<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 September 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. Yes X 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 October 31, 1998,
11,646,223 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 SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 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. 18
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds. 19
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>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 7,856,201 $ 4,446,753
Investments available for sale 1,150,039 2,010,775
Accounts receivable 5,701,729 3,989,927
Inventories 6,939,484 --
Prepaid expenses and other current assets 1,469,444 578,957
Deferred income taxes 505,674 170,674
----------- -----------
Total current assets 23,622,571 11,197,086
Investments available for sale 12,113,705 19,556,262
Furniture, fixtures & equipment, net 1,283,509 245,779
Intangible assets, net 6,167,535 313,673
Deferred income taxes 229,223 229,223
----------- -----------
Total Assets $43,416,543 $31,542,023
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 7,004,059 $ 202,352
Accrued liabilities 1,521,792 826,242
Line of credit 8,000,000 --
Income taxes payable 717,345 1,011,426
Current portion of consideration
due on asset purchase -- 81,804
----------- -----------
Total Current Liabilities 17,243,196 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; 11,622,423
(at September 30, 1998) and 9,609,867
(at December 31, 1997) shares issued
and outstanding 11,623 9,610
Additional paid-in capital 39,013,504 25,022,437
Deferred stock option compensation 306,493 231,087
Unrealized gain on investments available for sale 147,264 163,600
Retained earnings (deficit) (13,305,537) 3,993,465
----------- -----------
Total Stockholders' Equity 26,173,347 29,420,199
----------- -----------
Total Liabilities and Stockholders' Equity $43,416,543 $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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Chip and licensing revenue $ 3,935,479 $ 2,505,656 $ 11,341,907 $6,833,555
Product and component sales 7,382,323 -- 18,658,661 --
----------- ----------- ------------ ----------
Total revenues 11,317,802 2,505,656 30,000,568 6,833,555
Cost of sales 7,810,345 71,161 19,596,284 186,240
----------- ----------- ------------ ----------
Gross margin 3,507,457 2,434,495 10,404,284 6,647,315
Sales and marketing 1,176,466 400,284 3,876,993 1,190,178
Research and development 577,816 116,137 1,576,526 414,516
General and administrative 1,536,407 636,739 4,157,535 1,842,272
----------- ----------- ------------ ----------
Operating income before write-off
of acquired in-process research
and development 216,768 1,281,335 793,230 3,200,349
Write-off of acquired in-process
research and development -- -- 18,510,378 --
----------- ----------- ------------ ----------
Income (loss) from operations 216,768 1,281,335 (17,717,148) 3,200,349
Other income -- -- 77,438 --
Interest income, net 11,728 276,471 316,688 806,712
----------- ----------- ------------ ----------
11,728 276,471 394,126 806,712
Income (loss) before income tax
expense (benefit) 228,496 1,557,806 (17,323,022) 4,007,061
Income tax expense (benefit) 36,986 475,131 (24,020) 1,381,356
----------- ----------- ------------ ----------
Net income (loss) $ 191,510 $ 1,082,675 $(17,299,002) $2,625,705
=========== =========== ============ ==========
Net Income (Loss) per Common Share
Basic $ 0.02 $ 0.11 $ (1.53) $ 0.28
=========== =========== ============ ==========
Diluted $ -- $ 0.11 $ -- $ 0.25
=========== =========== ============ ==========
Weighted Average Shares Used in the
Calculation of Net Income (Loss)
per Common Share
Basic 11,619,090 9,580,867 11,339,653 9,542,287
=========== =========== ============ ==========
Diluted N/A 10,244,385 N/A 10,620,668
=========== =========== ============ ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,299,002) $ 2,625,705
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,300,758 251,604
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 (77,438) --
Amortization of premium on investments available for sale 39,464 81,903
Accretion of consideration due on asset purchase 8,196 17,882
Increase in deferred compensation 75,406 60,909
Increase (decrease) in cash resulting from changes in
operating accounts, net of acquisitions:
Accounts receivable 1,560,735 (2,067,923)
Inventories (307,698) --
Prepaid expenses and other current assets (437,722) (125,077)
Accounts payable (1,750,143) (152,936)
Other accrued liabilities 695,550 (215,572)
Income taxes payable (467,447) 881,124
------------ -----------
Net cash provided by operations 1,516,037 1,357,619
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (166,042) (35,080)
Proceeds from sales of investments available for sale 8,317,572
Purchases of investments available for sale (580,256)
Cash paid for acquisitions, less cash acquired (6,911,216) --
Expenditures related to patents (576,830) (51,439)
------------ -----------
Net cash provided (used) in investing activities 663,484 (666,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 8,000,000 --
Payments on subsidiary debt (6,846,737) --
Payment of consideration due on asset purchase (91,707) (140,394)
Exercise of stock options 168,371 140,543
------------ -----------
Net cash provided by financing activities 1,229,927 149
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,409,448 690,993
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,446,753 3,455,997
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,856,201 $ 4,146,990
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 239,716 $ 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 $ (16,336) $ 55,742
</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 nine months ended September 30, 1998, the Company issued 1,680,611
shares of common stock in payment of $12,105,778 of the acquisition price of
Valence Technology, Inc.
(Note 2)
During the nine months ended September 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 nine months ended September 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 nine months ended September 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 Technology, Inc. during the nine
months ended September 30, 1998. (Note 2)
In conjunction with the acquisition, certain liabilities were assumed as
follows:
Fair value of assets acquired $ 14,076,279
Acquired in-process research and development costs 17,471,668
Acquired intangible assets 5,910,400
------------
Total consideration (21,879,033)
------------
Liabilities assumed $ 15,579,314
============
During the nine months ended September 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.
