<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SRS Labs, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
1
<PAGE> 2
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
2
<PAGE> 3
SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
We cordially invite you to attend our 1999 Annual Meeting of Stockholders.
This Annual Meeting will be held at 10:00 A.M., California time, on Thursday,
June 10, 1999, at the principal executive offices of the Company, located at
2909 Daimler Street, Santa Ana, California 92705, for the following purposes:
1. To elect two Class III directors to the Board of Directors to hold
office for a term of three years and until their respective successors are
elected and qualified.
2. To act upon a proposal to approve the Amended and Restated SRS
Labs, Inc. 1996 Nonemployee Directors' Stock Option Plan.
3. To transact such other business as may properly come before this
Annual Meeting or any adjournment thereof.
The Board of Directors has nominated Stephen V. Sedmak and Thomas C.K. Yuen
as the nominees for election to the Board of Directors as Class III directors.
The Board of Directors has fixed the close of business on April 16, 1999,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, this Annual Meeting.
YOU ARE CORDIALLY INVITED TO BE PRESENT AND TO VOTE AT THIS ANNUAL MEETING
IN PERSON. HOWEVER, YOU ARE ALSO REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE-PAID AND ADDRESSED ENVELOPE, WHETHER OR NOT YOU
EXPECT TO ATTEND. IN THE EVENT YOU HAVE RETURNED A SIGNED PROXY, BUT ELECT TO
ATTEND THIS ANNUAL MEETING AND VOTE IN PERSON, YOU WILL BE ENTITLED TO VOTE.
By Order of the Board of Directors,
/s/ John AuYeung
--------------------------------------
John AuYeung
Executive Vice President,
Chief Operating Officer and Secretary
Santa Ana, California
April 29, 1999
<PAGE> 4
SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
PROXY STATEMENT
------------------------
The Board of Directors of SRS Labs, Inc. (the "Company") is soliciting
proxies to be voted at the Annual Meeting of Stockholders of the Company to be
held on Thursday, June 10, 1999, at the principal executive offices of the
Company, located at 2909 Daimler Street, Santa Ana, California 92705, at 10:00
A.M., California time, and at any adjournments thereof (the "Annual Meeting" or
the "Meeting"), for the purposes set forth in the accompanying Notice of Annual
Meeting of Stockholders and described herein. This Proxy Statement describes
issues on which we would like you, as a stockholder, to vote. It also gives you
information on these issues so that you can make an informed decision. The
approximate date on which this Proxy Statement and the enclosed form of proxy
are first being sent or given to stockholders is May 7, 1999.
VOTING RIGHTS AND SOLICITATION OF PROXIES
WHO MAY VOTE. The Board of Directors of the Company (the "Board of
Directors" or the "Board") has fixed the close of business on April 16, 1999, as
the record date for the determination of stockholders entitled to receive notice
of, and to vote at, the Annual Meeting (the "Record Date"). The only outstanding
class of stock of the Company is its common stock, par value $.001 per share
("Common Stock"). At the Record Date, 11,697,944 shares of Common Stock were
outstanding. Of that amount, 12,000 shares were held as treasury shares. Each
share of Common Stock, excluding treasury shares, entitles its record holder on
the Record Date to one vote on all matters. With respect to the election of
directors only (Proposal 1), stockholders may vote in favor of all nominees or
withhold their votes as to all nominees or withhold their votes as to specific
nominees.
NOMINATIONS FOR DIRECTORS. The Bylaws of the Company (the "Bylaws") set
forth certain procedures relating to the nomination of directors (the
"Nomination Bylaw") and no person shall be eligible for election as a director
unless nominated in accordance with the provisions of the Nomination Bylaw.
Nominations of persons for election to the Board of Directors may be made by (a)
the Board of Directors or a committee appointed by the Board of Directors or (b)
any stockholder who (i) is a stockholder of record at the time of giving the
notice provided for in the Nomination Bylaw, (ii) shall be entitled to vote for
the election of directors at the Annual Meeting and (iii) complies with the
notice procedures set forth in the Nomination Bylaw.
