<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21123
SRS LABS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 33-0714264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 442-1070
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGES SINCE
LAST REPORT)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: as of July 31, 1998,
11,612,423 shares of the issuer's common stock, par value $.001 per share, were
outstanding.
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<PAGE> 2
SRS LABS, INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three months and
six months ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (Unaudited) 5
Notes to the Interim Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SRS LABS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,104,965 $ 4,446,753
Investments available for sale 2,003,496 2,010,775
Accounts receivable 6,048,780 3,989,927
Inventories 6,632,774 --
Prepaid expenses and other current assets 2,626,555 578,957
Deferred income taxes 505,674 170,674
------------ ------------
TOTAL CURRENT ASSETS 22,922,244 11,197,086
Investments available for sale 12,045,824 19,556,262
Furniture, fixtures & equipment, net 1,344,685 245,779
Intangible assets, net 6,488,840 313,673
Deferred income taxes 229,223 229,223
------------ ------------
TOTAL ASSETS $ 43,030,816 $ 31,542,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 7,917,510 $ 202,352
Accrued liabilities 1,518,977 826,242
Line of credit 7,000,000 --
Income taxes payable 678,966 1,011,426
Current portion of consideration due on asset purchase -- 81,804
------------ ------------
TOTAL CURRENT LIABILITIES 17,115,453 2,121,824
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value 2,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.001 par value 56,000,000 shares authorized; 11,612,423 (at
June 30, 1998) and 9,609,867 (at December 31, 1997)
shares issued and outstanding 11,613 9,610
Additional paid-in capital 39,012,115 25,022,437
Deferred stock option compensation 282,841 231,087
Unrealized gain on investments available for sale 105,841 163,600
Retained earnings (deficit) (13,497,047) 3,993,465
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,915,363 29,420,199
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,030,816 $ 31,542,023
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Chip and licensing revenue $ 4,524,467 $ 2,115,799 $ 7,406,428 $ 4,327,899
Product and component sales 7,100,903 -- 11,276,338 --
------------- ------------- ------------- --------------
TOTAL REVENUES 11,625,370 2,115,799 18,682,766 4,327,899
COST OF SALES 7,387,523 75,885 11,785,939 115,079
------------- ------------- ------------- --------------
GROSS MARGIN 4,237,847 2,039,914 6,896,827 4,212,820
Sales and marketing 1,511,633 361,232 2,700,527 789,894
Research and development 599,631 114,787 998,710 298,379
General and administrative 1,368,305 490,373 2,621,128 1,205,533
------------- ------------- ------------- ---------
OPERATING INCOME BEFORE WRITE-OFF OF ACQUIRED
IN-PROCESS RESEARCH AND DEVELOPMENT 758,278 1,073,522 576,462 1,919,014
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH
AND DEVELOPMENT -- -- 18,510,378 --
------------- ------------- ------------- --------------
INCOME (LOSS) FROM OPERATIONS 758,278 1,073,522 (17,933,916) 1,919,014
OTHER INCOME -- -- 77,438 --
INTEREST INCOME, NET 184,906 272,597 304,960 530,241
------------- ------------- ------------- --------------
184,906 272,597 382,398 530,241
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 943,184 1,346,119 (17,551,518) 2,449,255
INCOME TAX EXPENSE (BENEFIT) 222,762 498,064 (61,006) 906,225
------------- ------------- ------------- --------------
NET INCOME (LOSS) $ 720,422 $ 848,055 $ (17,490,512) $ 1,543,030
============= ============= ============= ==============
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 0.06 $ 0.09 $ (1.56) $ 0.16
============= ============= ============= ==============
Diluted $ 0.06 $ 0.08 $ N/A $ 0.14
============= ============= ============= ==============
WEIGHTED AVERAGE SHARES USED IN THE
CALCULATION OF NET INCOME (LOSS) PER
COMMON SHARE
Basic 11,545,318 9,560,089 11,199,935 9,547,807
============= ============= ============= ==============
Diluted 12,572,615 10,740,610 N/A 10,744,356
============= ============= ============= ==============
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,490,512) $ 1,543,030
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 805,683 163,459
Deferred income taxes (335,000) --
Write-off of acquired in-process research and development 18,510,378 --
Realized gain on sales of investments available for sale (76,277) --
Amortization of premium on investments available for sale 32,520 54,602
Accretion of consideration due on asset purchase 8,196 5,961
Increase in deferred compensation 51,754 43,096
Increase (decrease) in cash resulting from changes in operating accounts,
net of acquisitions:
Accounts receivable 1,213,908 (1,287,568)
Inventories (988) --
Prepaid expenses and other current assets (1,595,057) (37,811)
Accounts payable (836,693) (115,268)
Other accrued liabilities 692,735 (224,227)
Income taxes payable (477,042) 545,031
------------ ------------
Net cash provided by operations 503,606 690,305
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (95,292) (15,373)
Proceeds from sales of investments available for sale 7,467,572
Purchases of investments available for sale (580,256)
Cash paid for acquisitions, less cash acquired (6,911,216) --
Expenditures related to patents (534,985) (51,439)
------------ ------------
Net cash used in investing activities (73,921) (647,068)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 7,000,000 --
Payments on subsidiary debt (6,846,737) --
Payment of consideration due on asset purchase (91,707) (112,305)
Exercise of stock options 166,971 140,543
------------ ------------
Net cash provided by financing activities 228,527 28,238
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 658,212 71,475
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,446,753 3,455,997
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,104,965 $ 3,527,472
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 109,896 $ 0
Income taxes $ 640,000 $ 0
SUPPLEMENTAL DISCLOSURES ON NON-CASH TRANSACTIONS:
Additional consideration accrued for asset purchase $ 8,196 $ 41,794
Unrealized gain (loss) on investments, net $ 57,759 $ (7,665)
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
During the six months ended June 30, 1998, the Company issued 1,680,611 shares
of common stock in payment of $12,105,778 of the acquisition price of Valence
Technologies, Inc. (Note 2)
During the six months ended June 30, 1998, the Company issued 125,000 shares of
common stock in consideration for certain non-competition agreements with the
key employees of Valence. The shares have an ascribed fair value of $900,400.
(Note 2)
During the six months ended June 30, 1998, the Company issued 25,000 shares of
common stock in conjunction with the acquisition of VIP. The shares have an
ascribed fair value of $176,575. (Note 2)
During the six months ended June 30, 1998, the Company issued warrants to
purchase 100,000 shares of common stock in conjunction with the acquisition of
VIP. The warrants have an ascribed value of $341,957. (Note 2)
The Company acquired the stock of Valence Technologies, Inc. during the six
months ended June 30, 1998 (Note 2)
In conjunction with the acquisition, certain liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 14,076,279
Acquired in-process research and development costs 17,471,668
Acquired intangible assets 5,910,400
Total consideration (21,879,033)
------------
Liabilities assumed $ 15,579,314
============
</TABLE>
During the six months ended June 30, 1998, the Company issued 35,294 shares of
common stock in conjunction with the acquisition of certain rights associated
with the Circle Surround technology. The shares have an ascribed fair value of
$300,000. (Note 2)
See accompanying notes to financial statements
6
<PAGE> 7
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL/BASIS OF PRESENTATION
SRS Labs, Inc. (the "Company") is known as a leading provider of audio and
voice enhancement technology solutions. The Company's business consists of
licensing audio and voice enhancement technologies to manufacturers of consumer
electronics, computer, gaming and telecommunications equipment; the design of
custom ASICs (application-specific integrated circuits) for consumer
electronics, game, telecommunications and personal computer manufacturers; the
distribution of components, chips and assembly systems for the China and Hong
Kong markets; and the manufacturing and marketing of home theater and game
products for the Asian consumer marketplace.
The accompanying interim consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of December 31, 1997) in conformity with generally accepted accounting
principles for interim financial information and with the rules and regulations
of the U.S. Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. In the opinion of management, all adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation have been included.
The interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997, the Current Report on Form 8-K dated March 12, 1998 and the Current Report
on Form 8-K/A dated May 18, 1998. Current and future financial statements may
not be directly comparable to the Company's historical financial statements. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
2. ACQUISITIONS
On March 2, 1998, the Company acquired (the "Acquisition") all of the
outstanding shares of capital stock of Valence Technology Inc., a British Virgin
Islands holding company with its principal business operations in Hong Kong and
China ("Valence"). Valence, which conducts its business through its subsidiaries
based in Hong Kong and China, is engaged in three primary areas of business,
namely, the design and sale of application-specific integrated circuits (ASICs)
and other semiconductor products; the design, manufacture and sale of consumer
electronics products; and the distribution of components and products within
mainland China and throughout Asia. The aggregate purchase price of $19,500,000
consisted of approximately $7,400,000 in cash and 1,680,611 shares of the
Company's common stock. The acquisition was accounted for as a purchase having
an effective date of February 1, 1998. In connection with such acquisition,
three of the four management shareholders and their respective sole
shareholders, each of whom was a key employee of Valence or one of its
subsidiaries, entered into non-competition 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 125,000 additional shares of its
common stock in aggregate to such three shareholders.
7
<PAGE> 8
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following summarizes the consideration granted for the acquisition of
Valence and non-compete agreements, the allocation of the purchase price and
other purchase accounting adjustments:
<TABLE>
<S> <C>
Cash $ 7,394,222
Common stock 13,006,178
-------------
Total purchase price 20,400,400
Deficiency in net assets acquired 1,503,035
Estimated acquisition costs 1,478,633
-------------
Excess of purchase price over net assets $ 23,382,068
=============
Allocation to:
In-process research and development $ 17,471,668
Intangible assets 5,910,400
-------------
$ 23,382,068
=============
</TABLE>
The resulting intangible assets are being amortized on a straight-line
basis over periods ranging from three to eleven years.
Unaudited proforma combined results of operations for the six months ended
June 30, 1998 would have been as follows had the Acquisition occurred on January
1, 1998:
<TABLE>
<S> <C>
Revenues $ 21,020,759
Proforma Net Loss $ (520,064)
Proforma Net Loss Per Share $ (0.05)
Weighted Average Shares Outstanding 11,500,870
</TABLE>
On February 28, 1998, the Company acquired certain rights to a proprietary
technology, Voice Intelligibility Processor, ("VIP") from a third party. The
aggregate consideration, including acquisition costs, was $1,138,710 and was
comprised of $620,178 in cash, 25,000 shares of the Company's common stock with
a fair value of $176,575 and warrants to purchase 100,000 shares of the
Company's common stock at $9.47 per share with a fair value of $341,957. The
purchase price allocated to in-process research and development was charged to
the Company's operations, resulting in a charge of $1,038,710. The remainder of
the purchase price was allocated to an intangible asset and is being amortized
over eight years.
On May 21, 1998, the Company acquired certain rights to a proprietary
technology, Circle Surround, from a third party. The aggregate consideration,
including acquisition costs, was $834,985 and was comprised of $534,985 in cash
and 35,294 shares of the Company's common stock with a fair value of $300,000.
The purchase price was allocated to an intangible asset and is being amortized
over ten years.
3. INVESTMENTS AVAILABLE FOR SALE
The Company has classified its investments as available-for-sale in
accordance with SFAS No. 115. As of June 30, 1998, the Company's
available-for-sale investments had a cost of $13,879,987 and an estimated fair
value of $14,049,320, based on quoted market prices. The unrealized gains on
these investments of $179,393, net of income taxes of $73,552, have been
reported in the Company's Consolidated Balance Sheet as an increase in
stockholders' equity.
4. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 requires that all items recognized under accounting standards as components
of comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. It also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. For example, other comprehensive
earnings
8
<PAGE> 9
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
may include foreign currency translation adjustments and unrealized
gains and losses on marketable securities classified as available-for-sale.
Annual financial statements for prior periods will be reclassified, as required.
The Company's total comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 720,422 $ 848,055 $(17,490,512) $ 1,543,030
Unrealized gain (loss) on investments
available for sale, net of tax (17,343) 81,656 (57,759) (4,589)
--------------------------------------------------------------------------------
Total comprehensive income (loss) $ 703,079 $ 929,711 $(17,548,271) $ 1,538,441
================================================================================
</TABLE>
5. NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128) which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. FAS 128 requires the Company to disclose a basic and
diluted earnings per share (EPS). The Company adopted the provisions of FAS 128
in the fiscal year ended December 31, 1997. The following is an illustration of
the reconciliation of the numerators and the denominators of the basic and
diluted net income (loss) per common share computations:
<TABLE>
<CAPTION>
FOR THREE MONTHS FOR THREE MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1997
----------------------------------------- -----------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC:
Income available to
common stockholders $ 720,422 11,545,318 $ 0.06 $ 848,055 9,560,089 $ 0.09
DILUTED:
Effect of Dilutive Securities:
Stock options 1,027,297 1,180,521 (0.01)
---------- ---------- ---------- ---------- ---------- ----------
Income available to common
stockholders $ 720,422 12,572,615 $ 0.06 $ 848,055 10,740,610 $ 0.08
========== ========== ========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR SIX MONTHS FOR SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1997
-------------------------------------------- --------------------------------------------
LOSS 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 $(17,490,512) 11,199,935 $ (1.56) $ 1,543,030 9,547,807 $ 0.16
DILUTED :
Effect of Dilutive Securities:
Stock options 1,196,549 (0.02)
------------ ------------ ------------ ------------ ------------ ------------
Income available to common
stockholders N/A N/A N/A $ 1,543,030 10,744,356 $ 0.14
============ ============ ============ ============ ============ ============
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SRS Labs, Inc. (the "Company") is known as a leading provider of audio and
voice enhancement technology solutions. The Company's business consists of
licensing audio and voice enhancement technologies to manufacturers of consumer
electronics, computer, gaming and telecommunications equipment; the design of
custom ASICs (application-specific integrated circuits) for consumer
electronics, game, telecommunications and personal computer manufacturers; the
distribution of components, chips and assembly systems for the China and Hong
Kong markets; and the manufacturing and marketing of home theater and game
products for the Asian consumer marketplace.
From the Company's inception in 1993 through February of 1998, the Company
derived substantially all of its revenue from royalties received from technology
licenses. On March 2, 1998, the Company acquired all of the outstanding capital
stock of Valence Technology Inc., a British Virgin Islands holding company with
its principal business operations in Hong Kong and China ("Valence") for an
aggregate purchase price, excluding non-compete agreements and acquisition
costs, of $19,500,000 consisting of approximately $7,400,000 in cash and
approximately 1,680,611 shares of the Company's common stock, $.001 par value
per share (the "Common Stock"). The acquisition was accounted for as a purchase
with an effective date of February 1, 1998. The acquisition of Valence has had,
and will continue to have, a material impact on the Company's financial
statements for the reporting period ending June 30, 1998 and for the reporting
periods thereafter; accordingly, current and future financial statements may not
be directly comparable to the Company's historical financial statements.
During the first quarter of the fiscal year ending December 31, 1998
("Fiscal 1998"), the Company acquired certain rights to Voice Intelligibility
Processor ("VIP"), which is a patented voice processing technology that improves
the intelligibility of the spoken voice, especially in high ambient noise
environments. Aggregate consideration, including acquisition costs, was
$1,138,710 and was comprised of $620,178 in cash, 25,000 shares of Common Stock
and warrants to purchase 100,000 shares of Common Stock at $9.47 per share.
During the second quarter of Fiscal 1998, the Company acquired certain
rights to Circle Surround, which is a patented audio delivery system that allows
multi-channel surround sound to be encoded into a two-channel stereo format and
allows an encoded two-channel audio source or a traditional stereo audio source
to be decoded into a multi-channel surround format. The aggregate purchase
price, including acquisition costs, was $834,985 and was comprised of $534,985
in cash and 35,294 shares of Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues
Total revenues for the three months ended June 30, 1998 were $11,625,370
including revenues generated by Valence. This contrasts with the second quarter
of 1997 when the revenues of $2,115,799 were generated entirely from the
Company's licensing activities. Chip and licensing revenue of $4,524,467
increased 113.8% compared to the same period last year. Licensing revenue
decreased from the same period last year, but the decrease was offset by the
custom ASIC chip design and chip sales related to Valence's activities. Revenue
generated from product and component sales is primarily attributable to Valence;
and therefore, is not comparable to last year.
Gross Margin
Gross margin for the three month period ended June 30, 1998 decreased to
36.5% from 96.4% for the same period in 1997. This decrease results from the
shift in the Company's revenue base towards product and electronic component
sales which have significantly lower margins compared with the Company's
historic technology licensing revenue base. The Company's gross margins in the
future will depend on the revenue mix between product and electronic component
sales and revenues from licensing and chip activities. However, the Company
expects product and electronic component sales to contribute a significant
portion of revenues in the near term, resulting in lower anticipated margins
compared to its historical margins.
11
<PAGE> 12
Sales and Marketing
Sales and marketing expenses for the second quarter were $1,511,633
compared to $361,232 for the same quarter last year, an increase of 318.5% which
is primarily due to sales and marketing activities attributed to Valence. Sales
and marketing expenses as a percentage of total revenue for the three months
ended June 30, 1998 decreased to 13.0% from 17.1% for the three months ended
June 30, 1997 due to the leveraging of these expenses over a wider revenue
base.
Research and Development
Research and development expenses for the second quarter were $599,631
compared to $114,787 for the same quarter last year, an increase of 422.4% which
is primarily due to research and development activities attributed to Valence.
Research and development expenses as a percentage of total revenue for the three
months ended June 30, 1998 decreased slightly to 5.2% from 5.4% for the three
months ended June 30, 1997.
General and Administrative
General and administrative expenses for the second quarter were $1,368,305
compared to $490,373 for the same quarter last year, an increase of 179.0% which
is primarily attributable to Valence's operations. General and administrative
expenses as a percentage of total revenue for the three months ended June 30,
1998 decreased to 11.8% from 23.2% for the three months ended June 30, 1997, as
general and administrative expenses are leveraged over a larger revenue base.
Other Income/Interest Income, net
Net interest income for the second quarter of $184,906 decreased from net
interest income of $272,597 for the second quarter of 1997. The decrease is
primarily due to lower average cash and investment balances during the current
quarter as compared to the prior year due to cash paid in conjunction with the
acquisition of Valence and for the acquisition of new technologies.
Income Tax Expense
Income tax expense for the second quarter was $222,762 compared to $498,064
for the same quarter last year, a decrease of 55.3%. The effective tax rate for
the three months ended June 30, 1998, which is based on current estimates of the
annual effective income tax rate, was 23.6% compared to 37.0% for the three
months ended June 30, 1997. Lower statutory tax rates in the Asian countries
where Valence has its principal business operations resulted in a lower
consolidated tax rate for the Company.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues
Total revenues for the six months ended June 30, 1998 were $18,682,766
including revenues generated by Valence since February 1, 1998. This contrasts
with the six month period ended June 30, 1997 when the revenues of $4,327,899
were all generated from the Company's licensing activities. Chip and licensing
revenue of $7,406,428 increased 71.1% compared to the same period last year.
Licensing revenue decreased from the same period last year, but the decrease was
offset by the custom ASIC chip design and chip sales related to Valence's
activities. Revenue generated from product and component sales is primarily
attributable to Valence; and therefore, is not comparable to last year.
Gross Margin
Gross margin for the six month period ended June 30, 1998 decreased to
36.9% from 97.3% for the same period in 1997. This decrease results from the
shift in the Company's revenue base towards product and electronic component
sales that have significantly lower margins compared with the Company's historic
technology licensing revenue base. The Company's gross margins in the future
will depend on the revenue mix between product and electronic component sales
and revenues from licensing and chip activities.
12
<PAGE> 13
However, the Company expects product and electronic component sales to
contribute a significant portion of revenues in the near term, resulting in
lower anticipated margins compared to its historical margins.
Sales and Marketing
Sales and marketing expenses for the first six months of 1998 were
$2,700,527 compared to $789,894 for the same prior year period, an increase of
241.9% which is primarily due to sales and marketing activities attributed to
Valence. Sales and marketing expenses as a percentage of total revenue for the
six months ended June 30, 1998 decreased to 14.5% from 18.3% for the six months
ended June 30, 1997 due to the leveraging of these expenses over a wider revenue
base.
Research and Development
Research and development expenses for the six months ended June 30, 1998
were $998,710 compared to $298,379 for the same period last year, an increase of
234.7% which is primarily due to research and development activities attributed
to Valence. Research and development expenses as a percentage of total revenue
for the six months ended June 30, 1998 decreased to 5.3% from 6.9% for the six
months ended June 30, 1997.
General and Administrative
General and administrative expenses for the first six months of 1998 were
$2,621,128 compared to $1,205,533 for the comparable prior year period, an
increase of 117.4% which is primarily attributable to Valence's operations.
General and administrative expenses as a percentage of total revenue for the six
months ended June 30, 1998 decreased to 14.0% from 27.9% for the six months
ended June 30, 1997, as general and administrative expenses are leveraged over a
larger revenue base.
Acquired In-Process Research and Development
Acquired in-process research and development costs of $18,510,378 during
the six month period ended June 30, 1998 represented an allocation of a portion
of the purchase price for certain assets associated with the VIP technology and
for the acquisition of the outstanding shares of Valence Technology, Inc. to
in-process research and development costs, which, based on management
assumptions, had no future alternative use. (See Note 2 to the Interim
Consolidated Financial Statements.)
Other Income / Interest Income, net
Net interest and other income resulted in net other income of $382,398, a
decrease from the net interest income amount of $530,241 for the first half of
1997. The decrease is primarily due to lower average cash and investment
balances during the fiscal year to date as compared to the prior year due to
cash paid in conjunction with the acquisition of Valence and for the acquisition
of new technologies.
Income Tax Expense (Benefit)
The income tax benefit for the six months ended June 30, 1998 was $61,006
compared to expense of $906,225 for the same period last year. Lower statutory
tax rates in the Asian countries where Valence has its principal business
operations contributed to a lower consolidated tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity at June 30, 1998 consisted of
cash, cash equivalents and investments aggregating $19.2 million, as well as
borrowings available under its credit facility. The Company's cash, cash
equivalents and investments serve as collateral for borrowings under the
Company's credit facility. At June 30, 1997, the Company had cash, cash
equivalents and long term investments of approximately $25.0 million.
The Company has primarily financed its operations through the cash provided
by its operations and proceeds from its initial public offering of Common Stock
in August 1996. The Company's operating activities provided
13
<PAGE> 14
$503,606 in cash for the six months ended June 30, 1998 and $690,305 for the six
months ended June 30, 1997. The $186,699 decrease in cash provided by operations
was primarily due to the increase in prepaid expenses and other current assets
and the decrease in accounts payable resulting from the payment of acquisition
related expenses and the payment of estimated corporate income taxes, all of
which were partially offset by the decrease in accounts receivable.
As described above, the Company acquired Valence and additional
technologies during the first six months of Fiscal 1998. (See Note 2 to the
Interim Consolidated Financial Statements.)