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:
Cash $ 7,394,222
Common stock 13,006,178
-----------
Total purchase price 20,400,400
Deficiency in net assets acquired 1,503,035
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
===========
7
<PAGE> 8
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended
September 30, 1998 would have been as follows had the Acquisition occurred on
January 1, 1998:
Revenues $32,338,561
Proforma Net Loss $ (328,554)
Proforma Net Loss Per Share $ (0.03)
Weighted Average Shares Outstanding 11,819,713
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 September 30, 1998, the Company's
available-for-sale investments had a cost of $13,014,145 and an estimated fair
value of $13,263,744, based on quoted market prices. The unrealized gains on
these investments of $249,600, net of income taxes of $102,336, have been
reported in the Company's Consolidated Balance Sheet as an increase in
stockholders' equity.
8
<PAGE> 9
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 Nine Months Ended
September 30, September 30,
---------------------- -------------------------
1998 1997 1998 1997
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss) $191,510 $1,082,675 $(17,299,002) $2,625,705
Unrealized gain (loss) on investments
available for sale, net of tax 41,423 60,331 (16,336) 55,742
-------- ---------- ------------ ----------
Total comprehensive income (loss) $232,933 $1,143,006 $(17,315,338) $2,681,447
======== ========== ============ ==========
</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 September 30, 1998 Ended September 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 $ 191,510 11,619,090 $ 0.02 $ 1,082,675 9,580,867 $ 0.11
DILUTED:
Effect of Dilutive Securities:
Stock options 663,518 0.00
---------- ---------- ------ ----------- ---------- ------
Income available to common
stockholders N/A N/A N/A $ 1,082,675 10,244,385 $ 0.11
========== ========== ====== =========== ========== ======
</TABLE>
9
<PAGE> 10
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months For Nine Months
Ended September 30, 1998 Ended September 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 (loss) available to
common stockholders $(17,299,002) 11,339,653 $ (1.53) $ 2,625,705 9,542,287 $ 0.28
DILUTED:
Effect of Dilutive Securities:
Stock options 1,078,381 (0.03)
------------ ---------- ------- ----------- ---------- ------
Income available to common
stockholders N/A N/A N/A $ 2,625,705 10,620,668 $ 0.25
============ ========== ======= =========== ========== ======
</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 September 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
Total revenues for the three months ended September 30, 1998 were
$11,317,802 including revenues generated by Valence. This contrasts with the
third quarter of 1997 when the revenues of $2,505,656 were generated entirely
from the Company's licensing activities. Chip and licensing revenue of
$3,935,479 increased 57.1% compared to the same period last year. Licensing
revenue decreased from the same period last year primarily as a result of
declining per unit royalty due to aggressive pricing from certain of the
Company's competitors, the weakness in the semiconductor industry as experienced
by our chip partners, the erosion of revenue in the PC market, where certain
royalties paid to the company are a percentage of average selling price and the
absence of technology transfer fees due to overall economic conditions. Should
these conditions continue, they may result in declining licensing revenue in the
future. 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.
11
<PAGE> 12
Gross Margin
Gross margin for the three month period ended September 30, 1998 decreased
to 31.0% from 97.2% for the same period in 1997. This decline in margin
percentage results from the decrease in licensing revenues for the current
quarter and the shift in the Company's revenue base towards product and
electronic component sales which have significantly lower margins as compared
with the Company's historic technology licensing revenue base. The decline in
margin percentage is also due to competitive price reductions of the Company's
electronic products, specifically VideoCD players sold primarily in China. 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, as well as competitive pricing pressure on existing products.
Sales and Marketing
Sales and marketing expenses for the third quarter were $1,176,466 compared
to $400,284 for the same quarter last year, an increase of 193.9% which is
primarily due to sales and marketing activities attributed to Valence. Sales and
marketing expenses as a percentage of total revenue for the three months ended
September 30, 1998 decreased to 10.4% from 16.0% for the three months ended
September 30, 1997 due to the leveraging of these expenses over a larger revenue
base.
Research and Development
Research and development expenses for the third quarter were $577,816
compared to $116,137 for the same quarter last year, an increase of 397.5% which
is primarily due to research and development activities attributed to Valence.
For the three months ended September 30, 1998, Valence incurred research and
development expenses aggregating $421,677. Research and development expenses as
a percentage of total revenue for the three months ended September 30, 1998
increased slightly to 5.1% from 4.6% for the three months ended September 30,
1997.
General and Administrative
General and administrative expenses for the third quarter were $1,536,407
compared to $636,739 for the same quarter last year, an increase of 141.3% which
is attributable to Valence's operations and the amortization of certain
intangible assets associated with the Valence acquisition. Amortization of these
intangibles total $326,497 for the three months ended September 30, 1998.
General and administrative expenses as a percentage of total revenue for the
three months ended September 30, 1998 decreased to 13.6% from 25.4% for the
three months ended September 30, 1997, as general and administrative expenses
are leveraged over a larger revenue base.
Other Income/Interest Income, net
Net interest and other income for the third quarter was $11,728 compared to
$276,471 for the same quarter of 1997. Other income and interest income, net
reflects interest earned on average cash and investment balances less interest
paid on the outstanding borrowings under the Company's line of credit. The
decrease is primarily due to lower average cash and investment balances as
compared to the prior year and current interest expense charged on the
outstanding borrowings under the Company's line of credit.