Nominations by stockholders shall be made in written form to the Secretary
of the Company. To be timely for the Annual Meeting, a stockholder's notice must
have been delivered to or mailed and received at the principal executive offices
of the Company not more than 90 days (March 13, 1999) nor less than 60 days
(April 12, 1999) prior to the first anniversary of the preceding year's annual
meeting (June 11, 1999); provided, however, that in the event that the date of
the Annual Meeting is changed by more than 30 days from such anniversary date,
notice by the stockholder to be timely must be received by the Company not later
than the close of business on the 10th day following the day on which public
announcement of the date of the Meeting is first made. For the annual meeting to
be held in the year 2000, a stockholder's notice shall be delivered to or mailed
and received at the principal executive offices of the Company not earlier than
March 12, 2000 and not later than April 11, 2000.
To be effective, the written notice must include (a) the name and address,
as they appear on the Company's books, of the stockholder giving the notice and
of the beneficial owner, if any, on whose behalf the nomination is made; (b) a
representation that the stockholder giving the notice is a holder of record of
stock of the Company entitled to vote at the Annual Meeting and intends to
appear in person or by proxy at the Annual Meeting to nominate the person or
persons specified in the notice; (c) the number of shares of Common Stock owned
beneficially and of record by the stockholder giving the notice and by the
beneficial owner, if any, on
<PAGE> 5
whose behalf the nomination is made; (d) a description of all arrangements or
understandings between or among any of (i) the stockholder giving the notice,
(ii) the beneficial owner on whose behalf the notice is given, (iii) each
nominee, and (iv) any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder giving the notice; (e) such other information regarding each nominee
proposed by the stockholder giving the notice as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the U.S.
Securities and Exchange Commission (the "SEC") had the nominee been nominated,
or intended to be nominated, by the Board; and (f) the signed consent of each
nominee to serve as a director of the Company if so elected. At the request of
the Board of Directors, any person nominated by the Board for election as a
director shall furnish to the Secretary of the Company that information required
to be set forth in a stockholder's notice of nomination which pertains to the
nominee.
The presiding officer of the Annual Meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the procedures
prescribed by the Nomination Bylaw, and if he should so determine, he shall so
declare to the Meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of the Nomination Bylaw, a stockholder
also must comply with all applicable requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in the Nomination Bylaw.
REVOCABILITY OF PROXY. You may revoke your proxy prior to its exercise. You
may do this by (a) delivering to the Secretary of the Company, John AuYeung, at
or prior to the Annual Meeting, an instrument of revocation or another proxy
bearing a date or time later than the date or time of the proxy being revoked or
(b) voting in person at the Annual Meeting. Mere attendance at the Annual
Meeting will not serve to revoke your proxy.
HOW YOUR SHARES WILL BE VOTED. All proxies received and not revoked will be
voted as directed. If no directions are specified, such proxies will be voted
"FOR" (a) election of the Board's nominees for Class III directors and (b)
approval of the Amended and Restated SRS Labs, Inc. 1996 Nonemployee Directors'
Stock Option Plan. As to any other business which may properly come before the
Annual Meeting, the persons named in such proxies will vote in accordance with
their best judgment, although the Company does not presently know of any other
such business.
VOTING; QUORUM; AND BROKER NON-VOTES. Shares of Common Stock will be
counted as present at the Annual Meeting if the stockholder is present and votes
in person at the Meeting or has properly submitted a proxy card. A majority of
the Company's outstanding shares entitled to vote as of the Record Date must be
present at the Annual Meeting in order to hold the Meeting and conduct business.
This is called a quorum. As noted above, treasury shares are not entitled to
vote and, therefore, are not counted in determining a quorum. Abstentions and
non-votes will be counted for purposes of determining the existence of a quorum
at the Annual Meeting. The two nominees receiving the highest number of votes
"for" a director will be elected as directors. This number is called a
plurality. The affirmative vote of a majority of the shares of Common Stock
present in person or by proxy at the Annual Meeting and entitled to vote on each
of the proposals (other than the election of directors) is required for the
adoption of each such proposal. Abstentions will be counted as votes against any
of the proposals as to which a stockholder abstains, but non-votes will have no
effect on the voting with respect to any proposal as to which there is a
non-vote. A non-vote may occur when a nominee holding shares of Common Stock for
a beneficial owner does not vote on a proposal because such nominee does not
have discretionary voting power and has not received instructions from the
beneficial owner.