On March 4, 1998, the Company obtained a revolving line of credit with a
bank which expires on June 1, 2000 and is secured by certain of the Company's
investments. The total availability under the line of credit is the lesser of
$10 million or a percentage of the fair market value of the collateral. The line
of credit bears interest at the bank's prime rate or LIBOR plus 0.75%. The
Company had $7.0 million outstanding under the line of credit as of June 30,
1998. As a result of the acquisition of Valence, the Company provided Valence
$7.0 million to pay off its short-term debt and other obligations. These funds
were provided by borrowings on the above-referenced line of credit.
The Company anticipates that its primary uses of working capital in future
periods will be to acquire new technologies, to provide Valence with additional
working capital and to fund increased costs for additional sales headcount and
marketing activities associated with the introduction of new technologies and
products into the market. The Company also anticipates making additional capital
expenditures for the improvement of its operating system infrastructure and
management reporting systems in the United States and Hong Kong. Management
currently estimates these capital expenditures could aggregate $1,500,000
through 1999.
Based on current plans and business conditions, the Company believes that
its cash, cash equivalents, investments and/or available borrowings under its
line of credit, together with any amounts generated from operations, will be
sufficient to meet the Company's operating and capital requirements for the
foreseeable future. However, there can be no assurance that the Company will not
be required to seek other financing sooner or that such financing, if required,
will be available on terms satisfactory to the Company.
FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS
Included in this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations are a number of forward-looking statements
that are subject to certain risks and uncertainties that could cause the
Company's actual results and financial position to be affected negatively as
events unfold in the markets for the Company's products. These events include,
but are not limited to, the risks involved in the expansion of the Company's
business through acquisitions of new companies like Valence or new technologies
like VIP and Circle Surround, as well as the risks discussed below. The Company
assumes no obligation to update the forward-looking information in this Report
or the factors listed below to reflect actual results or changes in the factors
affecting such forward-looking information.
Quarterly Fluctuations
The Company's operating results may fluctuate from those in prior quarters
and will continue to be subject to quarterly and other fluctuations due to a
variety of factors, including the extent to which the Company's licensees
incorporate SRS or the Company's other technologies into their products, the
gain or loss of significant customers, competitive pressures on selling prices,
the acceptance of new or enhanced versions of the Company's technologies, the
rate that the Company's semiconductor licensees manufacture and distribute chips
to original equipment manufacturers ("OEMs"), the ability of the Company to
secure one-time license fees for its technologies from new and existing
licensees and general business conditions, particularly those affecting the
consumer electronics market. Due to the Company's dependence on the consumer
electronics market, the substantial seasonality of sales in the market could
impact the Company's revenues and net income. In particular, the Company
believes that there is seasonality relating to the Christmas season as well as
the Chinese New Year within the Asia-Pacific region which fall into the fourth
and first quarters, respectively.
14
<PAGE> 15
Changes to the Business Model/Integration of Valence/Refinement of Asian
Strategy
From the Company's inception in 1993 to 1997, the Company derived
substantially all of its revenues from licensing activities. As a result of the
acquisition of Valence, the Company has added business operations engaged in the
design and sale of ASICs and other semiconductor products; the design,
manufacture and sale of consumer electronics products; and the distribution of
components and products within mainland China and throughout Asia. These
operations differ substantially from the Company's previous business model, and
future operating results could be affected by a variety of factors, including
the timing of customer orders, the timing of development revenue, changes in the
mix of products distributed and the mix of distribution channels employed, the
emergence of new industry standards, product obsolescence and changes in pricing
policies by the Company, its competitors or its suppliers.
The Company's future success will depend in large part on its ability to
successfully integrate the operations of Valence with those of the Company. The
degree to which the Company can successfully integrate such operations will
depend on a number of factors, including the Company's ability to expand the
scope of its operations beyond technology licensing into the new business of
manufacturing electronic and semiconductor products and the Company's ability to
increase its market penetration in China. The integration of certain operations
following the acquisition will require the dedication of management and other
personnel resources which may temporarily distract from the day-to-day business
of the combined company. The geographic separation of these operations is likely
to place additional strain on the Company's resources. In addition, the
Company's significant operations in China and Asia may require refinement to
adapt to the changing and expanding market conditions in that region. This
refinement may impact certain of the Company's current business directions,
including Valence, as the Company attempts to position itself to maximize
penetration of these rapidly developing markets. The Company's operations in
Asia, and internationally in general, also are subject to risks of unexpected
changes in, or impositions of, legislative or regulatory requirements.
The acquisition of Valence has added significant diversity to the Company's
overall business structure and the Company's opportunities. The Company
recognizes that in the presence of such corporate diversity, and in particular
with regard to the semiconductor industry, there will always exist a potential
for a conflict among sales channels between the Company and certain of the
Company's technology licensees. Although the operations of the Company's
licensing business and those of Valence are generally complementary, there can
be no assurances that sales channel conflicts will not arise. If such potential
conflicts do materialize, the Company may or may not be able to mitigate the
effect of such perceived conflicts which, if not resolved, may impact the
results of operations.
Currency Risk/Stability of Asian Markets
The Company expects that international sales will continue to represent
a significant portion of total revenues. To date, all of the Company's revenues
have been denominated in U.S. dollars and most costs have been incurred in U.S.
dollars. It is the Company's expectation that licensing revenues will continue
to be denominated in U.S. dollars for the foreseeable future. With its
acquisition of Valence and the Company's anticipated expansion of its business
in China and other parts of Asia, the Company's consolidated operations and
financial results could be significantly affected by risks associated with
international activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes
in the value of the U.S. dollar versus the local currency in which the products
are sold. In addition, the Company's valuation of assets recorded as a result of
the Valence acquisition may also be adversely impacted by the currency
fluctuations relative to the U.S. dollar. The Company intends to actively
monitor its foreign exchange exposure and to implement strategies to reduce its
foreign exchange risk at such time that the Company determines the benefits of
such strategies outweigh the associated costs. However, there is no guarantee
that the Company will take steps to insure against such risks, and should such
risks occur, there is no guarantee that the Company will not be significantly
impacted. Countries in the Asia Pacific region have recently experienced
weakness in their currency, banking and equity markets. These weaknesses could
adversely affect consumer demand for Valence's products, the U.S. dollar value
of the Company's and its subsidiaries' foreign currency denominated sales, the
availability and supply of product components to Valence and ultimately, the
Company's consolidated results of operations.
Competitive Pressures
The Company's existing and potential competitors include both large and
emerging domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution
15
<PAGE> 16
and other resources. Competitors of the Company may also include a number of
smaller companies that may have greater flexibility to address specific market
needs. In addition, the markets in which the Company competes are intensely
competitive and are characterized by rapid technological changes, declining
average sales prices and rapid product obsolescence.
Importance of Intellectual Property
The Company's ability to compete may be affected by its ability to protect
its proprietary information. The Company has filed several U.S. and foreign
patent applications and to date has a number of issued U.S. and foreign patents
covering various aspects of its technologies. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as do the laws of the U.S. The semiconductor industry is characterized by
frequent claims and litigation regarding patent and other property rights. The
Company is not currently a party to any claims of this nature. There can be no
assurances that third parties will not assert additional claims or initiate
litigation against the Company or its customers with respect to existing or
future products. In addition, the Company may initiate claims or litigation
against third parties for infringement of the Company's proprietary rights or to
determine the scope and validity of the proprietary rights of the Company or
others.
Management of Growth; Dependence on Key Personnel
The Company has recently experienced rapid growth and expansion with the
acquisition of Valence. This acquisition has placed, and will continue to place,
a significant strain on its administrative, operational and financial resources,
and has increased, and will continue to increase, the level of responsibility
for both existing and new management personnel. The Company's future success
depends in part on the continued service of its key engineering, sales,
marketing and executive personnel, including highly skilled semiconductor design
personnel. The Company anticipates that any future growth will require it to
recruit and hire a number of new personnel in engineering, operations, finance,
sales and marketing. Competition for such personnel is intense, and there can be
no assurance that the Company can retain and recruit necessary personnel to
operate its business and support future growth. The Company's ability to manage
its growth successfully also will require the Company to continue to expand and
improve its administrative, operational, management and financial systems and
controls.
Volatility of Stock Price
The trading price of the Common Stock has been, and will likely continue to
be, subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the markets in which the Company does
business, or relating to the Company specifically, have in the past resulted in,
and could in the future result in, an immediate and adverse effect on the market
price of the Common Stock.
Year 2000 Compliance
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which the Company
operates. Additionally, companies must coordinate with other entities with which
they electronically interact, such as customers and creditors.
The Company and its subsidiaries have evaluated all significant internal
operating systems and have determined that their Year 2000 compliance efforts
will not have a material impact on the results of operations.
In addition, the Company and its subsidiaries are actively working with all
of their major suppliers and customers to assess their Year 2000 compliance
efforts and the Company's exposure to them. At this time, it is
16
<PAGE> 17
not possible to quantify the aggregate cost to the Company and its subsidiaries
related to the Year 2000 compliance issues facing the Company's major suppliers
and customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
During the second quarter of Fiscal 1998, the Company acquired certain
assets, including the Circle Surround technology, of Rocktron Corporation
("Rocktron"), pursuant to an Asset Purchase Agreement dated May 21, 1998 (the
"Circle Surround Acquisition") for an aggregate purchase price of $800,000. In
connection with the Circle Surround Acquisition, the Company paid to Rocktron
$500,000 in cash and issued to Rocktron 35,294 shares of the Company's common
stock, $.001 par value per share. In addition, the Company agreed to pay
Rocktron royalties based upon certain percentages (ranging from 5-50%) of
licensing royalties generated from use of the Circle Surround technology over a
ten year period. The securities were issued in reliance on the private offering
exemption set forth in Section 4(2) of the Securities Act of 1933, as amended,
on the basis that they were issued under circumstances not involving a public
offering.
USE OF PROCEEDS
The effective date of the Company's initial public offering of its Common
Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). During the second
quarter of Fiscal 1998, the Company utilized $500,000 of the $22,052,955 net
offering proceeds as follows:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS, OFFICERS, GENERAL
PARTNERS OF THE ISSUER OR THEIR
ASSOCIATES TO PERSONS OWNING TEN
PERCENT OR MORE OF ANY CLASS OF
EQUITY SECURITIES OF THE ISSUER, DIRECT OR INDIRECT
AND TO AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS
-------------------------------- ------------------
<S> <C> <C>
Construction of plant, building and
facilities -- --
Purchase and installation of machinery and
equipment -- --
Purchase of real estate -- --
Acquisition of other business(es)/assets -- 8,394,222(1)
Repayment of indebtedness -- --
Working capital -- --
Temporary investment (cash and municipal
bonds) -- 13,658,733(2)
</TABLE>
- -------------------------------
(1) In connection with the Circle Surround Acquisition, the Company utilized
$500,000 of the net offering proceeds as part of the consideration to
acquire assets related to the Circle Surround technology. During the first
quarter of Fiscal 1998, the Company utilized an aggregate of $7,894,222 in
connection with two other acquisitions (see Note 2 to the Interim
Consolidated Financial Statements).
(2) The remaining funds are temporarily invested in cash and municipal bonds
pending application.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of SRS Labs, Inc. was held on June 11,
1998 for the purpose of (i) electing two Class II Directors to the Board of
Directors; (ii) voting on a proposal to approve an amendment to the SRS Labs,
Inc. Amended and Restated 1996 Long-Term Incentive Plan (the "Incentive Plan")
to increase the number of shares of common
18
<PAGE> 19
stock available for issuance thereunder by 2,500,000; and (iii) voting on a
proposal to approve an amendment to the Incentive Plan to allow directors of the
Company and any Subsidiary of the Company to participate in the Incentive Plan.
