N)
-----------------
FMV
Upon any such exercise, the number of shares of Common Stock
purchasable upon exercise of this Warrant shall be reduced by such designated
number of shares of Common Stock and, if a balance of purchasable shares Common
Stock remains after such exercise, the Company shall execute and deliver to the
holder hereof a new warrant for such balance of shares of Common Stock.
No payment of any cash or other consideration to the Company
shall be required from the holder of this Warrant in connection with any
exercise of this Warrant by exchange pursuant to this Section 1.2 or otherwise.
Such exchange shall be effective upon the date of receipt by the Company of the
original Warrant surrendered for cancellation and a written request from the
holder hereof that the exchange pursuant to this section be made, or at such
later date as may be specified in such request. No fractional shares arising out
of the above formula for determining the number of shares issuable in such
exchange shall be issued, and the Company shall in lieu thereof make payment to
the holder hereof of cash in the amount of such fraction multiplied by the fair
market value of a share of Common Stock on the date of the exchange.
For the purposes of this Warrant, the "fair market value" of
any number of shares of Common Stock shall mean such number of shares multiplied
by the Market Price Per Share, as determined pursuant to Section 3 below.
Notwithstanding the foregoing, the holder of this Warrant shall
only be entitled to exercise this Warrant in the manner provided in this Section
1.2, an aggregate of four (4) times during the term specified herein.
2. Reservation of Shares. The Company shall, at all times until the
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant. The Company covenants that the
shares of Common Stock issuable on exercise of the Warrant shall be duly and
validly issued and fully paid and non-assessable and free of liens, charges and
all taxes with respect to the issue thereof, and that at such time as the
Warrant Shares may be sold, without registration, pursuant to the provisions of
Rule 144 of the Securities Act of 1933, as amended (the
2
<PAGE> 3
"Securities Act"), such shares shall be listed on each national securities
exchange and/or NASDAQ, if any, on which the other shares of outstanding Common
Stock of the Company are then listed.
3. Fractional Interests. The Company shall not issue any fractional
shares or scrip representing fractional shares upon the exercise or exchange of
this Warrant. With respect to any fraction of a share resulting from the
exercise or exchange hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current fair market value per
share of Common Stock (herein, the "Market Price Per Share"), determined as
follows:
3.1 If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on three (3) trading days
prior to the date of exercise of this Warrant, or if no such sale is made on any
of those days, the mean of the closing bid and asked prices for such days on
such exchange or NASDAQ;
3.2 If the Common Stock is not so listed or admitted to
unlisted trading privileges or quoted on NASDAQ, the current fair market value
shall be the mean of the last bid and asked prices reported on the three trading
days prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
3.3 If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current fair market value shall be an amount, not less than book value,
determined in such reasonable manner as may be prescribed by the Company's Board
of Directors in good faith.
4. No Rights as Stockholders. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company, either at law or in
equity. The rights of the Holder are limited to those expressed in this Warrant
and are not enforceable against the Company except to the extent set forth
herein.
5. Adjustments.
5.1 Subdivision or Combination of Shares. If the Company is
recapitalized through the subdivision or combination of its outstanding shares
of Common Stock into a larger or smaller number of shares, the number of Warrant
Shares shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
3
<PAGE> 4
5.2 Dividends in Common Stock or Securities Convertible into
Common Stock. If the Company declares a dividend or distribution on Common Stock
payable in Common Stock or securities convertible into Common Stock, the number
of shares of Common Stock for which this Warrant may be exercised shall be
increased, as of the record date for determining which holders of Common Stock
shall be entitled to receive such dividend, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of Common Stock
as a result of such dividend or distribution, and the Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all the
Warrant Shares issuable hereunder immediately after the record date for such
dividend or distribution shall equal the aggregate amount so payable immediately
before such record date.
5.3 Distributions of Other Securities or Property.
(a) Other Securities. If the Company distributes to
holders of its Common Stock, other than as part of its dissolution or
liquidation or the winding up of its affairs, any of its securities (other than
Common Stock or securities convertible into Common Stock) or any evidence of
indebtedness, then in each case, the number of Warrant Shares thereafter
purchasable upon exercise of this Warrant shall be determined by multiplying the
number of Warrant Shares theretofore purchasable by a fraction, of which the
numerator shall be the then Market Price Per Share of Common Stock (as
determined pursuant to Section 3) on the record date mentioned below in this
Section 5.3(a), and of which the denominator shall be the then Market Price Per
Share of Common Stock on such record date, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the shares of the Company's capital stock or evidences of
indebtedness distributable with respect to each share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective retroactively as of the record date for the determination of
stockholders entitled to receive such distribution.
(b) Property. If the Company distributes to the holders of
its Common Stock, other than as a part of its dissolution or liquidation or the
winding up of its affairs, any of its assets (including cash), the Exercise
Price per Warrant Share shall be reduced, without any further action by the
parties hereto, by the Per Share Value (as hereinafter defined) of the dividend
or distribution. For the purposes of this Section 5.3(b), the "Per Share Value"
of any dividend or distribution other than cash shall be equal to the fair
market value of such non-cash distribution on each share of Common Stock as
determined in good faith by the Board of Directors of the Company; for dividends
or distributions of cash, the Per Share Value thereof shall be the cash
distributed per share of Common Stock.
5.4 Rights Offering. If the Company offers rights or warrants
to persons which entitle them to subscribe to or purchase Common Stock or
securities convertible into Common Stock, the Company shall give written notice
of any such proposed offering to the Holder at least fifteen days prior to the
proposed record date in order to permit the Holder to exercise this Warrant on
or before such record date. There shall be no adjustment in the number of shares
of Common Stock for which this Warrant may be exercised, or in the Exercise
Price, by virtue of any such distribution pursuant to this Section 5.4.