EXPENSES; METHOD OF SOLICITATION. The expenses of soliciting proxies for
the Annual Meeting are to be paid by the Company. Solicitation of proxies may be
made by means of personal calls upon, or telephonic or telegraphic
communications with, stockholders or their personal representatives by
directors, officers and employees of the Company who will not be specially
compensated for such services. Although there is no formal agreement to do so,
the Company may reimburse banks, brokerage houses and other custodians, nominees
and fiduciaries for their reasonable expenses in forwarding this Proxy Statement
to stockholders whose Common Stock is held of record by such entities. The Board
of Directors has authorized certain officers of the Company to retain the
services of a proxy solicitation firm if, in such officers' view, it is deemed
2
<PAGE> 6
necessary. The Company has not engaged such a firm at this time; however, to the
extent it decides to do so, the Company will utilize the services of Corporate
Investor Communications, Inc. to assist in the solicitation of proxies in
connection with this Proxy Statement, and such firm will receive a fee estimated
to be $4,000 and will be reimbursed for out-of-pocket expenses.
The Company was incorporated in the State of California in June 1993 and
reincorporated in the State of Delaware in June 1996. All references to the
Company reflect this continuation. The Company first became a reporting company,
pursuant to Section 13(a) of the Exchange Act, in August 1996.
3
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table contains certain information as of the Record Date
regarding all persons who were the beneficial owners of more than 5% of the
outstanding shares of Common Stock, each of the directors of the Company
including each nominee for director, each of the executive officers named in the
Summary Compensation Table set forth herein under the caption "Compensation of
Executive Officers" (we refer to all these officers as the "Named Executive
Officers") and all directors and executive officers as a group. The persons
named hold sole voting and investment power with respect to the shares shown
opposite their respective names, unless otherwise indicated. The information
with respect to each person specified is as supplied or confirmed by such
person, based upon statements filed with the SEC, or based upon the actual
knowledge of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF
SHARES RIGHT TO PERCENT OF
NAME OWNED(2) ACQUIRE(3) CLASS(1)(2)(3)
---- --------- ---------- --------------
<S> <C> <C> <C>
Thomas C.K. Yuen and Misako Yuen(4)(5)................. 2,876,337 293,017 26.43%
Mutual Management Corp.(6)............................. 652,046 -- 5.57%
Packard Bell NEC, Inc.(7).............................. 572,061 382,104 7.90%
Thomrose Holdings (BVI) Limited(8)(9).................. 778,179 -- 6.65%
Rayfa (BVI) Limited(9)(10)............................. 709,760 -- 6.07%
Capital Guardian Trust Company(11)..................... 692,000 -- 5.92%
Class I Directors:
Robert Pfannkuch(5).................................. -- 20,000 *
Jeffrey I. Scheinrock(5)............................. -- 32,242 *
Thomas W.T. Wan(8)(9)................................ 778,179 8,750 6.72%
Class II Directors:
John AuYeung(5)...................................... -- 23,750 *
John Tu(5)........................................... 211,152 20,000 1.97%
Class III Directors/Nominees:
Stephen V. Sedmak(5)(12)............................. 561,948 396,042 7.92%
Thomas C.K. Yuen(4)(5)............................... 2,876,337 293,017 26.43%
Named Executive Officers Who are Not Directors:
Janet M. Biski(13)................................... -- 98,880 *
Thomas R. Parkinson(14).............................. -- 8,750 *
All directors and executive officers as a group (9
persons)............................................. 4,427,616 901,431 42.30%
</TABLE>
- ---------------
* Less than one percent.
(1) Subject to applicable community property and similar statutes.
(2) Includes shares beneficially owned, whether directly or indirectly,
individually or together with associates.
(3) Shares that can be acquired through stock option exercises through June 15,
1999 (within 60 days of the Record Date). These shares are referred to
herein as "Stock Option Shares."
(4) Includes 2,668,582 shares of Common Stock held by Mr. and Mrs. Yuen as
co-trustees of the Thomas Yuen Family Trust and 293,017 Stock Option Shares
granted to Mr. Yuen. Also includes 207,755 shares of Common Stock held by
Atsuko Hamasaki as trustee of the Yuen 1993 Irrevocable Trust (144,825
shares) and as custodian for Mr. and Mrs. Yuen's children, Jennifer Wen Lee
Yuen (31,465 shares) and Constance Kahlee Yuen (31,465 shares). Mr. and
Mrs. Yuen disclaim beneficial ownership of the 207,755 shares held by
Atsuko Hamasaki.
(Footnotes continued on the next page.)
4
<PAGE> 8
(Footnotes continued from the preceding page.)