John AuYeung and John Tu were elected to serve as Class II Directors of the
Company for three year terms expiring at the 2001 Annual Meeting of
Stockholders. Jeffrey I. Scheinrock and Thomas W.T. Wan continued in office as
Class I Directors, and Stephen V. Sedmak and Thomas C.K. Yuen continued in
office as Class III Directors. The tabulation of the votes cast for the election
of Mr. AuYeung and Mr. Tu was as follows:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
---------- ----------
<S> <C> <C>
Mr. AuYeung 10,182,460 31,481
Mr. Tu 9,901,090 312,851
</TABLE>
The amendment to the Incentive Plan to increase by 2,500,000 the number of
common shares available for issuance was approved. The tabulation of the votes
was as follows:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-Votes
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
6,864,052 1,424,325 11,333 1,914,231
</TABLE>
The amendment to the Incentive Plan to allow directors of the Company and
its Subsidiaries to participate in the Incentive Plan was approved. The
tabulation of the votes was as follows:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-Votes
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
9,140,072 1,055,441 18,428 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed below are filed with the U.S. Securities
and Exchanges Commission (the "Commission") as part of this Report.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of May 21, 1998, by and
between Rocktron Corporation and the Company.
10.1 Registration Rights Agreement dated as of May 21, 1998,
between Rocktron Corporation and the Company.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Complying with the undertaking set forth in its Current Report on Form 8-K
dated March 12, 1998 and filed with the Commission on March 13, 1998 related to
the acquisition of Valence, the Company filed with the Commission on May 18,
1998 a Current Report on Form 8-K/A dated May 18, 1998, filing the following
financial information relating to the acquisition of Valence: (i) audited
consolidated financial statements of Valence for the ten months ended January
31, 1998 and for the year ended March 31, 1997, and the related Independent
Auditors' Report and (ii) unaudited pro forma consolidated condensed financial
statements of SRS Labs, Inc. for the twelve months ended December 31, 1997 and
the three months ended March 31, 1998 reflecting the acquisition of Valence. No
other reports on Form 8-K were filed during the three month period ended June
30, 1998.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SRS LABS, INC.,
a Delaware Corporation
Date: August 14, 1998 By: /s/ JANET M. BISKI
------------------------------------
Janet M. Biski
Vice President, Chief Financial Officer and
Secretary (Principal Financial and
Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement dated as of May 21, 1998, by and
between Rocktron Corporation and the Company.
10.1 Registration Rights Agreement dated as of May 21, 1998,
between Rocktron Corporation and the Company.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
BETWEEN
SRS LABS, INC.
AND
ROCKTRON CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. Purpose of Agreement 1
II. Purchase and Sale of the Assets 1
A. Assets 1
1. Test and Demonstration Equipment and Documentation 1
2. Product Samples 1
3. Business Support Records and Data 1
4. Intellectual Property 1
5. Software 2
6. Contract Rights 2
B. Delivery/Risk of Loss 2
III. Consideration 2
A. Initial Payments 2
B. Royalty Payments 3
C. License 4
IV. Representations and Warranties 4
A. Representations and Warranties of Each Party 4
B. Representations and Warranties of the Seller 4
1. No Conflict 5
2. Title to the Assets 5
3. Intellectual Property 6
4. Actions and Proceedings 6
5. Consents 6
6. Contracts 6
7. Status of License with Analog Devices 6
8. Investment Representations and Warranties 6
9. Accuracy of Documents and Information 9
10. Taxes 9
C. Representations and Warranties of the Buyer 9
1. No Conflict 9
2. Actions and Proceedings 9
3. Consents 10
4. Status of the Shares 10
5. Accuracy of Documents and Information 10
V. Indemnification 10
A. Indemnification by the Seller 10
B. Indemnification by the Buyer 11
C. Notice of Claim 11
D. Defense 11
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
E. Duration of Parties' Obligations 12
VI. Costs 12
A. Finder's or Broker's Fees 12
B. Expenses 12
VII. Additional Agreements and Post-Closing Matters 13
A. Additional Agreements 13
B. License Agreement to Seller 13
1. Improvements by the Seller 13
C. Post-Closing Support 14
1. Technical Support 14
2. Engineering Support 14
VIII. Miscellaneous 15
A. Notices 16
B. Bulk Sales 16
C. Headings 16
D. Entire Agreement; Modification; Waiver 16
E. Counterparts 16
F. Parties in Interest 17
G. Assignment 17
H. Governing Law 17
I. Venue 17
J. Further Assurances 17
K. Validity; Severability 18
L. Press Release 18
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Attachments
and Exhibits
- ------------
Exhibit A Prohibited Licensees
Attachment 1 Product Samples
Attachment 2 Test and Demonstration Equipment and Documentation and Business
Support Records and Data Assignment
Attachment 3 Trademark Assignment
Attachment 4 Patent Assignment
Attachment 5 Copyright Assignment
Attachment 6 Contract Assignment
Attachment 7 Royalty and Other Payments
Attachment 8 License Agreement
Attachment 9 Registration Rights Agreement
</TABLE>
With the exception of the Registration Rights Agreement (Attachment 9)
which is filed as part of the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998 as Exhibit 10.1, the remaining above-referenced
Attachments and Exhibit have not been filed herewith. The Company will furnish
supplementally a copy of any omitted Exhibit or Attachment to the U.S.
Securities and Exchange Commission upon request.
<PAGE> 5
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement"), dated as of May 21,
1998 (the "Closing Date"), is entered into by and among Rocktron Corporation, a
Michigan corporation (the "Seller") and SRS Labs, Inc., a Delaware corporation
(the "Buyer").
I. PURPOSE OF AGREEMENT.
The Seller wants to sell to the Buyer, and the Buyer wants to buy from
the Seller, certain assets of the Seller related to technology for the
encoding of four or five channels to two channels of sound and decoding
the two channels back to four or five channels of sound (the "Circle
Surround Technology").
II. PURCHASE AND SALE OF THE ASSETS.
The Seller hereby agrees to sell, transfer, convey and deliver to the
Buyer and the Buyer hereby agrees to purchase from the Seller, subject
to and upon the terms and conditions contained herein or attached
hereto, all of the Assets (defined below), free and clear of all
options, liabilities, obligations, liens, pledges, mortgages, security
interests or other encumbrances of any kind.
A. Assets. The "Assets" means the following property related to the
Circle Surround Technology:
1. Test and Demonstration Equipment and Documentation.
Documentation, instructions, blueprints, drawings,
schematics, marketing materials, demonstration discs
(CD's) and a list of audio and video tapes utilized in
the design, manufacture, testing and demonstration of
products utilizing the Circle Surround Technology, all
as listed in the Assignment - Test and Demonstration
Equipment and Documentation and Business Support Records
and Data (Attachment 2).
2. Product Samples. Samples of specific consumer products,
all as listed in Attachment 1.
3. Business Support Records and Data. Correspondence
identifying potential customers, customer and vendor
lists and contact logs, sales order files,
confidentially and other business agreements, logo and
trademark artwork and the file histories of the patents
and trademarks described in Articles II.A.4.b. and
II.A.4.c below, all as described in Assignment - Test
and Demonstration Equipment and Documentation and
Business Support Records and Data (Attachment 2).
4. Intellectual Property. Intellectual property shall
include:
1. All intellectual property described in the
Assignment- Test and Demonstration Equipment and
Documentation and Business Support Records and
Data (Attachment 2).
2. The trademarks and trademark applications,
including, all goodwill associated therewith,
described in the Assignment - Trademarks
(Attachment 3).
3. The patents and patent applications described in
the Assignment - Patents (Attachment 4).
<PAGE> 6
4. The copyrights described in the Assignment -
Copyright (Attachment 5).
5. Software. All software including media storage and
printed versions, together with all associated
documentation as described in the Assignment - Copyright
(Attachment 5).
6. Contract Rights. All rights of the Seller, under the
agreements described in the Assignment - Contracts
(Attachment 6) (the "Contracts"). Notwithstanding
anything to the contrary, the Seller shall retain all
rights and liabilities associated with the "velocity"
trademark/litigation settlement related to Rocktron
Corporation v. Robert Bosch Corporation (Civil Action
No. 97-73422) in the United States District Court,
Eastern District of Michigan, Southern Division.
B. Delivery/Risk of Loss.
The Seller shall deliver the Assets to the Buyer at the Buyer's
principal executive offices in Santa Ana, California. The Seller
shall bear all costs incident to shipment of the Assets to such
location. All risk of loss attributable to the Assets shall
remain with the Seller until such time as the same have been
actually delivered into the physical possession of the Buyer.
III. CONSIDERATION.
In consideration for the Assets, the Buyer shall pay to the Seller the
following amounts:
A. Initial Payments.
1. A total of $500,000 shall be paid to the Seller
consisting of $450,000 paid on the Closing Date in the
form of a cashier's check or wire transfer to an account
designated by the Seller at least three (3) business
days prior to the Closing Date and $50,000 previously
paid to the Seller by the Buyer on April 9, 1998.
2. Shares of common stock of the Buyer, $.001 par value per
share (the "Common Stock"), with a value of $300,000,
determined by the method of computation as provided
below (the "Shares").
In making the computation of the Shares, the parties
shall determine a number of full shares of Common Stock
which have a total value as nearly equal to U.S.$300,000
as is practicable, by dividing into $300,000 the daily
average of the high and low sales prices for the Common
Stock on The Nasdaq Stock Market, Inc. as reported in
The Wall Street Journal (with the exception of any
errors in such reports) for each trading day during the
period beginning on and including March 16, 1998, and
ending on and including May 18, 1998, three (3) business
days prior to the Closing Date (the share price so
computed, the "Share Price"). The parties agree that the
Share Price equals $8.50 per share and the number of
Shares computed pursuant to this section equals 35,294.
Irrevocable instructions shall be delivered by the Buyer
to the Buyer's transfer agent on the Closing Date so
that a certificate in the name of the Seller
representing the Shares may be issued on the Closing
Date in the Seller's name and delivered by the Buyer to
the Seller as soon as practicable after the Closing
Date. At the Closing Date, the Buyer also shall enter
into a Registration Rights Agreement with the Seller in
the form set forth in Attachment 9.
B. Royalty Payments.
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<PAGE> 7
1. For the periods aggregating ten (10) years after the
Closing Date, the Buyer 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 Buyer 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 Buyer
hereunder. The Seller agrees that such certified public
accountant shall be required to sign an agreement with
the Buyer protecting confidential information of the
Buyer and shall be authorized by the Buyer 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 Buyer's
normal business hours and upon reasonable advance
written request. The Buyer 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 over a calendar year are understated
by more than fifteen percent (15%) of the royalties
actually due. The Seller shall have no other rights to
examine the Buyer's books and records.
3. The Buyer shall, at its option, be entitled to reduce
the amount that the Buyer would otherwise be obligated
to pay to the Seller pursuant to this Article III.B, in
satisfaction of any of the Seller's undisputed
obligations to the Buyer hereunder, including, without
limitation, any offset to which the Buyer is entitled to
under the provisions contained in Attachment 7.
C. License.
1. The Buyer is granting to the Seller a license to use the
Circle Surround Technology to the extent provided in the
license attached hereto as Attachment 8.