5.5 Merger, Sale of Assets. If at any time while this Warrant,
or any portion
4
<PAGE> 5
thereof, is outstanding and unexpired there shall be (i) a reorganization (other
than a combination, reclassification, exchange or subdivision of shares
otherwise provided for herein), (ii) a merger or consolidation of the Company
with or into another corporation in which the Company is not the surviving
entity, or a reverse triangular merger in which the Company is the surviving
entity but the shares of the Company's capital stock outstanding immediately
prior to the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash, or otherwise, or (iii) a sale or
transfer of the Company's properties and assets as, or substantially as, an
entirety to any other person, then, as a part of such reorganization, merger,
consolidation, sale or transfer, lawful provision shall be made so that the
holder of this Warrant shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified herein and upon payment of the
Exercise Price then in effect, the number of shares of stock or other securities
or property of the successor corporation resulting from such reorganization,
merger, consolidation, sale or transfer that a holder of the shares deliverable
upon exercise of this Warrant would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Warrant had been
exercised immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 5. The
foregoing provisions of this Section 5.5 shall similarly apply to successive
reorganizations, consolidations, mergers, sales and transfers and to the stock
or securities of any other corporation that are at the time receivable upon the
exercise of this Warrant. In all events, appropriate adjustment (as determined
in good faith by the Company's Board of Directors) shall be made in the
application of the provisions of this Warrant with respect to the rights and
interests of the Holder after the transaction, to the end that the provisions of
this Warrant shall be applicable after that event, as near as reasonably may be,
in relation to any shares or other property deliverable after that event upon
exercise of this Warrant.
5.6 Reclassification. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, shall change
any of the securities as to which purchase rights under this Warrant exist, by
reclassification of securities or otherwise, into the same or a different number
of securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 5.
5.7 Liquidation, etc. If the Company shall, at any time before
the expiration of this Warrant, dissolve, liquidate or wind up its affairs, or
otherwise declare a dividend, or make a distribution to the holders of its
Common Stock generally, whether in cash, property or assets of any kind,
including any dividend payable in stock or securities of any other issuer owned
by the Company (excluding regularly payable cash dividends declared from time to
time by the Company's Board of Directors or any dividend or distribution
referred to in Section 5.2 or Section 5.3), the Exercise Price shall be reduced,
without any further action by the parties hereto, by the Per Share Value (as
hereinafter defined) of the dividend. For purposes of this Section 5.7, the "Per
Share Value" of a cash dividend or other distribution shall be the dollar amount
of the distribution on each share of Common Stock and the "Per Share Value" of
any dividend or distribution other than cash shall be equal to the fair market
value of such non-cash distribution on each share of Common Stock as determined
in good faith by the Board of Directors of the Company.
5
<PAGE> 6
5.8 Adjustment of Exercise Price. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted, the
Exercise Price with respect to the Warrant Shares shall be adjusted by
multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
5.9 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant or the Exercise Price of the
Warrant Shares is adjusted as provided herein, the Company shall mail to the
Holder a notice of such adjustment or adjustments, prepared and signed by the
Chief Financial Officer or Secretary of the Company, which sets forth the number
of Warrant Shares purchasable upon the exercise of the Warrant and the Exercise
Price of such Warrant Shares after such adjustment, a brief statement of the
facts requiring such adjustment, and the computation by which such adjustment
was made.
6. Notices to Holder. So long as this Warrant shall be outstanding
(a) if the Company shall pay any dividends or make any distribution upon the
Common Stock otherwise than in cash or (b) if the Company shall offer generally
to the holders of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
similar rights or (c) if there shall be any capital reorganization of the
Company in which the Company is not the surviving entity, recapitalization of
the capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or other transfer of all or substantially
all of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company, then in such event, the
Company shall cause to be mailed to the Holder, at least twenty days prior to
the relevant date described below (or such shorter period as is reasonably
possible if twenty days is not reasonably possible), a notice containing a
description of the proposed action and stating the date or expected date on
which a record of the Company's stockholders is to be taken for the purpose of
any such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up is to take place, the effect of the
action, to the extent such effect may be known on the date of such notice, on
the Exercise Price and the kind and amount of shares of stock or other
securities or property deliverable on the exercise of the Warrant, and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event. All such notices shall
be deemed to have been received (i) in the case of personal delivery, on the
date of such delivery, and (ii) in the case of mailing, on the third business
day following the date of such mailing.
7. Transfer or Loss of Warrant.
7.1 Transfer. This Warrant may be transferred, exercised,
exchanged or assigned ("transferred"), in whole or in part, subject to the
provisions of this Section 7.1. The Holder shall have the right to transfer all
or a part of this Warrant and all or part of the Warrant Shares. The Company
shall register on its books any transfer of the Warrant, upon surrender of same
to the Company with a written instrument of transfer duly executed by the
registered Holder or by a duly authorized attorney. Upon any such registration
of a transfer, new Warrant(s) shall be issued to the transferee(s) and the
surrendered Warrant shall be cancelled by the Company. A Warrant may also be
exchanged, at the option of the Holder, for one or more new Warrants
6
<PAGE> 7
representing the aggregate number of Warrant Shares evidenced by the Warrant
surrendered. This Warrant and the Warrant Shares or any other securities ("Other
Securities") received upon exercise of this Warrant or the conversion of the
Warrant Shares shall be subject to restrictions on transferability unless
registered under the Securities Act, or unless an exemption from registration is
available. Until this Warrant and the Warrant Shares are so registered, this
Warrant and any certificate for Warrant Shares issued or issuable upon exercise
of this Warrant shall contain a legend on the face thereof, in form and
substance satisfactory to counsel for the Company, stating that this Warrant or
the Warrant Shares may not be sold, transferred or otherwise disposed of unless,
in the opinion of counsel satisfactory to the Company, which may be counsel to
the Company, that the Warrant or the Warrant Shares may be transferred without
such registration. This Warrant and the Warrant Shares may also be subject to
restrictions on transferability under applicable state securities or blue sky
laws. Until the Warrant and the Warrant Shares are registered under the
Securities Act, the Holder shall reimburse the Company for its expenses,
including attorneys' fees, incurred in connection with any transfer or
assignment, in whole or in part, of this Warrant or any Warrant Shares.
7.2 Compliance with Laws. Until this Warrant or the Warrant
Shares are registered under the Securities Act, the Company may require, as a
condition of transfer of this Warrant or the Warrant Shares that the transferee
(who may be the Holder in the case of an exchange) represent that the securities
being transferred are being acquired for investment purposes and for the
transferee's own account and not with a view to or for sale in connection with
any distribution of the security. The Company may also require that the
transferee provide written information adequate to establish that the transferee
is an "accredited investor" within the meaning of Regulation D issued under the
Securities Act, or otherwise meets all qualifications necessary to comply with
exemptions to the Securities Act, all as determined by counsel to the Company.