(5) The mailing address of such stockholder is c/o SRS Labs, Inc., 2909 Daimler
Street, Santa Ana, California 92705.
(6) Mutual Management Corp. ("MMC"), Salomon Smith Barney Holdings Inc. ("SSB
Holdings") and Travelers Group Inc. ("TRV"), 388 Greenwich Street, New
York, New York 10013, filed a joint Schedule 13G on or about September 9,
1998. SSB Holdings is the sole stockholder of MMC, and TRV is the sole
stockholder of SSB Holdings. MMC has shared voting and dispositive power
over 600,000 shares, and SSB Holdings and TRV each have shared voting and
dispositive power over 652,046 shares. SSB Holdings and TRV disclaim
beneficial ownership of the shares referred to in the Schedule 13G.
(7) The mailing address for Packard Bell NEC, Inc. is 1 Packard Bell Way,
Sacramento, California 95828.
(8) All of the 778,179 shares are held by Thomrose Holdings (BVI) Limited
("Thomrose"). Mr. Thomas W.T. Wan, a director and an executive officer of
the Company, is the sole stockholder of Thomrose.
(9) The mailing address of such stockholder is c/o Valence Technology Inc.,
Unit 413, 4th Floor, Hong Kong Industrial Technology Centre, 72 Tat Chee
Avenue, Kowloon Tong, Hong Kong.
(10) The sole stockholder of Rayfa (BVI) Limited is Raymond Choi. Mr. Choi also
is the President of Valence Semiconductor Design Limited, a subsidiary of
Valence Technology Inc.
(11) Capital Guardian Trust Company ("CGTC"), 333 South Hope Street, Los
Angeles, California 90071, filed a Schedule 13G on or about February 12,
1999. CGTC is an investment management company that holds dispositive and
voting power over 692,000 shares.
(12) Includes 13,800 shares held by Mr. Sedmak's wife, Mary Sedmak, as custodian
for their children, Jeffrey Sedmak (6,900 shares) and Sarah Sedmak (6,900
shares). Mr. Sedmak resigned as an executive officer and employee of the
Company effective July 7, 1998.
(13) Ms. Biski resigned as an executive officer and employee of the Company
effective April 16, 1999. The mailing address for Ms. Biski is 24699 Del
Prado, Dana Point, California 92629.
(14) Mr. Parkinson resigned as an executive officer and employee of the Company
effective February 5, 1999. The mailing address for Mr. Parkinson is 107
Florence Dr., Aptos, California 95003.
ELECTION OF DIRECTORS
(PROPOSAL 1)
Under the Company's Certificate of Incorporation and Bylaws, which provide
for a "classified" board of directors, two persons, Stephen V. Sedmak and Thomas
C.K. Yuen, have been nominated by the Board of Directors for election at the
Annual Meeting to serve a three year term expiring at the annual meeting in 2002
and until their respective successors are elected and qualified. Directors shall
be elected by a plurality of the votes of shares of Common Stock present in
person or represented by proxy at the Annual Meeting and entitled to vote on
such election.
The Bylaws provide for seven directors. Currently, there are three Class I
directors (Messrs. Pfannkuch, Scheinrock and Wan), whose term expires at the
2000 annual meeting of stockholders; two Class II directors (Messrs. AuYeung and
Tu), whose term expires at the 2001 annual meeting of stockholders; and two
Class III directors (Messrs. Sedmak and Yuen), whose term expires at the Annual
Meeting.
Each of the nominees presently serves as a Class III director and has
served continuously as a director of the Company since the date indicated in his
biography below. In the event either nominee is unable to or declines to serve
as a director at the time of the Annual Meeting (which is not anticipated), the
persons named in the proxy will vote for the election of such person or persons
as may be designated by the present Board of Directors. UNLESS OTHERWISE
DIRECTED IN THE ACCOMPANYING PROXY, THE PERSONS NAMED THEREIN WILL VOTE FOR THE
ELECTION OF THE TWO DIRECTOR NOMINEES LISTED BELOW.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
STEPHEN V. SEDMAK AND THOMAS C.K. YUEN AS CLASS III DIRECTORS.