IV. REPRESENTATIONS AND WARRANTIES.
A. Representations and Warranties of Each Party.
Each Party (where applicable) represents and warrants to the
other Party as follows:
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<PAGE> 8
1. It is a corporation duly organized, validly existing and
in good standing under the laws of its respective state
of incorporation, and has all necessary corporate power
and corporate authority to enter into and to perform its
obligations under this Agreement and the other documents
and agreements referenced or contemplated herein and to
consummate the transactions contemplated hereby.
2. The execution, delivery and performance of this
Agreement and the other documents and agreements
referenced or contemplated herein has been duly
authorized.
3. Each of this Agreement and the other documents and
agreements referenced or contemplated herein constitutes
a legal, valid and binding obligation of such Party,
enforceable against such party in accordance with its
respective terms, except as such enforceability may be
subject to or limited by (a) bankruptcy, insolvency,
moratorium, fraudulent conveyance or other similar laws
relating to the rights of creditors generally, (b)
limitations imposed by law or equitable principles upon
the availability of specific performance, injunctive
relief or equitable remedies, and (c) concepts of
materiality.
B. Representations and Warranties of the Seller.
The Seller represents and warrants to the Buyer as follows:
1. No Conflict. 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;
c. result, to the Seller's present knowledge, in a
breach or violation of, or be in conflict with,
or constitute a default under, any judgment,
order, decree, statute, law, rule, regulation or
other restriction of any court, government or
governmental agency applicable to the Seller or
the Assets; or
d. result in a breach or violation of, or be in
conflict with, or constitute a default under the
terms, conditions of any lease, license,
promissory note, conditional sales contract,
commitment, indenture, mortgage, deed of trust,
partnership agreement or other agreement,
contract, instrument or arrangement to which the
Seller is a party or any of the Assets is bound.
2. Title to the Assets. The Seller has and, upon the
consummation of the transactions contemplated by the
Agreement (the "Closing"), the Buyer shall have, sole,
good and marketable title to the Assets, free and clear
of all liens, encumbrances or claims of any kind
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<PAGE> 9
or nature whatsoever, including, without limitation,
those portions of the Assets which may have been
developed by the Seller's consultants or independent
contractors.
3. Intellectual Property.
a. Included in the Assets listed in Attachments 2,
3, 4 and 5 are all of the proprietary assets
(collectively, the "Intellectual Property")
owned by the Seller, or currently under
development by the Seller, or in which the
Seller owns rights, which are related to the
Circle Surround Technology as of the date
hereof. The use of the products incorporating
Circle Surround Technology by the Seller's
customers for the purpose for which sold, and
the use or publication by the Seller or the
Buyer of the technology disclosed in the
patents, trademarks and copyrights included in
the Assets do not, to the best of the Seller's
knowledge, involve infringement or claimed
infringement of any patent, trademark or
copyright. The Seller warrants that the patents
and trademarks included in the Assets are, to
the best of the Seller's knowledge, valid,
enforceable and free from defects.
b. Except as set forth in this Agreement, the
Attachments and/or the Appendices hereto, 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 to be acquired by the
Buyer from the Seller. 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, 4 and 5 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, 4 and 5 except as
specifically noted in the respective attachment.
4. Actions and Proceedings. There are no actions, suits, or
proceedings pending or, to the knowledge of the Seller,
threatened which, individually or in the aggregate,
would have a material adverse effect on the Seller or
the Assets or which would seek to question, delay or
prevent the consummation of, or materially impair the
ability of the Seller to consummate the transactions
contemplated hereby.
5. Consents. Except as specifically provided in this
Agreement and to the best of the Seller's knowledge,
there are no authorizations, approvals, consents, orders
or waivers required to be obtained from, or notices or
filings required to be given to, or made with, any
government, governmental agency or any person (whether
or not governmental in character) in connection with (a)
the execution and delivery of this Agreement and the
other documents and agreements referenced or
contemplated herein; (b) the consummation of the
transactions contemplated hereby; and (c) the
fulfillment of or the compliance with the terms,
conditions and provisions hereof.
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<PAGE> 10
6. Contracts. True and complete copies of all Contracts
included in the Assets have been made available to the
Buyer prior to the execution hereof. As of the date
hereof, except as otherwise provided in this Agreement:
a. there exist no circumstance, to Seller's
knowledge, which would affect the validity or
enforceability of any of the Contracts in
accordance with their respective terms;
b. the 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 legal validity and enforceability of any of
the Contracts has not been, and shall not in any
manner be, impaired by the consummation of the
transactions contemplated hereby. There is no
warranty with respect to the performance of any
of the Contracts.
7. Status of License with Analog Devices. The Seller never
received production silicon by year end 1997 as
specified under that certain Restricted Exclusive Analog
Technology and Nonexclusive Know-How and Trademark
License dated October 28, 1997 (the "ADI License
Agreement") by and between the Seller and Analog
Devices, Inc. ("ADI"). The Seller has provided to the
Buyer documentation evidencing the status of ADI's
performance with respect to the ADI License Agreement.
8. Investment Representations and Warranties. The Seller
understands and represents and warrants for itself to,
and agrees with, the Buyer that:
a. The Seller understands that no U.S. federal or
state agency has passed on, or made any
recommendation or endorsement of the Shares.
b. The Seller acknowledges that, in making the
decision to accept (i) the Shares as part of the
purchase price for the Assets, it has relied
solely upon independent investigations made by
it and not upon any representations made by the
Buyer with respect to the Buyer or the Shares,
except for the representations and warranties in
this Agreement, except that the Seller has
received, reviewed and relied upon (i) the
Buyer's Annual Report to Stockholders for the
year ended December 31, 1997 and (ii) copies of
the Buyer's report on Form 10-KSB for the year
ended December 31, 1997, the Buyer's Current
Report on Form 8-K dated March 12, 1998 (and the
amendment to such Report filed on Form 8-K/A
dated May 18, 1998), and the Buyer's definitive
Proxy Statement dated April 30, 1998, each filed
by the Buyer pursuant to the Exchange Act,
which, together with any filings by
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<PAGE> 11
the Buyer under the Exchange Act after the date
hereof and prior to the Closing, are defined as
"Exchange Act Reports."
c. The Seller understands that the Shares are being
offered and sold to it in reliance on specific
exemptions from or non-application of the
registration requirements of U.S. federal and
state securities laws and that the Buyer is
relying upon the truth and accuracy of the
representations, warranties, agreements,
acknowledgments and understandings of the Seller
set forth herein in order to determine the
applicability of such exemptions and the
suitability of the Seller to acquire the Shares.
d. The Seller is acquiring the Shares for
investment for such Seller's own account, not as
a nominee or agent, and not with a view to the
resale or distribution of any part thereof,
within the meaning of the Securities Act, and
the Seller has no present intention of selling,
granting any participation in, or otherwise
distributing the same within the meaning of the
Securities Act. By executing this Agreement, the
Seller further represents that it does not have
any contract, undertaking, agreement or
arrangement with any person to sell, transfer or
grant participation to such person or to any
third person with respect to any of the Shares.
e. The Seller represents that it has had an
opportunity to ask questions and receive answers
from the Buyer regarding the terms and
conditions of the offering of the Shares and
that it has received the information it
requested regarding the business and affairs of
the Buyer.
f. The Seller acknowledges that it is able to fend
for itself and bear the economic risk of its
investment and has such knowledge and experience
in financial or business matters that it is
capable of evaluating the merits and risks of
the investment in the Shares.
g. The Seller understands that the Shares it is
acquiring are characterized as "restricted
securities" under the U.S. federal securities
laws inasmuch as they are being acquired from
the Buyer in a transaction not involving a
public offering and that under such laws and
applicable regulations such securities may be
resold without registration under the Securities
Act only in certain limited circumstances. In
this connection, the Seller represents that it
is familiar with Rule 144 promulgated under the
Securities Act, as presently in effect, and
understands the resale limitations imposed
thereby and by the Securities Act.
h. Without in any way limiting the representations
set forth above or restricting the Seller's
ability to utilize Rule 144, the Seller further
agrees not to make any disposition of all or any
portion of the Shares unless and until:
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<PAGE> 12
(i) There is then 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
(ii) (x) The Seller shall have notified the
Buyer of the proposed disposition and
shall have furnished the Buyer with a
detailed statement of the circumstances
surrounding the proposed disposition,
and (y) if requested by the Buyer, the
Seller shall have furnished the Buyer
with an opinion of counsel, reasonably
satisfactory to the Buyer, that such
disposition will not require
registration of such shares under the
Securities Act.
i. The Seller has the financial ability to bear the
economic risk of its investment in the Shares,
has adequate means of providing for its current
needs and foreseeable future contingencies and
has no need for liquidity with respect to its
investment in the Shares. The Seller is an
"accredited investor," as that term is defined
in Regulation D promulgated under the Securities
Act.
j. The Seller knows of no public solicitation or
advertisement in connection with the offer or
sale of the Shares.
k. The Seller acknowledges that the certificates
representing the Shares shall contain the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED, OR
REGISTERED OR QUALIFIED UNDER ANY OTHER
SECURITIES LAW; THEY HAVE BEEN ACQUIRED BY THE
HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SUCH ACT AND
ANY APPLICABLE SECURITIES LAWS, OR UNLESS AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE
AND SRS LABS, INC. ("SRS") SHALL HAVE RECEIVED,
AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF
THE EXEMPTION REASONABLY SATISFACTORY TO SRS
(WHICH MAY INCLUDE, AMONG OTHER THINGS, AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO
SRS)."
9. Accuracy of Documents and Information. The copies of all
instruments, agreements, other documents and written
information delivered to the Buyer or any of its
representatives pursuant to this Agreement are complete
and correct in all material respects as of the date
hereof. The representations and warranties made by the
Seller
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<PAGE> 13
in this Agreement, or in other written materials
furnished to the Buyer hereunder or in connection with
the transactions contemplated hereby, taken as a whole,
do not contain any untrue statement of material fact and
do not omit any material fact necessary to make the
statements or facts contained herein or therein not
misleading.
10. Taxes. The Assets shall be free and clear of any liens
or encumbrances created by Seller's failure to (a) file
applicable federal, state, county and local tax returns
required to have been filed, and (b) pay or caused to be
paid all taxes required to be paid, with respect to the
Assets in those jurisdictions where the nature or use of
the Assets requires such filing and where the failure to
do so would have a material adverse affect on the
Assets.
C. Representations and Warranties of the Buyer.
The Buyer represents and warrants to the Seller as follows:
1. No Conflict. 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 Buyer's
Certificate of Incorporation or Bylaws; or
b. result in a breach or violation of, or be in
conflict with, or constitute a default under,
any judgment, order, decree, statute, law, rule,
regulation or other restriction of any court,
government or governmental agency applicable to
the Buyer.
2. Actions and Proceedings. There are no actions, suits, or
proceedings pending or, to the knowledge of the Buyer,
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 the Buyer to
consummate, the transactions contemplated hereby.
3. Consents. 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 the Buyer of the transactions
contemplated hereby, except that in connection with the
issuance of the Shares to the Seller, the Buyer must
file a Nasdaq National Market Notification Form for
Listing of Additional Shares with The Nasdaq Stock
Market, Inc.
4. Status of the Shares. Upon consummation of the
transactions contemplated hereby, the Shares will have
been, validly issued, fully paid, and nonassessable.