7.3 Loss of Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to it of loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, of reasonable
satisfactory indemnification, or, in the case of mutilation, upon surrender of
this Warrant, the Company will execute and deliver, or instruct its transfer
agent to execute and deliver, a new Warrant of like tenor and date, any such
lost, stolen or destroyed Warrant thereupon shall become void.
8. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or otherwise, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times, in
good faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. Notices and other communications to be given to the
Holder shall be deemed sufficiently given if delivered by hand, or three (3)
business days after mailing if mailed by registered or certified mail, postage
prepaid, addressed in the name and at the address of such Holder appearing on
the records of the Company. Notices or other communications to the Company shall
be deemed to have been sufficiently given if delivered by hand or three (3)
business days after mailing if mailed by registered or certified mail, postage
prepaid, to the Company at:
7
<PAGE> 8
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Either party may change the address to which notices shall be given by notice
pursuant to this Section 9.
10. Registration Rights. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith between the Purchaser and the Seller.
11. Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of Delaware.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this Warrant as of
February 26, 1998.
SRS LABS, INC.,
a Delaware corporation
/s/ STEPHEN V. SEDMAK
-----------------------------------------
Stephen V. Sedmak, President
9
<PAGE> 10
Annex A
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase______ shares of Common
Stock and herewith tenders payment for such shares of Common Stock in the amount
of $__________ by bank check made payable to "SRS Labs, Inc." The undersigned
requests that a certificate for such shares of Common Stock be registered in the
name of _____________________, whose address is ____________________________. If
such number of shares of Common Stock is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of the shares of Common Stock be
registered in the name of ________, whose address is _______________________,
and that such Warrant Certificate be delivered to _____________________, whose
address is . ----------------------------. Dated:
Signature:
------------------------------------
(Signature must conform in all
respects to name of Holder as
specified on the face of the Warrant
Certificate.)
- ---------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE> 1
EX-10.41
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant to Purchase
1,000 Shares of
Common Stock
As Herein Described
WARRANT TO PURCHASE COMMON STOCK OF
SRS LABS, INC.
This is to certify that, for value received, Van Valkenberg Furber
Law Group P.L.L.C., or registered assigns (in each case, the "Holder"), is
entitled to purchase, subject to the provisions of this Warrant (the "Warrant"),
from SRS Labs, Inc. (the "Company"), having its principal place of business at
2909 Daimler Street, Santa Ana, California 92705, at any time during the period
from the date hereof (the "Commencement Date") to 5:00 p.m., California time,
until December 31, 2001 (the "Expiration Date"), at which time this Warrant
shall expire and become void, One Thousand (1,000) shares ("Warrant Shares") of
the Company's Common Stock (the "Common Stock"). This Warrant shall be
exercisable at $9.467 per share (the "Exercise Price"). The number of shares of
Common Stock to be received upon exercise of this Warrant and the Exercise Price
shall be adjusted from time to time as set forth below. This Warrant also is
subject to the following terms and conditions:
1. Exercise of Warrant.
1.1 This Warrant may be exercised in full at any time from and
after the date hereof and before the Expiration Date, but if such date is a day
on which federal or state chartered banking institutions located in the State of
California are authorized to close, then on the next succeeding day which shall
not be such a day. Exercise shall be by presentation and surrender to the
Company at its principal office, or at the office of any transfer agent
designated by the Company, of (i) this Warrant, (ii) the attached exercise form
properly executed, and (iii) a bank check for the Exercise Price for the number
of Warrant Shares specified in the exercise form. If this Warrant is exercised
in part only, the Company or its transfer agent shall, upon surrender of the
Warrant, execute and deliver a new Warrant evidencing the rights of the Holder
to purchase the remaining number of Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant in proper form for exercise, accompanied
by payment as aforesaid, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered by the
Holder.
<PAGE> 2
1.2 Exercise by Exchange. In addition to and without limiting
the rights of the holder under the terms hereof, at the holder's option this
Warrant may be exercised during the term specified above by being exchanged in
whole or in part prior to its expiration for a number of shares of Common Stock
having an aggregate fair market value on the date of such exercise equal to the
difference between (x) the fair market value of the number of shares of Common
Stock subject to this Warrant designated as being exercised by the holder hereof
on the date of the exercise and (y) the aggregate Exercise Price for such shares
in effect at such times. The following diagram illustrates how many shares would
then be issued upon exercise pursuant to this Section 1.5:
Let: FMV = Fair market value per share at date of exercise.
PSP = Per share Exercise Price at date of exercise.
N = Number of shares desired to be exercised.
X = Number of shares issued after exercise.
Therefore: X = (FMV)(N)-(PSP)(N)
-----------------
FMV
Upon any such exercise, the number of shares of Common Stock
purchasable upon exercise of this Warrant shall be reduced by such designated
number of shares of Common Stock and, if a balance of purchasable shares Common
Stock remains after such exercise, the Company shall execute and deliver to the
holder hereof a new warrant for such balance of shares of Common Stock.
No payment of any cash or other consideration to the Company
shall be required from the holder of this Warrant in connection with any
exercise of this Warrant by exchange pursuant to this Section 1.2 or otherwise.
Such exchange shall be effective upon the date of receipt by the Company of the
original Warrant surrendered for cancellation and a written request from the
holder hereof that the exchange pursuant to this section be made, or at such
later date as may be specified in such request. No fractional shares arising out
of the above formula for determining the number of shares issuable in such
exchange shall be issued, and the Company shall in lieu thereof make payment to
the holder hereof of cash in the amount of such fraction multiplied by the fair
market value of a share of Common Stock on the date of the exchange.
For the purposes of this Warrant, the "fair market value" of
any number of shares of Common Stock shall mean such number of shares multiplied
by the Market Price Per Share, as determined pursuant to Section 3 below.
Notwithstanding the foregoing, the holder of this Warrant shall
only be entitled to exercise this Warrant in the manner provided in this Section
1.2, an aggregate of four (4) times during the term specified herein.