5
<PAGE> 9
INFORMATION WITH RESPECT TO THE CLASS III DIRECTOR NOMINEES
The following table sets forth information regarding the nominees,
including age on the date of the Annual Meeting, present position with the
Company, period served as a director and other business experience during the
past five years.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
Stephen V. Sedmak.............. 50 1993 Mr. Sedmak, currently retired, was one of the
founders of the Company. He served as President of
the Company since its inception in June 1993 until
July 1998. In addition, Mr. Sedmak has served as a
director of the Company since June 1993 and served as
Chief Operating Officer from June 1996 until July
1998. Mr. Sedmak also has served as a member of the
Compensation Committee of the Board since April 1999.
Prior to joining the Company, Mr. Sedmak served as
Vice President of Sales for PTC Corporation, a
provider of telecommunications systems, from January
1973 to March 1982, as Vice President of Sales for
The ICT Group, a provider of database marketing and
telemarketing services, from March 1985 to September
1987, and as Vice President of Sales for TeleRelation
Systems Inc., a software development company, from
January 1991 to June 1992. Mr. Sedmak was involved as
a founder of each of these companies. In addition,
Mr. Sedmak held a variety of executive sales and
marketing positions with IBM/ ROLM Corporation, a
leading telecommunications manufacturer, from March
1982 to March 1985.
Thomas C.K. Yuen............... 47 1994 Mr. Yuen has served as Chairman, Chief Executive
Officer and a director of the Company since January
1994, and has served as President of the Company
since April 1999. Mr. Yuen also has served as a
director of Valence Technology Inc. ("Valence") and
all but one of Valence's subsidiaries since March
1998. In addition, Mr. Yuen served as Chief Financial
Officer of the Company from January 1994 to July
1994. Since May 1995, Mr. Yuen has also served as
Chairman and a director for Asia Communications
Global Limited, a privately-held Internet technology
company focusing on the dissemination of financial,
home shopping and other information to substantially
all of the Asian market ("ACGL"). Since June 1993,
Mr. Yuen has served as Chairman, Chief Executive
Officer, President and a director of Atlantis
Computers, Inc. d/b/a NuReality, a privately held
company that manufactures computer multimedia and
consumer audio/video products and is a licensee of
the Company ("NuReality"). Mr. Yuen is one of the
founders of AST Research, Inc., where he served as a
director from such company's inception in 1981 until
June 1992 and the company's Co-Chairman and Chief
Operating Officer from August 1987 to June 1992.
</TABLE>
6
<PAGE> 10
INFORMATION WITH RESPECT TO DIRECTORS WHOSE TERMS CONTINUE
The following table sets forth similar information regarding the members of
the Board of Directors who are designated either Class I or Class II Directors
and are continuing in office as directors of the Company.
Class I Directors -- Term Expiring at the 2000 Annual Meeting
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
Robert Pfannkuch............ 64 1998 Mr. Pfannkuch has served as a director of the Company
since June 1998. Since April 1997, Mr. Pfannkuch has been
President of Panasonic Disc Services Corporation (PDSC)
headquartered in Torrance, California. A wholly-owned
subsidiary of Matsushita Electric Industrial Co. Ltd. in
Japan, PDSC was founded in June 1996 to manufacture DVDs
for the movie, music, and computer software industries.
From January 1990 to April 1997, Mr. Pfannkuch was
President of Telefuture Partners, a consulting firm for
both foreign and domestic electronic and media companies.
Mr. Pfannkuch has been in the field of video
communications since 1963 when he founded Audio Video
Industries. In 1974, he organized a videocassette
duplication division for Bell & Howell Company, which grew
into one of the world's largest duplicators and by 1985
was known as Bell & Howell/Columbia/Paramount Video
Services (BHCP) to reflect the addition of Columbia
Pictures and Paramount Pictures as joint venture partners.
In May 1988, The Rank Organisation Plc purchased BHCP and
renamed the unit "Rank Video Services America." Mr.
Pfannkuch was Chairman and CEO of Rank Video Services
America from May 1988 to January 1990. Having broad
exposure to all facets of the home video industry since
its inception, Mr. Pfannkuch is widely known and has
received numerous awards and citations for his many
contributions to the growth of home video, including
membership in the Video Hall of Fame.
Jeffrey I. Scheinrock....... 48 1996 Mr. Scheinrock has served as a director of the Company and
a member of the Board's Audit Committee since June 1996.