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<PAGE> 14
5. Accuracy of Documents and Information. The copies of all
instruments, agreements, other documents and written
information delivered to the Seller or on behalf of the
Buyer or any of its representatives pursuant to this
Agreement are complete and correct in all material
respects as of the date hereof. The representations and
warranties made by the Buyer in this Agreement, or in
other written materials furnished to the Seller
hereunder or in connection with the transactions
contemplated hereby, taken as a whole, do not contain
any untrue statement of material fact and do not omit
any material fact necessary to make the statements or
facts contained herein or therein not misleading.
V INDEMNIFICATION.
A0 Indemnification by the Seller. The Seller shall defend and hold
harmless the Buyer and its officers, directors, employees,
attorneys, and agents and its successors and assigns against and
in respect of any and all losses, damages, claims, obligations,
demands, actions (pending or threatened), suits, proceedings,
assessments, liabilities, judgments, recoveries and
deficiencies, costs and expenses (including, without limitation,
reasonable attorneys' fees and costs and expenses incurred in
investigating, preparing, defending against or prosecuting any
pending or threatened litigation, claim, proceeding or demand),
all on an after-tax basis, less any amounts actually paid as
insurance reimbursement, of any kind or character (collectively,
a "Loss"), which arises out of, results from, or relate to:
1. the Seller's possession, ownership, use or transfer of
Assets prior to the date hereof;
2. the products made and sold by the Seller other than the
products provided to Buyer pursuant to Article II.A.2
hereof;
3. any breach of, or failure by the Seller fully to
perform, or any inaccuracy in, any of the
representations, warranties, covenants or agreements of
the Seller in this Agreement, or in any attachment,
schedule, exhibit, certificate, list, or other document
furnished or to be furnished by the Seller under this
Agreement; and/or
4. the "Velocity" trademark litigation/settlement related
to Rocktron Corporation v. Robert Bosch Corporation
(Civil Action No. 97-73422) in the United States
District Court, Eastern District of Michigan, Southern
Division.
B0 Indemnification by the Buyer. The Buyer shall defend and hold
harmless the Seller and its officers, directors, employees,
attorneys, and agents and its successors and assigns against and
in respect of any and all Losses, which arise out of, result
from, or relate to any breach of, or failure by the Buyer fully
to perform, or any inaccuracy in, any of the representations and
warranties, covenants or agreements of the Buyer in this
Agreement or in any attachment, schedule, exhibit, certificate,
list or other document furnished or to be furnished by the Buyer
under this Agreement.
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<PAGE> 15
C0 Notice of Claim. Whenever the Buyer or the Seller learns of or
discovers any matter which may give rise to a claim for
indemnification (the "Claim") against any other party under this
Article V (the "Indemnity Obligor"), the Buyer or the Seller, as
the indemnified party (the "Indemnified Party"), shall give
notice to the Indemnity Obligor of the Claim. With respect to
Claims which are the subject of actions, suits, or proceedings
threatened or asserted in writing by any third party (a " Third
Party Claim"), the Indemnified Party shall, within 15 days
following receipt of such Third Party Claim, promptly notify the
Indemnity Obligor in writing of any Claim for recovery,
specifying in reasonable detail the nature of the Loss and the
amount of the liability estimated to arise therefrom. If the
Indemnified Party does not so notify the Indemnity Obligor
within 15 days of its discovery of a Third Party Claim, such
Claim shall be barred only to the extent that the Indemnity
Obligor is prejudiced by such failure to notify. The Indemnified
Party shall provide to the Indemnity Obligor as promptly as
practicable thereafter all information and documentation
reasonably requested by the Indemnity Obligor to verify the
Claim asserted.
D0 Defense. If the facts relating to a Loss arise out a Third Party
Claim, or if there is any claim against a third party available
by virtue of the circumstances of the Loss, the Indemnity
Obligor may, by giving written notice to the Indemnified Party
within 15 days following its receipt of the notice of such
claim, elect to assume the defense or the prosecution thereof,
including the employment of counsel or accountants, reasonably
satisfactory to the Indemnified Party, at its cost and expense;
provided, however, that during the interim the Indemnified Party
shall use its best efforts to take all action (not including
settlement) reasonably necessary to protect against further
damage or loss with respect to the Loss. The Indemnified Party
shall have the right to employ counsel separate from counsel
employed by the Indemnity Obligor in any such action and to
participate therein, but the fees and expenses of such counsel
shall be at the Indemnified Party's own expense, unless (a) the
employment thereof has been specifically authorized by the
Indemnity Obligor, (b) such Indemnified Party has been advised
by counsel reasonably satisfactory to the Indemnity Obligor that
there may be one or more legal defenses available to it which
are different from or additional to those available to the
Indemnity Obligor and in the reasonable judgment of such counsel
it is advisable for such Indemnified Party to employ separate
counsel, or (c) the Indemnity Obligor has failed to assume the
defense of such action and employ counsel reasonably
satisfactory to the Indemnified Party. Whether or not the
Indemnity Obligor chooses to defend or prosecute such claim, all
the parties hereto shall cooperate in the defense or prosecution
thereof and shall furnish such records, information and
testimony and shall attend such conferences, discovery
proceedings and trial as may be reasonably requested in
connection therewith. The Indemnity Obligor shall not be liable
for any settlement of any such claim effected without its prior
written consent. In the event of payment by the Indemnity
Obligor to the Indemnified Party in connection with any Loss
arising out of a Third Party Claim, the Indemnity Obligor shall
be subrogated to and shall stand in the place of the Indemnified
Party as to any events or circumstances in respect of which the
Indemnified Party may have any right or claim against such third
party relating to such indemnified matter. The Indemnified Party
shall cooperate with the Indemnity Obligor in prosecuting any
subrogated claim. The Indemnity Obligor will take no action in
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<PAGE> 16
connection with any claim that would adversely affect the
Indemnified Party without the consent of the Indemnified Party.
E0 Duration of Parties' Obligations. The Indemnity Obligor's
indemnification obligations under this Agreement shall survive
the Closing and shall terminate as follows: (a) with respect to
claims for indemnifying arising under Articles V.A.1, V.A.2 and
V.A.4, they shall continue and not terminate and (b) with
respect to all other claims for indemnity, after ten (10) years
from the date hereof.
VI COSTS.
A0 Finder's or Broker's Fees. The Seller represents to the Buyer
that it has not made any arrangement or had any dealings whereby
the Seller or the Buyer could become subject, absolutely or
contingently, to a claim for any brokerage commission or
finder's fee. The Buyer represents to the Seller that the Buyer
has not and will not pay any brokerage commission or finder's
fee in respect of the consideration to be paid under this
Agreement or any other agreement made in contemplation of this
Agreement, and the Buyer has not made any arrangement or had any
dealings whereby the Seller could become subject, absolutely or
contingently, to a claim for any brokerage commission or
finder's fee. The Seller on the one hand, and the Buyer, on the
other hand, each agree to indemnify and hold harmless the other
against any and all claims, demands, losses, costs, expenses,
obligations, liabilities, damages, recoveries, and deficiencies,
including interest, penalties, and reasonable attorneys fees,
incurred or suffered by reason of any brokerage commission or
finder's fee alleged to be payable because of any act, omission
or statement of the indemnifying party.
B0 Expenses. Whether or not the transactions contemplated by this
Agreement are consummated, each party shall pay its own fees and
expenses incident to the negotiation, preparation, execution,
delivery, and performance hereof, including, without limitation,
the fees and expenses of its respective counsel, accountants and
other experts.
VII ADDITIONAL AGREEMENTS AND POST-CLOSING MATTERS.
A0 Additional Agreements. 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 - Test and Demonstration Equipment
and Documentation and Business Support Records and Data,
in the form attached hereto as Attachment 2.
2 Assignment Agreement - Trademarks, in the form attached
hereto as Attachment 3.
3 Assignment Agreement - Patent, in the form attached
hereto as Attachment 4.
4 Assignment Agreement - Copyright, in the form attached
hereto as Attachment 5.
5 Assignment Agreement - Contracts, in the form attached
hereto as Attachment 6.
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<PAGE> 17
6 License Agreement, in the form attached hereto as
Attachment 8.
7 Registration Rights Agreement, in the form attached
hereto as Attachment 9.
B0 License Agreement to Seller. In connection with the Closing, the
Buyer shall grant to the Seller a limited license, in the form
attached hereto as Attachment 8, to use the Circle Surround
Technology. Such license agreement shall prohibit the Seller
from granting any sublicense thereunder (the "Circle Surround
License").
1 Improvements by the Seller. If at any time during this
Agreement any invention, new development, enhancement or
improvement, whether patentable or unpatentable,
relating to the Circle Surround Technology
(collectively, referred to herein as "Improvement") is
made by the Seller, including any such new development,
enhancement or improvement brought about by the Seller's
vendors or subcontractors, and as often as the same
shall occur:
a. During the First Two Years. During the first two
years of the Agreement, Seller shall not assign
or license any right, title and interest in and
to such invention, new development, enhancement
or improvement, to anyone other than Buyer.
However, for any Improvements which are assigned
to the Buyer during the first two years of this
Agreement, the Seller shall be granted a
non-exclusive royalty-free license back with
respect to such Improvements.
b. While Performing Technical Engineering Support.
Improvements made by the Seller while performing
technical or engineering support (see Article
VII.C, herein) as often as the same shall occur,
shall become the sole property of the Buyer.
Seller shall furnish to the Buyer all relevant
information pertaining thereto and shall assign
to the Buyer or one of the Buyer's affiliates,
in the Buyer's sole and absolute discretion, all
right, title and interest in and to such
invention, new development, enhancement or
improvement, without the requirement of any
payment or royalty from the Seller. However, for
any Improvements which are assigned to the Buyer
pursuant to this Article VII.B.1.b., the Seller
shall be granted, a non-exclusive royalty-free
license back with respect to such Improvements
and the terms of this Agreement shall be
extended with respect to any such assigned
Improvement to Buyer so as to require payment of
royalties received by Buyer for such Improvement
pursuant to Attachment 7 hereto for ten (10)
years from the date of such assignment or
license to the Buyer.
c. While Not Performing Technical or Engineering
Support. Improvements made by the Seller
relating to the Circle Surround Technology
during a time while not performing technical or
engineering support for the Buyer, shall be the
sole property of the Seller; provided however,
that Buyer has a right of first refusal to
license and/or purchase the Improvements made
after the first
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<PAGE> 18
two years while not performing technical or
engineering support under such terms as may be
agreed upon by the Seller and the Buyer.
2. Prohibited Licenses. The Buyer agrees that it will not
grant license agreements for any of the Assets acquired
by the Buyer herein relating to the Circle Surround
Technology to those companies within the musical
instrument or professional audio industries which are
listed on Exhibit "A", without obtaining the Seller's
prior approval.
C0 Post-Closing Support.
1 Technical Support. The Seller shall, following all
reasonable requests, provide technical support and
training at no charge to the Buyer (except for
reasonable travel expenses, including, but not limited
to, transportation, lodging and meals and limited to a
maximum of one (1) round trip by a representative of the
Seller to a location other than the Seller's place of
business for a period not to exceed three (3) days) for
six (6) months following the date hereof. For purposes
of this Agreement, "technical support" shall mean
assistance to the Buyer in understanding and using the
Circle Surround Technology.
2 Engineering Support. Following the Closing and for so
long as royalty payments or per-unit fees, if any, are
paid to the Seller, the Seller shall provide engineering
support to the Buyer. Unless otherwise requested by the
Buyer, the Seller agrees to designate James K. Waller,
Jr. to provide such services and by his acknowledgment
of this obligation in this Agreement James K. Waller,
Jr. agrees to provide such services. The Seller and Mr.