2. Reservation of Shares. The Company shall, at all times until the
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number of Warrant Shares which shall be required for issuance
and delivery upon exercise of this Warrant. The Company covenants that the
shares of Common Stock issuable on exercise of the Warrant shall be duly and
validly issued and fully paid and non-assessable and free of liens, charges and
all taxes
2
<PAGE> 3
with respect to the issue thereof, and that at such time as the Warrant Shares
may be sold, without registration, pursuant to the provisions of Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), such shares shall be
listed on each national securities exchange and/or NASDAQ, if any, on which the
other shares of outstanding Common Stock of the Company are then listed.
3. Fractional Interests. The Company shall not issue any fractional
shares or scrip representing fractional shares upon the exercise or exchange of
this Warrant. With respect to any fraction of a share resulting from the
exercise or exchange hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current fair market value per
share of Common Stock (herein, the "Market Price Per Share"), determined as
follows:
3.1 If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or is
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), the current fair market value shall be the last reported sale
price of the Common Stock on such exchange or NASDAQ on three (3) trading days
prior to the date of exercise of this Warrant, or if no such sale is made on any
of those days, the mean of the closing bid and asked prices for such days on
such exchange or NASDAQ;
3.2 If the Common Stock is not so listed or admitted to
unlisted trading privileges or quoted on NASDAQ, the current fair market value
shall be the mean of the last bid and asked prices reported on the three trading
days prior to the date of the exercise of this Warrant (i) by NASDAQ, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or
3.3 If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current fair market value shall be an amount, not less than book value,
determined in such reasonable manner as may be prescribed by the Company's Board
of Directors in good faith.
4. No Rights as Stockholders. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company, either at law or in
equity. The rights of the Holder are limited to those expressed in this Warrant
and are not enforceable against the Company except to the extent set forth
herein.
5. Adjustments.
5.1 Subdivision or Combination of Shares. If the Company is
recapitalized through the subdivision or combination of its outstanding shares
of Common Stock into a larger or smaller number of shares, the number of Warrant
Shares shall be increased or reduced, as of the record date for such
recapitalization, in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the Exercise Price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.
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<PAGE> 4
5.2 Dividends in Common Stock or Securities Convertible into
Common Stock. If the Company declares a dividend or distribution on Common Stock
payable in Common Stock or securities convertible into Common Stock, the number
of shares of Common Stock for which this Warrant may be exercised shall be
increased, as of the record date for determining which holders of Common Stock
shall be entitled to receive such dividend, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of Common Stock
as a result of such dividend or distribution, and the Exercise Price shall be
adjusted so that the aggregate amount payable for the purchase of all the
Warrant Shares issuable hereunder immediately after the record date for such
dividend or distribution shall equal the aggregate amount so payable immediately
before such record date.
5.3 Distributions of Other Securities or Property.
(a) Other Securities. If the Company distributes to
holders of its Common Stock, other than as part of its dissolution or
liquidation or the winding up of its affairs, any of its securities (other than
Common Stock or securities convertible into Common Stock) or any evidence of
indebtedness, then in each case, the number of Warrant Shares thereafter
purchasable upon exercise of this Warrant shall be determined by multiplying the
number of Warrant Shares theretofore purchasable by a fraction, of which the
numerator shall be the then Market Price Per Share of Common Stock (as
determined pursuant to Section 3) on the record date mentioned below in this
Section 5.3(a), and of which the denominator shall be the then Market Price Per
Share of Common Stock on such record date, less the then fair value (as
determined by the Board of Directors of the Company in good faith) of the
portion of the shares of the Company's capital stock or evidences of
indebtedness distributable with respect to each share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective retroactively as of the record date for the determination of
stockholders entitled to receive such distribution.
(b) Property. If the Company distributes to the holders
of its Common Stock, other than as a part of its dissolution or liquidation or
the winding up of its affairs, any of its assets (including cash), the Exercise
Price per Warrant Share shall be reduced, without any further action by the
parties hereto, by the Per Share Value (as hereinafter defined) of the dividend
or distribution. For the purposes of this Section 5.3(b), the "Per Share Value"
of any dividend or distribution other than cash shall be equal to the fair
market value of such non-cash distribution on each share of Common Stock as
determined in good faith by the Board of Directors of the Company; for dividends
or distributions of cash, the Per Share Value thereof shall be the cash
distributed per share of Common Stock.
5.4 Rights Offering. If the Company offers rights or warrants
to persons which entitle them to subscribe to or purchase Common Stock or
securities convertible into Common Stock, the Company shall give written notice
of any such proposed offering to the Holder at least fifteen days prior to the
proposed record date in order to permit the Holder to exercise this Warrant on
or before such record date. There shall be no adjustment in the number of shares
of Common Stock for which this Warrant may be exercised, or in the Exercise
Price, by virtue of any such distribution pursuant to this Section 5.4.
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<PAGE> 5
5.5 Merger, Sale of Assets. If at any time while this Warrant,
or any portion thereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 5. The foregoing provisions of this Section 5.5 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
5.6 Reclassification. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, shall change
any of the securities as to which purchase rights under this Warrant exist, by
reclassification of securities or otherwise, into the same or a different number
of securities of any other class or classes, this Warrant shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Warrant immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 5.
5.7 Liquidation, etc. If the Company shall, at any time before
the expiration of this Warrant, dissolve, liquidate or wind up its affairs, or
otherwise declare a dividend, or make a distribution to the holders of its
Common Stock generally, whether in cash, property or assets of any kind,
including any dividend payable in stock or securities of any other issuer owned
by the Company (excluding regularly payable cash dividends declared from time to
time by the Company's Board of Directors or any dividend or distribution
referred to in Section 5.2 or Section 5.3), the Exercise Price shall be reduced,
without any further action by the parties hereto, by the Per Share Value (as
hereinafter defined) of the dividend. For purposes of this Section 5.7, the "Per
Share Value" of a cash dividend or other distribution shall be the dollar amount
of the distribution on each share of Common Stock and the "Per Share Value" of
any dividend or distribution other than cash shall be equal to the fair market
value of such non-cash distribution on
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<PAGE> 6
each share of Common Stock as determined in good faith by the Board of Directors
of the Company.
5.8 Adjustment of Exercise Price. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant is adjusted, the
Exercise Price with respect to the Warrant Shares shall be adjusted by
multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
5.9 Notice of Adjustment. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant or the Exercise Price of the
Warrant Shares is adjusted as provided herein, the Company shall mail to the
Holder a notice of such adjustment or adjustments, prepared and signed by the
Chief Financial Officer or Secretary of the Company, which sets forth the number
of Warrant Shares purchasable upon the exercise of the Warrant and the Exercise
Price of such Warrant Shares after such adjustment, a brief statement of the
facts requiring such adjustment, and the computation by which such adjustment
was made.