Income Tax Expense
Income tax expense for the third quarter was $36,986 compared to $475,131
for the same quarter last year, a decrease of 92.2%. The effective tax rate for
the three months ended September 30, 1998, which is based on current estimates
of the annual effective income tax rate, was 16.2% compared to 30.5% for the
three months ended September 30, 1997. Lower statutory tax rates in the Asian
countries where Valence has its principal business operations, and where
substantially all of the earnings for the quarter arose, resulted in a lower
consolidated tax rate for the Company.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
Total revenues for the nine months ended September 30, 1998 were $30,000,568
including revenues generated by Valence since February 1, 1998. This contrasts
with the nine month period ended September 30, 1997 when the revenues of
$6,833,555 were all generated from the Company's licensing activities. Chip and
licensing revenue of $11,341,907 increased 66.0% 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 from licensing has decreased over the past year
due to declining per unit royalty due to aggressive pricing from certain of the
Company's competitors, the weakness in the semiconductor industry as experienced
by our chip partners, the erosion of revenue in the PC market, where certain
royalties paid to the company are a percentage of average selling price and the
absence of technology transfer fees due to overall economic conditions. Should
these conditions continue, they may result in declining licensing revenue in the
future. 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 nine month period ended September 30, 1998 decreased to
34.7% 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. 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 nine months of 1998 were
$3,876,993 compared to $1,190,178 for the same prior year period, an increase of
225.8% which is primarily due to sales and marketing activities attributed to
Valence. Sales and marketing expenses as a percentage of total revenue for the
nine months ended September 30, 1998 decreased to 12.9% from 17.4% for the nine
months ended September 30, 1997 due to the leveraging of these expenses over a
larger revenue base.
Research and Development
Research and development expenses for the nine months ended September 30,
1998 were $1,576,526 compared to $414,516 for the same period last year, an
increase of 280.3% which is primarily due to research and development activities
attributed to Valence. For the nine months ended September 30, 1998, Valence
incurred research and development expenses aggregating $1,160,903. Research and
development expenses as a percentage of total revenue for the nine months ended
September 30, 1998 decreased to 5.3% from 6.1% for the nine months ended
September 30, 1997.
General and Administrative
General and administrative expenses for the first nine months of 1998 were
$4,157,535 compared to $1,842,272 for the comparable prior year period, an
increase of 125.7% which is attributable to Valence's operations and the
amortization of certain intangible assets associated with the Valence
acquisition. Amortization of these intangibles total $853,992 for the nine
months ended September 30, 1998. General and administrative expenses as a
percentage of total revenue for the nine months ended September 30, 1998
decreased to 13.9% from 27.0% for the nine months ended September 30, 1997, as
general and administrative expenses are leveraged over a larger revenue base.
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<PAGE> 14
Acquired In-Process Research and Development
Acquired in-process research and development costs of $18,510,378 during the
nine month period ended September 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 for the first nine months of 1998 was
$394,126, a decrease from the net interest income amount of $806,712 for the
same prior year period. 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 nine months ended September 30, 1998 was
$24,020 compared to an expense of $1,381,356 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 September 30, 1998 consisted
of cash, cash equivalents and investments aggregating $21.1 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 September 30, 1997, the Company had cash, cash
equivalents and long term investments of approximately $25.7 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 $1,516,037 in cash
for the nine months ended September 30, 1998 and $1,357,619 for the nine months
ended September 30, 1997. The $158,418 increase in cash provided by operations
was primarily due to the decrease in accounts receivable.
As described above, the Company acquired Valence and additional technologies
during the first nine 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 $8.0 million outstanding under the line of credit as of September
30, 1998. As a result of the acquisition of Valence, the Company provided
Valence $8.0 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 $1,000,000
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
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<PAGE> 15
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.
Year 2000 Readiness Disclosure
The Company is currently in the process of addressing a problem that is
facing all users of automated information systems. The"Year 2000 issue" arises
out of the fact that 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 Company and its subsidiaries have identified the following areas, which
could be impacted by the Year 2000 issue. They are: Company products; internally
used systems and software; products or services provided by key third parties;
and the inability of chip partners or licensees to process business transactions
relating to licensing revenue.
During Fiscal 1998, the Company and its subsidiaries began a review of its
internal systems including those which support manufacturing process control and
financial and general business operations. The review consisted of an evaluation
of significant internal hardware systems and major software application programs
for their ability to accurately recognize and process dates properly in the Year
2000 and beyond. As a result of this evaluation, the Company has identified
certain systems which require upgrades to be Year 2000 ready, including certain
business software applications. The Company is in the process of replacing,
converting or eliminating systems which it has determined are not Year 2000
compliant. The Company anticipates that it will complete its review of its
internal systems and expects that all necessary upgrades to ensure Year 2000
compliance will be completed by the second quarter of 1999.
In addition, the Company and its subsidiaries are in the process of
assessing the compliance of their major customers, suppliers and vendors.
Management believes that third-party relationships upon which the Company
relies represent the greatest risk with respect to the Year 2000 issue, because
the Company cannot guarantee that third parties will be able to adequately
assess and address their Year 2000 compliance issues in a timely manner. As a
consequence, the Company can give no assurances that issues related to Year 2000
would not have a material adverse effect on future results of operations or
financial condition.