Waller shall provide the Buyer with an aggregate minimum
of 20 hours per month and an aggregate maximum of 32
hours per month, as requested by the Buyer. If Buyer
requires and requests more than 32 hours of engineering
support, the Seller may provide such support at its
discretion. For purposes of this Agreement, "engineering
support" shall mean assistance to the Buyer in the
application of the Circle Surround Technology as
contained in any related products and/or processes. For
engineering support, the Seller shall be paid $170 per
hour and shall be reimbursed for all reasonable travel
expenses including, but not limited to, transportation,
lodging and meals, with reimbursement to be made within
thirty (30) days of receipt by the Buyer of statements
therefor.
VIII MISCELLANEOUS.
A0 Notices. All notices, payments (other than at Closing),
requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been given if
personally delivered or if sent by telecopy or facsimile or
mailed by overnight, commercial air courier service or by first
class, registered or certified mail, postage prepaid, and
properly addressed as follows:
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<PAGE> 19
If to the Seller:
Rocktron Corporation
2870 Technology Drive
Rochester Hills, MI 48309
Attention: Mr. James K. Waller, Jr., President
Facsimile: (248) 853-4163
with a copy to:
Catalano, Zingerman & Associates, P.C.
810 S. Cincinnati, Suite 200
Tulsa, Oklahoma 74119
Attention: Frank J. Catalano, Esq.
Facsimile: (918) 599-9889
If to the Buyer:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, CA 92705
Attention: Janet M. Biski,
Vice President and Chief Financial Officer
Facsimile No. (714) 852-1099
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive, 17th floor
Costa Mesa, California 92647
Attention: John F. Della Grotta, Esq.
Facsimile No. (714) 979-1921
Any party may change its address for purposes of this Article by
giving the other parties written notice of the new address in
the manner set forth above. Notice will conclusively be deemed
to have been given when personally delivered, or if given by
mail, on the second day after being sent by an overnight,
commercial air courier service or on the third day after being
sent by first class, registered or certified mail, or if given
by telecopy or facsimile machine, when confirmation of
transmission is indicated by the sender's telecopy or facsimile
machine.
B0 Bulk Sales. The parties agree to waive compliance with the
provisions of Article 6 of the Uniform Commercial Code (Bulk
Transfers) as in effect in any jurisdiction and the bulk
transfer and bulk sales laws of any applicable state or
jurisdiction (the "Bulk Sales Laws") in connection with the
purchase and sale of the Assets hereunder. The Seller shall
indemnify
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<PAGE> 20
and hold harmless the Buyer, and shall reimburse the Buyer for,
any losses that the Buyer may suffer as a result of or due to
noncompliance with the provisions of the Bulk Sales Law.
C0 Headings. The subject headings of the Articles and Sections of
this Agreement are included for purposes of convenience only,
and shall not affect the construction or interpretation of any
of its provisions.
D0 Entire Agreement; Modification; Waiver. This Agreement
constitutes the entire agreement between the parties pertaining
to the subject matter contained in it and supersedes all prior
and contemporaneous agreements, representations, and
understandings of the parties (except for the Confidentiality
Agreement dated September 22, 1997 between the parties
concerning the subject matter hereof). No supplement,
modification or amendment of this Agreement shall be binding
unless executed in writing by all the parties. No waiver of any
of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No
waiver shall be binding unless executed in writing by the party
making the waiver.
E0 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
F0 Parties in Interest. Nothing in this Agreement, whether express
or implied, is intended to:
1 confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it
and their respective successors and assigns;
2 relieve or discharge any obligation or liability of any
third persons to any party to this Agreement; or
3 confer upon any third person any right of subrogation or
action over or against any party to this Agreement.
G0 Assignment. This Agreement shall be binding upon and inure to
the benefit of successors and assigns of the Seller and the
Buyer. The Buyer may freely assign its rights and obligations
under this Agreement. The Seller may assign its rights and
obligations under this Agreement with the following exceptions:
1 The License Agreement attached hereto as Attachment 8 is
assignable but such assignment shall only be royalty
free with respect to the sale or manufacture of units up
to and including twice the number of units sold or
manufactured under the License Agreement in the
preceding 12 months. Any additional units sold or
manufactured under the License Agreement will incur a
royalty at prevailing market rates.
2 The obligations of the Seller and James K. Waller, Jr.
described at Article VII.C may not be assigned.
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<PAGE> 21
H0 Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of California without
regard to the conflicts of law principles thereof.
I0 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.
J0 Further Assurances. The Seller will from time to time subsequent
to the Closing, at the Buyer's request and without further
consideration, execute and deliver such other instruments of
conveyance, assignment, and transfer, and take such other
actions, as the Buyer may reasonably request in order to more
effectively convey, assign, transfer the Assets to the Buyer.
K0 Validity; Severability. Each Article, section, subsection and
lesser section of this Agreement constitutes a separate and
distinct undertaking, covenant and/or provision hereof. Whenever
possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable
law. In the event that any provision of this Agreement shall be
determined to be unlawful, invalid or unenforceable, such
provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and
effect. In substitution for any provision of this Agreement held
unlawful, invalid or unenforceable, there shall be substituted a
provision of similar import reflecting the original intent of
the parties hereto to the fullest extent permissible under law.
L0 Press Release. The Seller and its affiliates shall not release a
press release relating to this Agreement or any of the
transactions or documents contemplated hereby without first
submitting a copy of such press release to the Buyer and
obtaining the prior approval of the Buyer to any such press
release, which approval shall not be unreasonably withheld. The
Buyer shall provide the Seller an advance copy of the press
release relating to the Closing of this Agreement.
(Signature page follows)
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<PAGE> 22
IN WITNESS WHEREOF, the Seller and the Buyer have caused this Agreement
to be duly executed as of the date first above written.
<TABLE>
<S> <C>
SRS Labs, Inc., a Delaware corporation Rocktron Corporation, a Michigan corporation
By: /s/ STEPHEN V. SEDMAK By: /s/ JAMES K. WALLER, JR.
----------------------------------------- ----------------------------------------
Stephen V. Sedmak James K. Waller, Jr.
President and Chief Operating Officer President
Acknowledged, agreed and accepted with
respect to Article VII, Section C.2
/s/ JAMES K. WALLER, JR.
-------------------------------------------
James K. Waller, Jr., as an individual and
an employee of Rocktron Corporation
</TABLE>
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<PAGE> 1
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
BETWEEN
ROCKTRON CORPORATION
AND
SRS LABS, INC.
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is entered into as
of May 21, 1998 by and between SRS LABS, INC., a Delaware corporation (the
"Company"), and Rocktron Corporation, a Michigan corporation ("Rocktron")
R E C I T A L S
A. Pursuant to that certain Asset Purchase Agreement dated May 21, 1998
(the "Asset Purchase Agreement") by and between the Company and Rocktron, the
Company shall issue 35,294 shares of common stock, U.S. $.001 par value per
share ("Common Stock"), of the Company to Rocktron.
B. As an inducement to enter into the Asset Purchase Agreement, the
Company desires to grant to the Holder, in conjunction with the transfer of the
35,294 shares of Common Stock (the "Shares").
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the Asset
Purchase Agreement and in this Agreement, the Company and the Holder agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
I.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Holder" shall mean Rocktron and any transferee of Registrable Shares
who, pursuant to Section 3.3 below, is entitled to registration rights
hereunder.
"Registrable Shares" shall mean the Shares and any shares of Common
Stock issued upon any stock split, stock dividend, recapitalization or similar
event with respect to such Shares; provided, however, that Registrable Shares
shall cease to be Registrable Shares: (a) after they have been resold in a
transaction which does not meet the requirements for the assignment of
registration rights as set forth in Section 3.3 hereof; (b) at such time as
Holder
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<PAGE> 3
is able to dispose of all of his Registrable Shares in one three month
period pursuant to Rule 144; or (c) two (2) years from the date of this
Agreement, whichever is earlier.
"Registration Period" shall mean the period beginning on the date hereof
and ending two (2) years from the date hereof.
"Rule 144" shall mean Rule 144 under the Securities Act, as such rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
ARTICLE II
REGISTRATION RIGHTS
II.1 Piggyback Registration Rights.
(a) Whenever at any time during the Registration Period, the Company
proposes to register any of its securities under the Securities Act (other than
on Forms S-4 or S-8 or a registration statement on Form S-1 covering an employee
benefit plan), it shall each time give prompt written notice to each Holder of
its intention to do so and, upon the written request of each such Holder given
within thirty (30) days after the giving of any such notice (which request shall
state the proposed method of distribution of such shares of Common Stock), the
Company shall include in the proposed registration (the "Proposed Registration")
all Registrable Shares with respect to which the Company has received a written
request from each such Holder for inclusion therein within thirty (30) days
after receipt of the Company's notice. Except as may otherwise be provided in
this Agreement, Registrable Shares with respect to which such request for
registration has been received will be registered by the Company and offered to
the public pursuant to this Section 2.1 on the same terms and subject to the
same conditions as are applicable to the Proposed Registration.
(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 2.1(a). In such event, the right
of any Holder to registration pursuant to Article II shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Shares 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
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<PAGE> 4
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) Notwithstanding anything herein to the contrary, the Company may, to
the extent then permitted by applicable law, at any time prior to the effective
date of the Proposed Registration, determine in its sole discretion not to
effect such registration, in which event the Company shall have no further
obligation under this Section 2.1 to register shares of Common Stock under such
Proposed Registration, except that the Company shall reimburse the stockholders
for any out-of-pocket fees and expenses incurred by them in connection with such
Proposed Registration.
II.2 Registration Procedures.
(a) Whenever the Company is required by the provisions of this
Article II to include Registrable Shares in a Proposed Registration, the Company
shall (unless it shall have determined to withdraw or abandon the Proposed
Registration), as expeditiously as possible:
(i) Cooperate with the Holders and any underwriter responsible
for the sale of Registrable Shares in their review of the Company in connection
with such registration;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
one hundred eighty (180) days from the day of its effectiveness and any
additional period as is necessary to correct any of the conditions referred to
in Section 2.2(a)(v)(A) or (B) below (the "Period of Availability") and to
comply with the provisions of the Securities Act and the Exchange Act, with
respect to the disposition of all securities covered by such registration
statement for such periods. At the expiration of the Period of Availability, the
Company may file a post-effective amendment to such registration statement to
deregister any unsold Registrable Shares;
(iii) Furnish to each Holder selling Registrable Shares pursuant
to the registration statement (a "Public Selling Stockholder"), without charge,
such number of copies of the prospectus forming a part of such registration
statement (including each preliminary prospectus) as conforms with the
requirements of the Securities Act, and such other documents as such Public
Selling Stockholder may reasonably request in order to facilitate the
disposition of such securities;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under the securities or blue sky laws of
such jurisdictions as counsel for the Public Selling Stockholders shall
reasonably request, and do any and all other acts and things which may be
necessary or advisable to enable the Public
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<PAGE> 5
Selling Stockholders, or any underwriter offering such securities for the Public
Selling Stockholders, to consummate the disposition thereof in such
jurisdiction; provided, however, that in no event shall the Company be obligated
to qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to service of process in suits
other than those arising out of the offer or sale of the securities covered by
such registration statement in any jurisdiction where it is not now so subject;
(v) (A) Notify the Public Selling Stockholders, any time a
prospectus relating the Registrable Shares is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus forming a part of such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and (B) at the
request of the Public Selling Stockholders, prepare and furnish the Public
Selling Stockholders, without charge, with a reasonable number of copies of any
supplement to or any amendment of such prospectus that may be necessary so that,
as thereafter delivered to the purchasers of such securities, such prospectus
shall not include any untrue statement of a material fact or omit 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; and
(vi) If appropriate under the circumstances, enter into an
underwriting agreement, in the form then customarily used by the underwriters
managing the public offering and consistent with the provisions of this Article
II, with the underwriters of the securities covered by such registration
statement.