6. Notices to Holder. So long as this Warrant shall be outstanding
(a) if the Company shall pay any dividends or make any distribution upon the
Common Stock otherwise than in cash or (b) if the Company shall offer generally
to the holders of Common Stock the right to subscribe to or purchase any shares
of any class of Common Stock or securities convertible into Common Stock or any
similar rights or (c) if there shall be any capital reorganization of the
Company in which the Company is not the surviving entity, recapitalization of
the capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or other transfer of all or substantially
all of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company, then in such event, the
Company shall cause to be mailed to the Holder, at least twenty days prior to
the relevant date described below (or such shorter period as is reasonably
possible if twenty days is not reasonably possible), a notice containing a
description of the proposed action and stating the date or expected date on
which a record of the Company's stockholders is to be taken for the purpose of
any such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up is to take place, the effect of the
action, to the extent such effect may be known on the date of such notice, on
the Exercise Price and the kind and amount of shares of stock or other
securities or property deliverable on the exercise of the Warrant, and the date
or expected date, if any is to be fixed, as of which the holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such event. All such notices shall
be deemed to have been received (i) in the case of personal delivery, on the
date of such delivery, and (ii) in the case of mailing, on the third business
day following the date of such mailing.
7. Transfer or Loss of Warrant.
7.1 Transfer. This Warrant may be transferred, exercised,
exchanged or assigned ("transferred"), in whole or in part, subject to the
provisions of this Section 7.1. The Holder shall have the right to transfer all
or a part of this Warrant and all or part of the Warrant Shares. The Company
shall register on its books any transfer of the Warrant, upon surrender of
6
<PAGE> 7
same to the Company with a written instrument of transfer duly executed by the
registered Holder or by a duly authorized attorney. Upon any such registration
of a transfer, new Warrant(s) shall be issued to the transferee(s) and the
surrendered Warrant shall be cancelled by the Company. A Warrant may also be
exchanged, at the option of the Holder, for one or more new Warrants
representing the aggregate number of Warrant Shares evidenced by the Warrant
surrendered. This Warrant and the Warrant Shares or any other securities ("Other
Securities") received upon exercise of this Warrant or the conversion of the
Warrant Shares shall be subject to restrictions on transferability unless
registered under the Securities Act, or unless an exemption from registration is
available. Until this Warrant and the Warrant Shares are so registered, this
Warrant and any certificate for Warrant Shares issued or issuable upon exercise
of this Warrant shall contain a legend on the face thereof, in form and
substance satisfactory to counsel for the Company, stating that this Warrant or
the Warrant Shares may not be sold, transferred or otherwise disposed of unless,
in the opinion of counsel satisfactory to the Company, which may be counsel to
the Company, that the Warrant or the Warrant Shares may be transferred without
such registration. This Warrant and the Warrant Shares may also be subject to
restrictions on transferability under applicable state securities or blue sky
laws. Until the Warrant and the Warrant Shares are registered under the
Securities Act, the Holder shall reimburse the Company for its expenses,
including attorneys' fees, incurred in connection with any transfer or
assignment, in whole or in part, of this Warrant or any Warrant Shares.
7.2 Compliance with Laws. Until this Warrant or the Warrant
Shares are registered under the Securities Act, the Company may require, as a
condition of transfer of this Warrant or the Warrant Shares that the transferee
(who may be the Holder in the case of an exchange) represent that the securities
being transferred are being acquired for investment purposes and for the
transferee's own account and not with a view to or for sale in connection with
any distribution of the security. The Company may also require that the
transferee provide written information adequate to establish that the transferee
is an "accredited investor" within the meaning of Regulation D issued under the
Securities Act, or otherwise meets all qualifications necessary to comply with
exemptions to the Securities Act, all as determined by counsel to the Company.
7.3 Loss of Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to it of loss, theft, destruction or mutilation of this
Warrant and, in the case of loss, theft or destruction, of reasonable
satisfactory indemnification, or, in the case of mutilation, upon surrender of
this Warrant, the Company will execute and deliver, or instruct its transfer
agent to execute and deliver, a new Warrant of like tenor and date, any such
lost, stolen or destroyed Warrant thereupon shall become void.
8. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or otherwise, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times, in
good faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment.
9. Notices. Notices and other communications to be given to the
Holder shall be deemed sufficiently given if delivered by hand, or three (3)
business days after mailing if mailed by registered or certified mail, postage
prepaid, addressed in the name and at the address of such Holder appearing on
the records of the Company. Notices or other communications to the Company shall
be deemed to have been sufficiently given if delivered by hand or three (3)
business
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<PAGE> 8
days after mailing if mailed by registered or certified mail, postage
prepaid, to the Company at:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Either party may change the address to which notices shall be given by notice
pursuant to this Section 9.
10. Registration Rights. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith between the Purchaser and the Seller.
11. Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of Delaware.
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<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this Warrant as of
February 26, 1998.
SRS LABS, INC.,
a Delaware corporation
/s/ STEVEN V. SEDMAK
----------------------------------
Stephen V. Sedmak, President
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<PAGE> 10
Annex A
[FORM OF EXERCISE]
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase______ shares of Common
Stock and herewith tenders payment for such shares of Common Stock in the amount
of $__________ by bank check made payable to "SRS Labs, Inc." The undersigned
requests that a certificate for such shares of Common Stock be registered in the
name of _____________________, whose address is ____________________________. If
such number of shares of Common Stock is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of the shares of Common Stock be
registered in the name of , whose address is _______________________, and that
such Warrant Certificate be delivered to _____________________, whose address is
.
Dated:
Signature:
----------------------------------
(Signature conform in all respects
to name of Holder as specified on
the face of the Warrant Certificate.)
- --------------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder.)