Total costs relating to the Company's compliance efforts, based on
management's best estimates, could range as high as $1,000,000. The Company is
expensing as incurred, all costs related to the assessment of Year 2000
compliance issues. Equipment purchases required for Year 2000 compliance will be
capitalized and charged to expense over the useful lives of those assets in
accordance with the Company's existing policy. These cost estimates are based on
currently available information and may be subject to change.
While the Company continues to focus on solutions for Year 2000 issues and
expects its internal operations to be Year 2000 compliant in a timely manner,
the difficulty in determining whether third-parties have resolved their Year
2000 issues necessitates the need for the development of a contingency plan.
Such a plan will set forth the Company's responses should the Company or
third parties which are materially significant to the Company fail to achieve
Year 2000 compliance in a timely manner. The Company expects to finalize its
contingency plan by mid-year 1999.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations; (b) products and technologies licensed
or sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the Year 2000 Information Readiness Act."
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<PAGE> 16
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.
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 create business synergies upon integrating the operations of
Valence with those of the Company. The degree to which the Company can
successfully derive synergistic value 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 has required and will continue to 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 have required
refinement to adapt to the changing 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 selected growth segments in that region. 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
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<PAGE> 17
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 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
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<PAGE> 18
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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). Since the
Company's last periodic report filed pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended (i.e., its Quarterly Report on
Form 10-Q for the Quarterly Period Ended June 30, 1998), there has been no
change in the Company's use of its aggregate net offering proceeds of
$22,052,955. As noted in such prior Report, the Company utilized an
aggregate of $8,394,222 in connection with three acquisitions (see Note 2 to
the Interim Consolidated Financial Statements herein) with the remaining
funds being temporarily invested in cash and municipal bonds pending
application.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Report.
Exhibit
No. Description
------- -----------
10.1 Employment Agreement, dated July 1, 1998 by and between
the Company and John AuYeung.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Commission during the three
month period ended September 30, 1998.
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<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: November 13, 1998 By: /s/ JANET M. BISKI
---------------------------------------
Janet M. Biski
Vice President, Chief Financial Officer
and Secretary (Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.1 Employment Agreement dated July 1, 1998 by and between the
Company and John AuYeung
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of July 1, 1998 by and
between SRS Labs, Inc., a Delaware corporation (the "Company") and John AuYeung,
an individual (the "Employee").
RECITALS
A. The Company develops, markets, sells, and licenses unique,
leading-edge, proprietary semiconductor designs and audio technologies. The
Company also distributes semiconductor products and other electronic component
products throughout China and parts of Asia. The Company has a need for
management personnel.
B. The Company desires to employ the Employee as the Vice President of
Business Development upon the terms and conditions set forth in this Agreement.
C. The Employee is willing to enter into this Agreement with respect to
the Employee's employment and services upon the terms and conditions set forth
in this Agreement.
AGREEMENT
In consideration of the provisions set forth in this Agreement, the
parties agree as follows:
1. EMPLOYMENT; DUTIES AND OBLIGATIONS
1.1 EMPLOYMENT. The Company hereby employs the Employee as the
Vice President of Business Development for the Company for the term of this
Agreement, and the Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth. Notwithstanding anything to the contrary
herein, except with the consent of the Employee, the Employee's principal place
of employment during the term of this Agreement or any renewal thereof shall be
located in Santa Ana, California, or within a radius of 25 miles of Santa Ana,
California, provided that the Employee recognizes that the position of Employee
will require substantial time traveling in the U.S. and abroad, and in
particular to China, Hong Kong and Taiwan to manage and develop the business
opportunities of the Company's licensable technologies in these regions and with
the assistance of the Company's subsidiary, Valence Technology Inc.
1.2 SERVICE TO THE COMPANY. Subject to applicable law, the
policies of the Board of Directors and the Executive Committee of the Company's
Board of Directors, the Employee shall have primary responsibility for, among
other things, managing and directing the business development activities of the
Company and in particular managing, directing, developing and expanding the
Company's licensing business of its technologies into the
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<PAGE> 2
Greater China region (China, Taiwan, Hong Kong). Specifically, the Employee
shall be responsible in developing the business strategies and championing the
implementation of such strategies in launching VIP, Circle Surround, DVD and the
other Company technologies into the consumer and telecom markets in the
above-mentioned geographical markets and coordinating such activities, as
needed, with the operations of the Company's subsidiary, Valence Technology,
Inc.
1.3 DEVOTION OF TIME TO THE BUSINESS. The Employee shall devote
no less than seventy percent (70%) of his entire professional time and best
efforts to the business of the Company and its subsidiaries, if any, and shall
not during the term of this Agreement engage in any other business activities;
provided, however, the parties acknowledge that the Employee serves as President
of Communications Management, Inc. and may continue to serve in such capacity to
the extent the Employee's duties in connection therewith do not materially
interfere with the services required by this Agreement. This Agreement shall not
be construed as preventing the Employee from investing his assets in such form
or manner as will not require any services on the part of the Employee for or
with respect to any of the entities in which such investments are made, except
as otherwise restricted in Section 7 herein. This Agreement shall not be
interpreted to prohibit the Employee from making passive personal investments or
conducting private business affairs if those activities do not materially
interfere with the services required under this Agreement. The Employee shall
not, directly or indirectly, acquire, hold, or retain any interest in any
business directly competing with or similar in nature to the business of
Employer; provided however, that the Employee's beneficial ownership of debt
securities in an amount not exceeding $500,000 and/or publicly-traded equity
securities in an amount not exceeding 5% of the total outstanding number of
shares of the particular class of such equity securities, which are issued by
any entity engaged in activities which are competitive with the business of the
Company or any of its subsidiaries, if any, shall not be deemed to be a breach
of any duty or obligation owed by the Employee to the Company or any of its
subsidiaries, if any, hereunder.