Since June 1997, Mr. Scheinrock has served as Chief
Executive Officer of Scheinrock Advisory Group, an
investment consulting firm. Prior thereto, he served as
Vice Chairman and Chief Financial Officer of Kistler
Aerospace Corporation, a manufacturer of reusable launch
vehicles, from July 1996 to May 1997. Prior thereto, he
served as Vice Chairman -- Finance and Strategic Planning
and Chief Financial Officer of Packard Bell Electronics,
Inc., a manufacturer of personal computers, from March
1989 to June 1996. Mr. Scheinrock also has served as a
director of Brilliant Digital Entertainment, a developer
and distributor of digital equipment, since October 1996.
Thomas W.T. Wan............. 38 1998 Mr. Wan has served as a Vice President and a director of
the Company since the closing of the acquisition of
Valence by the Company in March 1998. Mr. Wan was
appointed as a director and an executive officer of the
Company pursuant to the terms of the Stock Purchase
Agreement dated February 24, 1998, among the Company,
Valence, Mr. Wan and three other management stockholders
of Valence, relating to the acquisition of Valence by the
Company. Mr. Wan also serves as President and Chief
Executive Officer of Valence, a position he has held since
May 1995. In addition, Mr. Wan has served as a director of
Valence and each of Valence's subsidiaries since May 1995.
Mr. Wan also served as President, Chief Executive Officer
and Sales and Marketing Manager of Valence Semiconductor
(HK) Limited from April 1990 to May 1995. Prior thereto,
Mr. Wan served as Assistant Executive Engineer and
Executive Engineer in the Full-Custom Chip Design Division
of British Telecom Research Laboratories from 1985 to
1990.
</TABLE>
7
<PAGE> 11
Class II Directors -- Term Expiring at the 2001 Annual Meeting
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
John AuYeung, Ph.D.......... 47 1996 Dr. AuYeung has served as Executive Vice President since
July 1998 and as Chief Operating Officer, Secretary and
Acting Chief Financial Officer and Treasurer of the
Company since April 1999, as a director of the Company
since May 1996 and has served as a member of the Audit
Committee of the Board since June 1996. Dr. AuYeung also
served as a member of the Compensation Committee of the
Board, from June 1996 through June 1998. In addition,
Dr. AuYeung has served as a director of Valence and all
but one of Valence's subsidiaries since March 1998. From
November 1996 to February 1999, Dr. AuYeung served as
President, Secretary and Treasurer of ACG (U.S.), Inc.,
the U.S. subsidiary of a foreign-based Internet company.
Dr. AuYeung also has served since November 1996 as
President of Communications Management, Inc., a
management consulting firm and since October 1996, as
Assistant Secretary of ACGL. Prior thereto, Dr. AuYeung
served as Vice President, Technology and Business
Development of NuReality from May 1995 to October 1996.
In addition, Dr. AuYeung served in a variety of
management positions with Newport Corporation, a
scientific research instrument manufacturer, from March
1982 to April 1995. Prior to joining Newport
Corporation, Dr. AuYeung was a research scientist at the
Jet Propulsion Laboratory. Dr. AuYeung holds a B.S. from
the Massachusetts Institute of Technology and an M.S.
and a Ph.D. in electrical engineering from the
California Institute of Technology.
John Tu..................... 57 1994 Mr. Tu has served as a director of the Company since May
1994. In addition, since June 1996, Mr. Tu has served as
a member of the Audit Committee of the Board. Mr. Tu
also served as a member of the Compensation Committee of
the Board from June 1996 through June 1998 and currently
serves on such Committee since April 1999. Mr. Tu has
served as a director and President of Kingston
Technology Company (and its predecessor, Kingston
Technology Corporation), a manufacturer of computer
products, since October 1987. Mr. Tu also was a
co-founder of Kingston Technology Corporation. Prior
thereto, from 1982 to 1986, Mr. Tu served as President
of Camintonn Corporation, a manufacturer of board level
products for the DEC marketplace, and from 1986 to 1987,
he served as Vice President and General Manager of the
Digital Division after the company's sale to AST
Research. Mr. Tu was also a co-founder of Camintonn
Corporation. Mr. Tu earned a degree in electrical
engineering from the Technische Hochschule Darmstadt in
Germany.
</TABLE>
INFORMATION WITH RESPECT TO EXECUTIVE OFFICERS
The executive officers of the Company are Thomas C .K. Yuen, John AuYeung
and Thomas W.T. Wan, each of whom is also a director of the Company and whose
business biographies are referenced above. Executive officers are elected by,
and serve at the pleasure of, the Board of Directors.