(b) Each Public Selling Stockholder shall notify the Company, any time a
prospectus relating to the Registrable Shares is required to be delivered under
the Securities Act, of the happening of any event relating to such Public
Selling Stockholder, the Registrable Shares or the extended method of
disposition of such securities, as a result of which such prospectus includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing. Each Public Selling Stockholder
shall furnish the Company with such information regarding the Registrable Shares
and the intended method of disposition of such securities as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
II.3 Allocation of Expenses. Whenever the Company is required by the
provisions of this Article II to use its best efforts to effect the registration
of any shares of Common Stock under the Securities Act, the Company shall pay
all Registration Expenses in connection with any such registration.
"Registration Expenses" means all expenses incurred by the Company in complying
with this Article II, including, without limitation, all registration and filing
fees, printing expenses, expenses of complying with state securities or blue sky
laws, fees and disbursements of separate counsel for the Company and
accountants' fees and expenses incident to or required by any such registration.
All fees and disbursements of separate counsel for the Holders and counsel for
the underwriters and all
-5-
<PAGE> 6
other expenses of the Holders (including travel expenses) shall be borne by the
Holders. The underwriting commissions or discounts shall be borne pro rata by
the sellers of Common Stock pursuant to such registration statement, based on
the number of shares of Common Stock offered by each such seller (unless
otherwise agreed by such sellers). Notwithstanding the foregoing, the fees and
disbursements of counsel for the underwriters in a public offering pursuant to
Section 2.1 in which the Company is selling securities shall be borne by the
Company.
II.4 Indemnification. In connection with any registration of Registrable
Shares pursuant to this Article II:
(a) The Company agrees to indemnify and hold harmless each Holder
and each underwriter (within the meaning of the Securities Act) with respect to
such Holders' Registrable Shares, and each person, if any, controlling (within
the meaning of the Securities Act) such Holder or any such underwriter and each
director or officer of each of the foregoing, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such Holder,
underwriter, controlling person, director or officer or any of them may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, or in any post-effective amendment
thereto, or in any preliminary prospectus or prospectus thereunder, or in any
supplement to any such prospectus, or arise out of or are based upon the
omission or alleged omission to state in any of the foregoing documents a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified party for
any legal or any other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or
proceeding; provided, however, that (i) the Company shall not be liable to any
such Holder or any such underwriter, controlling person, director or officer in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any of the foregoing documents in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of such Holder or any underwriter with respect to the
Registrable Shares, any person controlling such Holder or any such underwriter,
as the case may be, specifically for use in the preparation of any such
documents, and (ii) the Company shall not be liable to any such underwriter,
controlling person, director or officer, to the extent that such statement or
omission was contained in a preliminary prospectus and corrected in final or
amended or supplemented prospectus and such Holder or any such underwriter
failed to deliver a copy of such final or amended or supplemented prospectus to
the person suing on the basis of such statement or omission within the time
required by the Securities Act; and provided, further, that the Company shall
not be required to indemnify any such underwriter unless such underwriter shall
have delivered to the Company its written agreement (i) to indemnify the
Company, each of its directors, each officer of the Company who shall have
signed such registration statement or any amendment thereto, each person named
in such registration statement or any amendment thereto as about to become a
director of the Company, and each person controlling the Company in a like
manner as that provided with respect to the Public Selling
-6-
<PAGE> 7
Stockholders in Section 2.4(b) (insofar as any actual or alleged untrue
statement or omission is made in any of the foregoing documents in reliance upon
and in conformity with any information furnished in writing to the Company by or
on behalf of such underwriter expressly for use in the preparation of any such
documents), and (ii) to be bound by the provisions of Section 2.4(c).
(b) Each Public Selling Stockholder hereby agrees to indemnify and hold
harmless the Company, each of its directors, each officer of the Company who
shall sign any registration statement under which Registrable Shares held by the
Company are registered or any amendment thereto, each person named in any such
registration statement or amendment as about to become a director of the
Company, and each person controlling (within the meaning of the Securities Act)
the Company from and against any and all losses, claims, damages or liabilities,
joint or several, to which the Company or any of them may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or proceedings in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
such registration statement, or any post-effective amendment thereto or in any
preliminary prospectus or prospectus thereunder, or in any supplement to any
such prospectus, or arise out of or are based upon the omission or alleged
omission to state in any of the foregoing documents a material fact required to
be stated therein or necessary to make the statements therein not misleading, in
each case to the extent but only to the extent that such statement or omission
was made in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of such Public Selling Stockholder
expressly for use in the preparation of any of such documents, and agrees to
reimburse each such indemnified party for any legal or any other expenses
reasonably incurred by it in connection with the investigation or defending any
such loss, claim, damage, liability or proceeding; provided, however, that (a)
such Public Selling Stockholder shall have no liability for any untrue
statements or omissions as to which such Public Selling Stockholder shall have
timely notified the Company in writing and the Company shall have thereafter
failed to correct in the final prospectus or a supplement to the prospectus, and
(b) the liability of each Public Selling Stockholder under these indemnification
provisions shall be limited to an amount equal to the public offering price of
the shares sold by such Public Selling Stockholder, unless such liability arises
out of or is based on willful misconduct by such Public Selling Stockholder.
(c) Promptly after receipt by an indemnified party under Section 2.4(a)
or 2.4(b) of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under either such subsection, notify the indemnifying party in writing of
the commencement thereof; but the omission so to notify the indemnifying party
shall not relieve the indemnifying party from any liability which it may have to
any indemnified party except to the extent the indemnifying party has been
actually prejudiced by such omission. In case any such action shall be brought
against the indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein, and, to the extent that it shall wish, jointly with any other
indemnifying party, similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such
-7-
<PAGE> 8
indemnified party. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying party
shall not be liable to such indemnified party under this Section 2.4 for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation.
(d) If, for any reason, the indemnification provided for in Section
2.4(a) and in Section 2.4(b) is not available to the indemnified parties, then
the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative benefits received
by the indemnified party and the indemnifying party, but also the relative fault
of the indemnified party and the indemnifying party, as well as any other
relevant equitable considerations.
ARTICLE III
GENERAL PROVISIONS
III.1 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. Such award shall include post-judgment attorneys' fees and
costs and the same shall not be deemed as merged into the final judgment.
III.2 Termination. This Agreement shall terminate in its entirety upon
the earlier of: (a) the occurrence of a sale of the Company (including by way of
merger or a sale of substantially all of its assets); (b) at such time as Holder
is able to dispose of all of his Registrable Shares in one three-month period
pursuant to the provisions of Rule 144; or (c) two (2) years from the date
hereof. Notwithstanding the foregoing, the provisions of Section 2.4 shall
survive the termination of this Agreement.
III.3 Assignment of Registration Rights. The right to cause the Company
to include the Holder's Registrable Shares in any registration pursuant to
Article II may be assigned to a transferee or assignee who acquires more than
one-half of the shares of Registrable Shares originally held by Rocktron (as
adjusted for stock splits, stock dividends, recapitalizations or similar events
after the date hereof), provided that the Company is given written notice of
such assignment prior to such assignment.
III.4 Further Assurances. Each of the parties hereto shall, during the
term hereof, take all actions necessary to effectuate the purposes and intent
hereof.
III.5 No Third Party Beneficiaries. Except as otherwise specifically
provided herein (e.g., Article II), the parties hereto together with any persons
or entities entitled to indemnification hereunder shall have the sole right to
enforce the performance of
-8-
<PAGE> 9
the provisions of this Agreement, and no other person shall be entitled to, or
shall have any claim, right, title or interest to or in any such matters by
virtue of this Agreement.
III.6 Amendments; Waiver. No amendment of or modification to this
Agreement shall be effective unless it shall be in writing and signed by the
Company and by Holders holding at least a majority of the issued and outstanding
shares of Common Stock held in the aggregate by such Holders. No waiver of any
provision of this Agreement shall be effective unless contained in a writing
referred specifically to such provision and signed by the party against whom the
waiver is alleged.
III.7 Notices. All notices or other communication required or permitted
to be given hereunder shall be in writing and shall be delivered by hand or sent
by telex, cable, facsimile or telecopy, or sent postage prepaid, by first class,
registered or certified mail, or sent by reputable overnight courier service,
and shall be deemed given when so delivered by hand, upon confirmation of
transmission if sent by telex, cable, facsimile or telecopy, or if mailed, five
(5) days after being sent by first class, registered or certified mail, or if
sent by reputable overnight courier service, on the second day after being sent,
as follows, or to such other address as may be hereafter designated by the
respective parties hereto in accordance with these notice provisions:
(i) if to the Company:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Fax: (714) 852-1099
Attention: Janet M. Biski, Vice President,
Chief Financial Officer and Secretary
with a copy by the same means to:
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive
Seventeenth Floor
Costa Mesa, California 92626
Fax: (714) 979-1921
Attention: John F. Della Grotta, Esq.
(ii) If to Holder,
Rocktron Corporation
2870 Technology Drive
Rochester Hills, Michigan 48309
Attention: James K. Waller, Jr., President
Fax: (248) 853-4163
-9-
<PAGE> 10
with a copy by the same means to:
Catalano, Zingerman & Associates, P.C.
810 S. Cincinnati, Suite 200
Tulsa, Oklahoma 74119
Fax: (918) 599-9889
Attention: Frank J. Catalano, Esq.
III.8 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
III.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
III.10 Entire Agreement. This Agreement, together with the Asset
Purchase Agreement, contain the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings relating to such subject matter.
III.11 Severability. If any provision of this Agreement or the
application of any such provision to any person or circumstance shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof.
III.12 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without regard to its
conflicts of law principles.
III.13 Venue. As part of the consideration for the Company's grant of
the registration rights provided for herein, 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
-10-
<PAGE> 11
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)
-11-
<PAGE> 12
[SIGNATURE PAGE -- REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
"COMPANY" SRS LABS, INC., a Delaware corporation
By: /s/ STEPHEN V. SEDMAK
-----------------------------------------
Stephen V. Sedmak,
President and Chief Operating Officer
"ROCKTRON" ROCKTRON CORPORATION, a Michigan corporation
By: /s/ JAMES K. WALLER, JR.
-----------------------------------------
James K. Waller, Jr.,
President
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,104,965
<SECURITIES> 14,049,320
<RECEIVABLES> 6,048,780
<ALLOWANCES> 0
<INVENTORY> 6,632,774
<CURRENT-ASSETS> 22,922,244
<PP&E> 1,089,935
<DEPRECIATION> 254,749
<TOTAL-ASSETS> 43,030,816
<CURRENT-LIABILITIES> 17,115,453
<BONDS> 0
0
0
<COMMON> 11,613
<OTHER-SE> 25,903,750
<TOTAL-LIABILITY-AND-EQUITY> 43,030,816
<SALES> 11,276,338
<TOTAL-REVENUES> 18,682,766
<CGS> 11,785,939
<TOTAL-COSTS> 6,320,365
<OTHER-EXPENSES> (77,438)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (304,960)
<INCOME-PRETAX> (17,551,518)
<INCOME-TAX> (61,006)
<INCOME-CONTINUING> (17,490,512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,490,512)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> 0
</TABLE>