2. TERM. The initial term of this Agreement shall commence as of July 1,
1998 and shall continue in effect until June 30, 1999. The Company may renew the
term of this contract for subsequent year periods by giving written notice to
the Employee of its intention to do so and assent thereto by the Employee.
3. COMPENSATION
3.1 BASE SALARY. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with the regular payroll practices of the Company (but at
least once a month), at a rate determined in accordance with this Agreement.
3.1.1 BASE SALARY. The Base Salary to be paid to the Employee
hereunder is $150,000 per year for the Company's 1998 fiscal year. The Base
Salary to be paid to the Employee hereunder during the Company's 1999 fiscal
year shall be $150,000 per year and shall remain at such level until amended.
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<PAGE> 3
3.1.2 ADJUSTMENTS TO BASE SALARY. Within six months of the end of
each of the Company's fiscal years, commencing with the Company's 1999 fiscal
year, the Compensation Committee of the Board (or in the absence of a
compensation committee, the Board committee performing equivalent functions or
the entire Board of Directors of the Company) shall review the Base Salary of
the Employee and determine whether to adjust it; provided however that the Base
Salary for any fiscal year shall not be less than the initial Base Salary to be
paid to the Employee for the Company's 1998 fiscal year.
3.2 401(K) PLAN. The Employee shall be eligible to participate in the
Company's voluntary salary deferral plan and such other similar plans as the
Company may adopt from time to time.
3.3 PERFORMANCE BONUS. Irrespective of any other bonus payment
payable to the Employee pursuant to this Agreement, the Compensation Committee
(or in the absence of a compensation committee, the Board committee performing
equivalent functions or the entire Board of Directors of the Company) shall
evaluate the Employee's performance at the end of each fiscal year and determine
whether the Employee's performance merits payment of a performance bonus to the
Employee. The performance bonus is wholly discretionary.
3.4 LONG-TERM INCENTIVE COMPENSATION. The Employee shall be eligible
to participate in all of the Company's long-term incentive compensation plans,
including, but not limited to, any Company stock option, restricted stock or SAR
plan (with the exception of those plans only applicable to non-employee
directors).
3.5 OTHER BENEFITS. The Employee shall be eligible to participate in,
and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance (including tax gross up amounts), vacation and sick
leave.
3.6 NO PROHIBITION AS TO OTHER COMPENSATION. Nothing herein shall be
deemed to preclude the Company, or any of the Company's subsidiaries, if any,
from awarding additional compensation or benefits to the Employee during the
term of this Agreement, upon approval of the Compensation Committee (or in the
absence of a compensation committee, the Board committee performing equivalent
functions or the entire Board of Directors of the Company), whether in the form
of raises, bonuses, additional fringe benefits or otherwise.
3.7 EXPENSES. The Company, in accordance with its policy (which may
be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business of the Company,
including, without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.
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<PAGE> 4
3.8 TAX WITHHOLDING. The Company and, to the extent applicable, any
other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.
4. TERMINATION
4.1 TERMINATION FOR CAUSE. The Company may terminate this Agreement
and discharge the Employee for cause at any time upon written notice. For
purposes of this Agreement, "cause" shall mean (i) the failure to follow the
reasonable instructions of the Board of Directors, (ii) the material breach of
any term of this Agreement and failure to cure such breach within ten (10) days
after written notice thereof from the Company, or (iii) the misappropriation of
assets of the Company or any subsidiary of the Company by the Employee resulting
in a material loss to such entity. The Employee shall not be entitled to receive
any further payments or other benefits under this Agreement after the expiration
of 30 days from the date of such notice, other than benefits which have
previously vested in the Employee.
4.1.1 DISPUTE REGARDING TERMINATION FOR CAUSE. In the event the
Company gives the Employee written notice of termination for cause, it shall
specify therein the reasons for such termination, and the Employee may, within
five days after the date of the Company's notice, give written notice to the
Company that he disputes the grounds for such termination. Any such dispute
shall be determined by arbitration as set forth herein. Within seven days after
the date of the Employee's written notice, each party shall select and notify
the other of the name and address of an arbitrator. The two arbitrators shall
promptly meet to determine whether the Employee's termination was for cause as
defined hereunder, and render a decision within fifteen days of submission of
the controversy to them. If the two arbitrators cannot within such a period
agree, then they shall, within five days thereafter, jointly select a third
arbitrator whose decision on the question of whether there was cause for the
termination of the Employee shall be final and binding. If the arbitrators
decide that there was not cause for the termination of the Employee, the
Employee shall be entitled to the full benefits of this Agreement for the
remainder of the then term thereof, less any amounts attributable to the
Employee's obligation to mitigate damages as determined by the arbitration
process. Each side shall pay its own arbitrator and the cost of the third
arbitrator, if required, shall be shared equally between the Company and the
Employee.
4.2 TERMINATION UPON DEATH. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company and/or its subsidiaries, if any, as the case may be, shall pay to
the Employee's legal representative the full salary for the month in which he
dies and such legal representative shall be entitled to receive those benefits
which have previously vested in the Employee.