8
<PAGE> 12
INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
MEETINGS OF THE BOARD AND ITS COMMITTEES
The Board of Directors manages the business of the Company. It establishes
overall policies and standards for the Company and reviews the performance of
management. In addition, the Board has established an Audit Committee and a
Compensation Committee whose functions are briefly described below. The Board
has not established a Nominating Committee. From July 1, 1998 through April 14,
1999, the Board decided to assume the responsibilities of the Compensation
Committee for making determinations regarding salaries, bonuses and other
compensation for the Company's officers and making decisions with respect to
awards, including but not limited to stock option grants to the Company's
directors, officers, key employees, consultants and important business
associates pursuant to the Company's discretionary plans. In April 1999, the
Board reinstated the Compensation Committee. The directors are kept informed of
the Company's operations at meetings of the Board and its committees through
reports and analyses from, and discussions with, management.
During the fiscal year ended December 31, 1998 (the "Fiscal Year" or
"Fiscal 1998"), the Board of Directors met on two occasions and took action by
Unanimous Written Consent on 10 occasions.
Audit Committee. The Audit Committee recommends to the Board of Directors
the appointment of the independent certified public accountants for the
following year and reviews the scope of the audit, the independent certified
public accountants' report and the auditors' comments relating to the adequacy
of the Company's system of internal controls and accounting policies. The
members of the Audit Committee are John AuYeung, John Tu and Jeffrey I.
Scheinrock (Chairman). During the Fiscal Year, the Audit Committee did not meet.
Compensation Committee. The Compensation Committee is responsible for
making determinations regarding salaries, bonuses and other compensation for the
Company's officers and making decisions with respect to awards, including but
not limited to stock option grants to the Company's directors, officers, key
employees, consultants and important business associates pursuant to the
Company's discretionary plans and bonus awards under the Company's Annual
Incentive Bonus Plan and the Company's Annual Supplemental Executive Bonus Plan.
In Fiscal 1998, the Compensation Committee was comprised of John AuYeung
(Chairman) and John Tu. Currently, the Compensation Committee is comprised of
Stephen V. Sedmak (Chairman) and John Tu. The Compensation Committee did not
meet during the Fiscal Year; however, it acted by Unanimous Written Consent on
six occasions.
Each incumbent director attended at least 75% of the aggregate of (a) the
total number of meetings of the Board of Directors held during the Fiscal Year
(held during the period for which he has been a director) and (b) the total
number of meetings held by all committees of the Board on which he served during
the Fiscal Year (held during the period that he served).
COMPENSATION OF DIRECTORS
Directors who also are employees of the Company are not paid any fees or
remuneration, as such, for their service on the Board or on any Board committee.
Cash Compensation. In Fiscal 1998, each nonemployee director was entitled
to receive $500 for each Board meeting that he attended and $250 for each
telephonic Board meeting in which he participated. Each nonemployee director
also was entitled to receive $250 for each committee meeting that he attended in
person or telephonically. In addition, each nonemployee director was entitled to
be reimbursed for reasonable travel and other expenses incurred in connection
with attending Board and committee meetings.
Nonemployee Directors' Plan. Each nonemployee director is eligible to
receive stock options under the SRS Labs, Inc. 1996 Nonemployee Directors' Stock
Option Plan (the "Nonemployee Directors' Plan"), a nondiscretionary, formula
stock option plan pursuant to which 120,000 shares of Common Stock have been
authorized for issuance.
9
<PAGE> 13
Each nonemployee director of the Company who was in office prior to the
date of the closing of the Company's Initial Public Offering (the "IPO") and
remained in office as of such date (namely, Messrs. AuYeung, Scheinrock and Tu)
was granted an option to purchase 10,000 shares of Common Stock which vested
upon the date of grant. On an ongoing basis, (a) each nonemployee director who
first becomes a member of the Board after the date of closing of the IPO
(namely, up to the date hereof, Mr. Pfannkuch) is granted an option to purchase
10,000 shares of Common Stock automatically upon election to the Board of
Directors which vests upon the date of grant, and (b) each nonemployee director
is granted an option to purchase 15,000 shares of Common Stock automatically
effective at the close of business on the date of each of the Company's annual
meeting of stockholders at which such nonemployee director is elected which
vests in three equal annual installments commencing on the first anniversary of
the applicable date of grant. Such option awards are in each case subject to
adjustments, as provided in the Nonemployee Directors' Plan.