<PAGE> 1
EX-10.42
==========================================================================
[BANK OF AMERICA LOGO]
BANK OF AMERICA BUSINESS LOAN AGREEMENT
NATIONAL TRUST AND SAVINGS ASSOCIATION
- --------------------------------------------------------------------------
This Agreement dated as of March 4, 1998, is between Bank of America National
Trust and Savings Association (the "Bank") and SRS Labs, Inc. (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below. The Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is the lesser of:
(i) Ten Million Dollars ($10,000,000) or
(ii) the loan value of the marketable securities pledged to the Bank. The
loan value of a marketable security will be a percentage of its fair
market value. The fair market value will be determined by the Bank
from time to time in its sole discretion. The percentage applied to a
particular marketable security will be set by the Bank at the time it
is pledged to the Bank. The percentage can be charged by the Bank at
any time for reasonable cause. The Bank's records of the applicable
percentage will be controlling.
If at any time the total amount of principal outstanding under the line
of credit exceeds this limit, the Borrower will immediately either
increase the loan value of marketable securities or other acceptable
collateral pledged to the Bank, or reduce the total mount outstanding in
order to comply with this limit. If any of the pledged assets are margin
stock, the Borrower will provide the Bank a Form U-1 Purpose Statement,
and the Bank and the Borrower will comply with the restrictions imposed
by Regulation U of the Federal Reserve, which may require a reduction in
the loan value of the margin stock pledged to the Bank.
For regulatory reasons, the Bank will not accept as collateral ineligible
Securities while they are being underwritten by BancAmerica Robertson
Stephens, or for thirty days thereafter. BancAmerica Robertson Stephens is
a wholly-owned subsidiary of BankAmerica Corporation, and is a registered
broker-dealer which is permitted to underwrite and deal in certain
ineligible Securities. "Ineligible Securities" means securities which may
not be underwritten or dealt in by member banks of the Federal Reserve
System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24,
Seventh), as amended.
(b) This is a revolving line of credit providing for cash advances and letters
of credit. During the availability period, the Borrower may repay
principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not
yet reimbursed to exceed the Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and June 1, 2000 (the "Expiration Date") unless the Borrower is
in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
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<PAGE> 2
factors, and is used as a reference point for pricing some loans. The
Bank may price loans to its customers at, above, or below the Reference
Rate. Any change in the Reference Rate shall take effect at the opening
of business on the day specified in the public announcement of a change
in the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on April 1, 1998, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than the Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates listed
below during interest periods agreed to by the Bank and the Borrower. The
optional interest rates shall be subject to the terms and conditions described
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:
(a) the LIBOR Rate plus 0.75 percentage point.
1.6 LETTERS OF CREDIT. This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 120 days
but not to extend beyond the Expiration Date. Each commercial
letter of credit will require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 360 days
but not to extend beyond the Expiration Date.
(iii) The amount of letters of credit outstanding at any one time,
(including amounts drawn on letters of credit and not yet
reimbursed), may not exceed Two Million Dollars ($2,000,000).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under this Agreement. The
amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank. Without limiting the foregoing, no letter of
credit may be issued to support any obligation of the Borrower in
connection with workers' compensation laws.
(d) to sign the Bank's form Application and Agreement for Commercial Letter
of Credit or Application and Agreement for Standby Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
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<PAGE> 3
2. OPTIONAL INTEREST RATES
2.1 OPTIONAL RATES. Each optional interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day each
month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 LIBOR RATE. The election of LIBOR Rates shall be subject to the
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, two, three, four, five, six, seven, eight, nine, ten, eleven, or
twelve months. The first day of the interest period must be a day other
than a Saturday or a Sunday on which the Bank is open for business in
California, New York and London and dealing in offshore dollars (a
"LIBOR Banking Day"). The last day of the interest period and the actual
number of days during the interest period will be determined by the Bank
using the practices of the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less than the
following:
(i) for interest periods of four months or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of one, two or three months, One Million
Dollars ($1,000,000).
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
----------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at
which the Bank's London Branch, London, Great Britain, would
offer U.S. dollar deposits for the applicable interest period to
other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) London Banking Days
before the commencement of the interest period. A "London
Banking Day" is a day on which the Bank's London Branch is open
for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The
percentage will be expressed as a decimal, and will include, but
not be limited to, marginal, emergency, supplemental, special,
and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate Portion no later
than 12:00 noon San Francisco time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as
specified above. For example, if there are no intervening holidays or
weekend days in any of the relevant locations, the request must be made
at least three days before the LIBOR Rate takes effect.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the
scheduled
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<PAGE> 4
payment date for such amount as required by this Agreement. The prepayment
fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the domestic certificate of deposit
market, the eurodollar deposit market, or other appropriate money
market selected by the Bank, for a period starting on the date on
which it was prepaid and ending on the last day of the interest period
for such Portion (or the scheduled payment date for the amount
prepaid, if earlier).
(g) The Bank will have no obligation to accept an election for a LIBOR Rate
Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a LIBOR Rate Portion are not available in the
London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
Portion.
3. EXPENSES
3.1 EXPENSES. The Borrower agrees to immediately repay the Bank for expenses
that include, but are not limited to, filing, recording and search fees and
documentation fees.
3.2 REIMBURSEMENT COSTS.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by
this Agreement. Expenses include, but are not limited to, reasonable
attorney's fees, including any allocated costs of the Bank's in-house
counsel.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic audits
of the collateral securing this Agreement, at such intervals as the Bank
may reasonably require. The audits may be performed by employees of the
Bank or by independent auditors.
4. COLLATERAL
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will
own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrower to the Bank (excluding any consumer
credit covered by the federal Truth in Lending law, unless the Borrower has
otherwise agreed in writing). All personal property collateral securing any
other present or future obligations of the Borrower to the Bank shall also
secure this Agreement.
Account number 3600014 maintained by Salomon Brothers Asset Management, Inc.
("Bailee") in the name of the Borrower, and all successor and replacement
accounts, regardless of the numbers of such accounts or the offices at which
such accounts are maintained (the "Accounts") and all rights of Borrower
against Bailee in connection with the Account.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable
to the Bank.
5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
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<PAGE> 5
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
5.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates and telefax
requests for the issuance of letters of credit given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14588-26464, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions it reasonably
believes are made by any individual authorized by the Borrower to give such
instructions. This indemnity and excuse will survive this Agreement's
termination.
5.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit account
number 14588-26464, or such other of the Borrower's accounts with the Bank
as designated in writing by the Borrower (the "Designated Account") on the
date each payment of principal and interest and any fees from the Borrower
becomes due (the "Due Date"). If the Due Date is not a banking day, the
Designated Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of any
such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank
will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the
debit will be reversed.