4.3 TERMINATION BY THE COMPANY WITHOUT CAUSE/SEVERANCE. In the event
the Company shall give written notice of termination without cause during the
then current term of this Agreement, the Employee's term of employment shall
terminate effective on the last day of
-4-
<PAGE> 5
the month such notice is deemed effective. Thereafter, the Employee shall be
entitled to receive for the remainder of the then current term of this
Agreement, or for a period of six (6) months (the "continuation" period),
whichever is longer, the Base Salary then in effect and the health, life,
disability insurance benefits and the other employee benefits which the Employee
had prior to such termination including, but not limited to those set forth in
Sections 3.3 through 3.7 herein (collectively referred to herein as the
"Termination Benefits"). During the continuation period, the Employee will
provide advisory services from time to time to the Chairman of the Board of the
Company and the Chief Executive Officer of the Company, as reasonably requested
by such individuals and acceptable in timing and scope to the Employee. The
Company anticipates that such advisory services will be limited to transitional
or management continuity matters and market trends in the Company's primary
market segments. During the continuation period outstanding options shall
continue to vest and vesting or performance restrictions on any stock awards
shall continue to lapse according to the schedules set forth in the respective
stock option or stock award agreements. If the Employee accepts employment from
any other party during the continuation period, the continuation period cash
salary and Termination Benefits will immediately terminate on the date on which
such new employment commences and the Employee will receive a lump sum severance
payment equal to 80% of the balance of the continued salary payable under this
Section 4.3. Any cash bonus amount which would otherwise be payable within the
twelve month period, if not paid on or prior to such acceptance date shall not
be paid. In addition, for purposes of options or other awards pursuant to the
Company's employee benefit plans, such acceptance date shall be deemed the
termination date under such plans. For purposes of this Section 4.3 and subject
to Section 5 herein, "employment" shall exclude (a) service as an officer or
director of the Employee's personal investment holding company, (b) service as a
director on the board of a corporation, (c) engagement as a bona fide part-time
consultant, or (d) self-employment or engagement as an officer or director of an
operating corporation or enterprise (as opposed to a personal investment holding
company) founded or controlled by the Employee and which has revenues of less
than $5,000,000 per year.
4.4 TERMINATION BY THE EMPLOYEE. Notwithstanding anything to the
contrary herein, this Agreement may be terminated voluntarily by the Employee
and the Employee agrees to provide 60 days prior written notice to the Company.
-5-
<PAGE> 6
5. TERMINATION FOLLOWING CHANGE IN CONTROL.
5.1 ELECTION. If either the Company elects to terminate the Employee
without cause pursuant to Section 4.3 within 90 days before or one year after a
Change in Control (as hereinafter defined) or the Employee elects to resign with
Good Reason (as hereinafter defined) within one year after a Change in Control,
then as a severance benefit and in lieu of all compensation or damages, the
Company shall (i) pay the Employee in one lump sum or in equal monthly
installments, at the sole election of the Employee, an aggregate amount equal to
the Base Salary in effect at the time of such termination or resignation for the
remainder of the then current term of this Agreement, or for six (6) months,
whichever is longer; (ii) pay the Employee any bonus amount earned pursuant to
the Company's annual incentive bonus plan or such similar plan and which would
otherwise be paid if the Employee were employed by the Company, one of its
subsidiaries, if any, or successors thereto during the six month period
commencing on the day of such termination or resignation under this Section 5
(the "Termination Period"); and (iii) provide to the Employee all Termination
Benefits (as such term is defined in Section 4.3 herein).
5.2 TERMS OF STOCK OPTIONS OR OTHER STOCK-BASED AWARDS. Any stock
option agreement or other stock award agreement heretofore or hereafter granted
under the Company's stock based compensation plans shall have as a term and
condition of such grant or award (in addition to such other provisions and
whether inserted into the applicable agreement or not) the following provision:
"Notwithstanding anything to the contrary, if in connection with
or as a result of a Change in Control (as defined in the
Employment Agreement, hereinafter defined) the Company elects to
terminate the Employee or the Employee elects to resign under
Section 5 of the Employment Agreement by and between the Company
and the Employee dated as of July 1, 1998 (the "Employment
Agreement"), then the date of exercisability of each outstanding
option, and the date on which all vesting or performance
restrictions lapse on any award pursuant to the Company's
employee benefit plans, shall be immediately accelerated,
allowing the Employee to immediately acquire all of the
outstanding unvested options or to immediately hold such stock
free and clear of any vesting or performance restrictions, as the
case may be."
-6-
<PAGE> 7
5.3 DEFINITIONS
5.3.1 For purposes of this Section 5 "Change in Control" shall
mean:
(i) The Company is merged, consolidated or reorganized into
or with another corporation or other legal person and as a result
of such merger, consolidation or reorganization less than a
majority of the combined voting power of the then-outstanding
securities of such corporation or person immediately after such
transaction are held in the aggregate by the holders of Voting
Stock (as that term is defined in subsection (iii) hereof) of the
Company immediately prior to such transaction;
(ii) The Company sells all or substantially all of its
assets to any other corporation or other legal person, less than
a majority of the combined voting power of the then-outstanding
voting securities of which are held directly or indirectly in the
aggregate by the holders of Voting Stock of the Corporation
immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act"), disclosing that any person (as the term "person"
is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities
representing 20% or more of the combined voting power of the
then-outstanding securities of the Company entitled to vote
generally in the election of directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in, or in response to, Form 8-K or Schedule 14A (or
any successor schedule, form or report or item therein) that a
Change in Control of the Corporation has or may have occurred or
will or may occur in the future pursuant to any then-existing
contract or transaction;
(v) If during any period of two consecutive years,
individuals who at the beginning of any such period constitute
the Directors of the Company cease for any reason to constitute
at least a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each
Director of the Company first elected during such period was
approved by a vote of at least two-thirds of the Directors of the
Company then still in office who were Directors of the Company at
the beginning of any such period; or
-7-
<PAGE> 8
(vi) Notwithstanding the foregoing provisions of (a)
subsections (iii) or (iv) hereof, a "Change in Control" shall not
be deemed to have occurred for purposes of this Agreement solely
because the Company, an entity in which the Company directly or
indirectly beneficially owns 50% or more of the voting securities
of such entity (an "Affiliate"), any Company-sponsored employee
stock ownership plan or any other employee benefit plan of the
Company either files or becomes obligated to file a report or a
proxy statement under or in response to Schedule 13D, Schedule
14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing
beneficial ownership by it of shares of voting securities of the
Corporation, whether in excess of 20% or otherwise, or because
the Company reports that a Change in Control of the Company has
or may have occurred or will or may occur in the future by reason
of such beneficial ownership or (b) Subsection (iii) hereof, a
"Change in Control" shall not be deemed to have occurred for
purposes of this Agreement solely because a person who is a
holder of five percent (5%) or more of the Voting Stock and who
also is an officer and director of the Company on the date of
this Agreement acquires 20% or more of the Voting Stock.
(vii) Notwithstanding the foregoing provisions of
subsections (i) and (ii) hereof, a "Change of Control" shall not
be deemed to have occurred for purposes of this Agreement solely
because the Company engages in an internal reorganization, which
may include a transfer of assets to one or more Affiliates,
provided that such transaction has been approved by at least
two-thirds of the Directors of the Company and as a result of
such transaction or transactions, at least 80% of the combined
voting power of the then-outstanding securities of the Company or
its successor are held in the aggregate by the holders of Voting
Stock immediately prior to such transactions.
5.3.2 For purposes of this Section 5, the Employee shall be
deemed to have resigned "with Good Reason" if he does so following a Change in
Control as a result of the Company or any or its subsidiaries, if any, having
done any or all of the following without the Employee's express written consent:
(i) assigned the Employee different duties or made changes in his reporting
responsibilities, title, or office that are substantially inconsistent with the
Employee's duties, responsibilities, titles, or offices immediately prior to the
Change in Control; (ii) reduced the Employee's Base Salary from that in effect
at the time of the Change in Control; (iii) failed to continue any bonus plan in
substantially the same form as it existed prior to the Change in Control; (iv)
required the Employee to be based more than 25 miles from his present office
location, except for required travel consistent with the Employee's present
business travel obligations; (v) failed to continue any plan or program for
compensation, employee benefits, stock purchase or ownership, life insurance,
group medical, disability, or vacation in substantially the same form as
immediately prior to the Change in Control, or otherwise made any material
reduction in the Employee's fringe benefits including but not limited to those
described in Section 3 herein; or (vi) failed to obtain the assumption of this
Agreement by any successor to the Company.
-8-
<PAGE> 9
5.4 RELATIONSHIP TO OTHER TERMINATION SECTIONS. The Employee shall
not be entitled to the benefits of this Section 5 if this Agreement and his
employment are terminated pursuant to Sections 4.1, 4.2, 4.3 or 4.4.
5.5 COMPANY'S SOLE OBLIGATIONS. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to such termination and of the severance benefits
set forth in this Section 5 as applicable constitute the sole obligations of the
Company and are in lieu of any damages or other compensation that the Employee
may claim in connection with this Agreement.
6. RESIGNATION AS DIRECTOR AND OFFICER. In the event of any termination
or resignation pursuant to Sections 4.1, 4.3, 4.4 or 5, the Employee shall be
deemed to have resigned voluntarily as an officer and director of the Company
(and of any subsidiaries of the Company, if any) if he was serving in either of
such capacities at the time of termination.
7. NON-COMPETITION, COVENANT NOT TO HIRE CERTAIN THE EMPLOYEES; TRADE
SECRETS. The Employee acknowledges that in the course of his employment
hereunder he will have access and be made privy to the marketing, business and
financial plans and trade secrets of the Company and the Company's subsidiaries,
if any, (for purposes of this Section 7 and Section 8 herein, collectively and,
as the case may be, each such subsidiary individually, referred to as the
"Company") and will have access to information of the Company important in its
operations. The Employee recognizes that it is vital to the Company's business
that such plans and secrets not be disclosed to or used by others, and that the
Company's relations with its employees not be disrupted. The Employee,
therefore, hereby agrees as follows:
(a) the Employee shall not at any time during the term of this
Agreement engage or be interested in, directly or indirectly, for himself or for
anyone else, or render any services or advice (as employee, consultant or
otherwise) to anyone directly or indirectly engaged in the operation or
management of, or the rendition of services to, any entity doing business in the
United States, directly competitive with or similar in nature to that operated
by the Company or any of its subsidiaries, if any;
(b) the Employee shall not at any time during the term of this
Agreement and for a period of one year after such termination (i) employ any
individual who was employed by the Company or any of its affiliates, during (i)
the one year period commencing one year prior to the date the Employee's
employment terminates, or (ii) in any way, cause, influence, or participate in
the employment of any such individual by anyone else during said period;
(c) the Employee shall not disclose or use any trade secrets of the
Company, either during the term hereof or six months after termination of this
Agreement; and provided however, that any disclosure to a governmental agency as
required by law by the Employee will not be a breach of this Section 5(c) of
this Agreement.