5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an
- 5 -
<PAGE> 6
offshore rate (if any), a banking day is a day other than a Saturday or a
Sunday on which the Bank is open for business in California and dealing in
offshore dollars. All payments and disbursements which would be due on a day
which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
5.6 TAXES.
(a) If any payments to the Bank under this Agreement are made from outside the
United States, the Borrower will not deduct any foreign taxes from any
payments it makes to the Bank. If any such taxes are imposed on any payment
made by the Borrower (including payments under this paragraph), the
Borrower will pay the taxes and will also pay to the Bank, at the time
interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if
such taxes had not been imposed. The Borrower will confirm that it has paid
the taxes by giving the Bank official tax receipts (or notarized copies)
within 30 days after the due date.
(b) Payments made by the Borrower to the Bank will be made without deduction of
United States withholding or similar taxes. If the Borrower is required to
pay U.S. withholding taxes, the Borrower will pay such taxes in addition to
the amounts due to the Bank under this Agreement. If the Borrower fails to
make such tax payments when due, the Borrower indemnifies the Bank against
any liability for such taxes, as well as for any related interest,
expenses, additions to tax, or penalties asserted against or suffered by
the Bank with respect to such taxes.
5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request
or requirement of a regulatory agency which is applicable to all national banks
or a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used. Instalments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
5.9 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is 2.00
percentage point(s) higher than the rate of interest otherwise provided under
this Agreement. This will not constitute a waiver of any default.
5.10 INTEREST COMPOUNDING. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Reference Rate plus 2.00
percentage points. This may result in compounding of interest.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to
the Bank, before it is required to extend any credit to the Borrower under this
Agreement:
6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
6.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of
incorporation.
6.3 SECURITY AGREEMENTS. Signed original security agreements, assignments
and financing statements (together with collateral in which the Bank requires a
possessory security interest), which the Bank requires.
- 6 -
<PAGE> 7
6.4 EVIDENCE OF PRIORITY Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.5 OTHER ITEMS. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
7.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed
and delivered, will be similarly legal, valid, binding and enforceable.
7.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
7.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
7.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank, including the Borrower's financial statement
dated as of December 31, 1997, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all material
contingent liabilities.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrower (or any guarantor)
7.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
7.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
7.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade
name rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
7.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 INCOME TAX MATTERS. The Borrower is not subject to limitations on its
entitlement to deduct interest for federal income tax purposes under Section
163(j) of the Internal Revenue Code of 1986 (known as the "earnings stripping"
provisions) and has no knowledge of any pending assessments or adjustments of
its income tax for any year.
7.12 NO TAX AVOIDANCE PLAN. The Borrower's obtaining of credit from the Bank
under this Agreement does not have as a principal purpose the avoidance of U.S.
withholding taxes.
- 7 -
<PAGE> 8
7.13 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
7.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
7.15 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive
review and assessment of the Borrower's computer applications and made inquiry
of the Borrower's key suppliers, vendors and customers with respect to the "year
2000 problem" (that is, the risk that computer applications may not be able to
properly perform date-sensitive functions after December 31, 1999) and, based
on that review and inquiry, the Borrower does not believe the year 2000 problem
will result in a material adverse change in the Borrower's business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit.
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 USE OF PROCEEDS. To use the proceeds of the credit only for financing the
acquisition of Valence Technology, Inc., for providing working capital, for
general corporate purposes and for the issuance of commercial and standby
letters of credit.
8.2 FINANCIAL INFORMATION. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time.
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with an
opinion not qualified in any manner, including not qualified due to
possible failure to take all appropriate steps to successfully address year
2000 system issues) by a Certified Public Accountant ("CPA") acceptable to
the Bank.
(b) Copies of the Borrower's Form 10-K Annual Report and Form 10-Q Quarterly
Report within 15 days after the date of filing with the Securities and
Exchange Commission.
(c) A borrowing certificate as of the last day of each month within 20 days
after month end.
(d) Within 10 days after each month end, the Borrower shall cause Bailee to
provide to the Bank copies of the Accounts statements.
(e) Promptly, such additional information regarding the business, financial or
corporate affairs of the Borrower that the Bank may from time to time
request.
8.3 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower (or
any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
8.4 BOOKS AND RECORDS. To maintain adequate books and records.
- 8 -
<PAGE> 9
8.5 AUDITS. To allow the Bank and its agents to examine, audit, and make copies
of any physical certificates and books and records concerning the collateral
securing this Agreement at any reasonable time. If any of the collateral, books
or records are in the possession of a third party, the Borrower authorizes that
third party to permit the Bank or its agents to have access to perform
examinations or audits.
8.6 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
8.7 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
8.8 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
8.9 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.10 COOPERATION. To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.
8.11 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
8.12 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's Business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for less
than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a substantial
part of the Borrower's business or the Borrower's assets.
(f) enter into any sale and leaseback agreement covering any of its fixed or
capital assets.
(g) acquire or purchase a business or its assets if such acquisition or
purchase will cause an event of default as described in Article 9 of this
Agreement.
(h) voluntarily suspend its business for more than 10 days in any 360 day
period.
9. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
9.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for
any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this Agreement.
9.3 FALSE INFORMATION. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
-9-
<PAGE> 10
9.4 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
9.5 RECEIVERS. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
9.6 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Million Dollars ($1,000,000) or more in excess of any
insurance coverage.
9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
9.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entities or affiliates has
guaranteed.
9.10 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
9.11 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
9.12 OTHER BREACH UNDER AGREEMENT. The Borrower fails to met the conditions of,
or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
10.2 CALIFORNIA LAW. This Agreement is governed by California Law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat
all financial information exchanged as confidential. If a participation is sold
or the loan is assigned, the purchaser will have the right of set-off against
the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications
of this Agreement);
-10-
<PAGE> 11
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of
the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank must
consent to submission of the claim or controversy to arbitration. If
both parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain;
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
-11-
<PAGE> 12
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if the
other party contests the lawsuit. However, if the controversy or claim
arises from or relates to an obligation to the Bank which is secured by
real property located in California at the time of the proposed submission
to arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek resolution
through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
10.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of the Bank's in-house counsel.
10.8 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.