-9-
<PAGE> 10
8. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Section 7 of this Agreement, the Company shall be entitled to an
injunction restraining the Employee from such breach. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies for such
breach or threatened breach.
9. INVENTIONS AND IMPROVEMENTS.
(a) The Employee hereby assigns to the Company an exclusive right to
all inventions, discoveries, ideas and improvements made by him, whether alone
or jointly with others, relevant to the subject matter of his employment.
(b) The Employee hereby recognizes as the exclusive property of the
Company and hereby assigns to the Company without further consideration:
(i) all inventions, discoveries, ideas and improvements made,
conceived or discovered, by the Employee during the term of this Agreement,
whether by himself or jointly with others (whether or not employees of the
Company) and whether or not made at the Company's premises or during working
hours, relating or pertaining in any way to the kind of business or any tests,
research or development carried on by the Company, or any subsidiary or
affiliate of the Company; and
(ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company), may hereafter file with respect to any such invention, discovery, idea
or improvement and each patent that may be issued thereon.
(c) The Employee agrees to execute any assignments to the Company or
its nominee of his rights, title and interest in any such invention,
discoveries, ideas and improvements, and any other instruments and documents
requisite or desirable in applying for and obtaining patents at the cost of the
Company with respect thereto in the United States and all foreign countries as
and when requested by the Company. The Employee further agrees whether in the
employ of the Company or nit, to cooperate to the extent and in the manner
requested by the Company in the prosecution or defense of any patent claims or
any litigation or other proceedings involving any inventions, discoveries or
improvements covered by this Agreement, but all expenses thereof shall be paid
by the Company. Any invention, discovery, idea or improvement within the scope
of this Section 9 shall be disclosed promptly in writing to the Board of
Directors of the Company.
(d) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea or improvement, whether because of his physical or mental
incapacity or for any other reason whatsoever, the Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by him.
-10-
<PAGE> 11
10. INSURANCE. The Company shall purchase and keep in full force and
effect for the Employee a policy of directors' and officers' liability insurance
at coverage levels consistent with other executive officers of the Company.
11. AUTHORITY. The individual executing this Agreement on behalf of the
Company represents and warrants to the Employee that the performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized by all requisite action and that he has the power and authority
to execute this Agreement.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, telecopy,
overnight courier service, or by United States certified or registered mail,
return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this Section and confirmation is received; and (c) if given by
certified or registered mail, three days after the mailing thereof.
Address for notices (unless and until written notice is given of
any other address):
If to the Company:
SRS Labs, Inc.
2909 Daimler Street
Santa Ana, California 92705
Attention: Ms. Janet M. Biski
Chief Financial Officer and Secretary
Fax: (714) 852-1099
If to the Employee:
John AuYeung
Fax: (949) 724-9646
13. FURTHER DOCUMENTS AND ACTS. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.
14. FINANCIAL REPORTING. Any computation pertaining to Employer's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.
15. 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.
-11-
<PAGE> 12
16. CALIFORNIA LAW. This Agreement has been negotiated and executed in
the State of California and is to be performed in Orange County, California.
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of California, including all matters of construction, validity,
performance and enforcement, without giving effect to principles of conflict of
laws. Any dispute, action, litigation or other proceeding concerning this
Agreement shall be instituted, maintained, heard and decided in Orange County,
California.
17. AMENDMENTS/WAIVER. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which such consent was required shall
not be deemed to imply consent or waiver of the necessity of obtaining such
consent for the same or similar acts in the future.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
19. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.
20. ENTIRE AGREEMENT. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written, have been fully merged herein and are
superseded hereby.
21. REMEDIES. All rights, remedies, undertakings, obligations, options,
covenants, conditions and agreements contained in this Agreement shall be
cumulative and no one of them shall be exclusive of any other.
22. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.
-12-
<PAGE> 13
23. INTERPRETATION. The language in all parts of this Agreement shall be
in all cases construed simply according to its fair meaning and not strictly for
or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the Sections of this
Agreement are for convenience only and shall not affect the construction or
interpretation of any of the provision herein.
24. MISCELLANEOUS. Each provision of this Agreement to be performed by a
party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents referenced in this Agreement are fully
incorporated into this Agreement by reference. Unless expressly set forth
otherwise, all references herein to a "day" shall be deemed to be a reference to
a calendar day. Unless expressly stated otherwise, cross-references herein shall
refer to provisions within this Agreement, and shall not be deemed to be
references to the overall transaction or to any other document. Time is of the
essence in the performance of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement in Orange
County as of the date first written above.
COMPANY: SRS LABS, INC., a Delaware corporation
By: /s/ THOMAS C. K. YUEN
----------------------------------
Thomas C.K. Yuen
Chairman of the Board and Chief
Executive Officer
By: /s/ JANET M. BISKI
----------------------------------
Janet M. Biski
Chief Financial Officer and
Secretary
EMPLOYEE: /s/ JOHN AU YEUNG
--------------------------------------
John AuYeung
-13-
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 13,263,744
<RECEIVABLES> 5,701,729
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<CURRENT-ASSETS> 23,622,571
<PP&E> 2,666,386
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0
0
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<CGS> 19,596,284
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<INCOME-PRETAX> (17,323,022)
<INCOME-TAX> (24,020)
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