10.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.11 HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
- 12 -
<PAGE> 13
10.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
This Agreement is executed as of the date stated at the top of the first page.
[BofA LOGO]
Bank of America
National Trust and Savings Association SRS Labs, Inc.
X /s/ JULIE R. WEIS X /s/ THOMAS C. K. YUEN
------------------ ---------------------
By: Julie R. Weis By:
Title: Vice President Title:
X /s/ JANET M. BISKI
---------------------
By:
Title: VP & CFO
Address where notices to the Bank Address where notices to the Borrower
are to be sent: are to be sent:
675 Anton Boulevard, 2nd Floor 2909 Daimler Street
Costa Mesa, CA 92626 Santa Ana, CA 92705
- 13 -
<PAGE> 1
EX-21
SRS LABS, INC.
SUBSIDIARIES
On March 2, 1998, SRS Labs, Inc. acquired all of the outstanding
capital stock of Valence Technology, Inc., a British Virgin Islands company with
its principal business operations in Hong Kong and China ("Valence"). Valence,
in turn, beneficially owns all of the capital stock of the following companies:
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
Valence Semiconductor Design Limited Hong Kong
ASP Microelectronics Limited ("ASP") Hong Kong
LEC Electronic Components Limited ("LEC") Hong Kong
VSD Electronics Limited Hong Kong
</TABLE>
ASP, in turn, beneficially owns all of the outstanding shares of
capital stock of LEC Microelectronics Limited, a Hong Kong company, and LED, in
turn, beneficially owns (a) all of the outstanding shares of capital stock of
LEC Electronics Limited, a Hong Kong company and (b) all of the capital
interests in VSD Electronics (Hui Yang) Ltd., a wholly-owned foreign enterprise
established under the laws of the Peoples Republic of China.
<PAGE> 1
EX-23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
SRS Labs, Inc.
We consent to the incorporation by reference in Registration Statements
Nos. 333-18981, 333-18983, 333-18985, 333-18987, 333-18989, and 333-29153 on
Form S-8 of SRS Labs, Inc. of our report dated February 6, 1998 (March 4, 1998
as to Note 10), appearing in SRS Labs, Inc.'s Annual Report on Form 10-KSB for
the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,446,753
<SECURITIES> 21,567,037
<RECEIVABLES> 3,989,927
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,197,086
<PP&E> 523,033
<DEPRECIATION> 277,254
<TOTAL-ASSETS> 31,542,023
<CURRENT-LIABILITIES> 2,121,824
<BONDS> 0
0
0
<COMMON> 9,610
<OTHER-SE> 29,410,589
<TOTAL-LIABILITY-AND-EQUITY> 31,542,023
<SALES> 10,081,283
<TOTAL-REVENUES> 10,081,283
<CGS> 210,348
<TOTAL-COSTS> 5,533,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,088,718)
<INCOME-PRETAX> 5,636,419
<INCOME-TAX> 1,863,200
<INCOME-CONTINUING> 3,773,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,773,219
<EPS-PRIMARY> .39<F1>
<EPS-DILUTED> .35<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS," AS PRESCRIBED BY SFAS NO. 128.
<F2>EPS IS REPORTED AS "DILUTED EPS," AS PRESCRIBED BY SFAS NO. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 3,904,434 3,527,472 4,146,990
<SECURITIES> 20,798,411 21,487,774 21,561,256
<RECEIVABLES> 1,294,572 1,990,534 2,770,889
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 5,826,683 6,226,524 7,713,663
<PP&E> 468,793 473,824 493,531
<DEPRECIATION> 202,048 226,464 251,159
<TOTAL-ASSETS> 27,474,568 28,534,089 30,026,271
<CURRENT-LIABILITIES> 1,568,938 1,657,174 1,992,622
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 9,535 9,581 9,581
<OTHER-SE> 25,856,466 26,863,249 28,024,068
<TOTAL-LIABILITY-AND-EQUITY> 27,474,568 28,534,089 30,026,271
<SALES> 2,212,100 2,115,799 2,505,656
<TOTAL-REVENUES> 2,212,100 2,115,799 2,505,656
<CGS> 39,194 75,885 71,161
<TOTAL-COSTS> 1,366,608 1,042,277 1,224,321
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (257,644) (272,597) (276,471)
<INCOME-PRETAX> 1,103,136 1,346,119 1,557,806
<INCOME-TAX> 408,161 498,064 475,131
<INCOME-CONTINUING> 694,975 848,055 1,082,675
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 694,975 848,055 1,082,675
<EPS-PRIMARY> .07<F1> .09<F1> .11<F1>
<EPS-DILUTED> .07<F2> .08<F2> .11<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS," AS PRESCRIBED BY SFAS NO. 128.
<F2>EPS IS REPORTED AS "DILUTED EPS," AS PRESCRIBED BY SFAS NO. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996
<CASH> 7,425,587 3,455,997
<SECURITIES> 17,241,185 20,969,785
<RECEIVABLES> 470,987 702,966
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,082,375 4,829,670
<PP&E> 411,345 458,451
<DEPRECIATION> 153,575 177,262
<TOTAL-ASSETS> 25,927,680 26,674,099
<CURRENT-LIABILITIES> 1,465,311 1,454,714
<BONDS> 0 0
0 0
0 0
<COMMON> 9,469 9,469
<OTHER-SE> 24,329,556 25,141,281
<TOTAL-LIABILITY-AND-EQUITY> 25,927,680 26,674,099
<SALES> 3,550,725 5,392,280
<TOTAL-REVENUES> 3,550,725 5,392,280
<CGS> 52,887 95,376
<TOTAL-COSTS> 2,159,344 3,300,539
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (116,818) (365,583)
<INCOME-PRETAX> 1,455,312 2,361,946
<INCOME-TAX> 315,455 500,937
<INCOME-CONTINUING> 1,139,857 1,861,009
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,139,857 1,861,009
<EPS-PRIMARY> .16<F1> .24<F1>
<EPS-DILUTED> .14<F2> .21<F2>
<FN>
<F1>EPS IS REPORTED AS "BASIC EPS," AS PRESCRIBED BY SFAS NO. 128.
<F2>EPS IS REPORTED AS "DILUTED EPS," AS PRESCRIBED BY SFAS NO. 128.
</FN>
</TABLE>