At the close of the Company's annual meeting of stockholders in Fiscal
1998, two such nonemployee directors (namely, Messrs. Tu and AuYeung, the latter
of whom, subsequent to such grant, became an employee director of the Company)
were each granted an option to purchase 15,000 shares of Common Stock at an
exercise price of $5.875 per share. On June 17, 1998, Mr. Pfannkuch was granted
an option to purchase 10,000 shares of Common Stock at an exercise price of
$5.375 per share. The exercise price for all options granted under the
Nonemployee Directors' Plan has been based upon the fair market value of Common
Stock on the date of grant.
The Company is proposing certain amendments to the Nonemployee Directors'
Plan in the form of an Amended and Restated Plan. Reference is made to the
caption "Approval of the Amended and Restated SRS Labs, Inc. 1996 Nonemployee
Directors' Stock Option Plan" herein for a discussion concerning these
amendments.
Incentive Plan. Each nonemployee director also is eligible to receive
awards under the Company's Amended and Restated 1996 Long-Term Incentive Plan
(the "Incentive Plan"), a discretionary plan currently administered by the
Board. In Fiscal 1998, each of the nonemployee directors of the Company (namely,
Messrs. Pfannkuch, Scheinrock, Sedmak and Tu), received non-statutory options to
purchase 20,000 shares of Common Stock at an exercise price of $2.6875 per
share. One-quarter of such options vested on the date of grant (December 23,
1998) and the remainder will vest in three equal annual installments commencing
December 23, 1999. In addition, Messrs. Pfannkuch and Scheinrock received
non-statutory options to purchase 5,000 and 10,000 shares of Common Stock at an
exercise price of $5.375 and $5.50 per share, respectively, vesting, in case of
Mr. Pfannkuch, on the date of grant (June 17, 1998), and in case of Mr.
Scheinrock, pro rata over a four-year period from the date of grant (July 7,
1998).
Compensation for Consulting Services. Jeffrey I. Scheinrock, a nonemployee
director, was paid consulting fees of $20,000 and was reimbursed for
approximately $300 of travel and other out-of-pocket expenses incurred in
connection with the exploration of the Company's potential relationships with
new and existing licensees during Fiscal 1998.
APPROVAL OF THE SRS LABS, INC. AMENDED AND RESTATED
1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
(PROPOSAL 2)
In July 1996, the Board of Directors adopted, and the stockholders
approved, the SRS Labs, Inc. 1996 Nonemployee Directors' Stock Option Plan, a
nondiscretionary, formula stock option plan in which only nonemployee directors
are eligible to participate (the "Nonemployee Directors' Plan"). The Nonemployee
Directors' Plan provides for automatic grants to each nonemployee director of an
option to purchase 10,000 shares of Common Stock on the date such nonemployee
director first becomes a member of the Board and an option to purchase 15,000
shares of Common Stock on the date of each annual meeting of stockholders at
which such nonemployee director is re-elected to the Board.
The Board of Directors has adopted, subject to stockholder approval,
various amendments to the Nonemployee Directors' Plan in the form of an Amended
and Restated Nonemployee Directors' Plan. The
10
<PAGE> 14
Nonemployee Directors' Plan, as amended and restated, shall be referred to
herein as the "Amended and Restated Nonemployee Directors' Plan" or the "Plan".
For purposes of this discussion, the proposed amendments are divided into two
principal categories: (a) an increase in the number of shares of Common Stock
that may be issued pursuant to options granted under the Nonemployee Directors'
Plan by 130,000 and (b) adoption of various changes, some of which liberalize
certain provisions of such plan consistent with certain regulatory developments.
Increase in the Number of Shares. Currently, the number of shares of Common
Stock which may be issued or transferred upon the exercise of options under the
Nonemployee Directors' Plan may not exceed 120,000 (subject to adjustment as
provided in the Plan). As of the Record Date, options to purchase 85,000 shares
of Common Stock have been awarded (all of which options remain outstanding),
leaving only 35,000 shares of Common Stock remaining to be issued pursuant to
awards made under the Nonemployee Directors' Plan.
Until June 1998, the Nonemployee Directors' Plan had been the exclusive
compensation plan to grant stock options to nonemployee directors. In connection
with last year's annual meeting of stockholders, however, the stockholders
approved an amendment to the SRS Labs, Inc. Amended and Restated 1996 Long-Term
Incentive Plan (the "Incentive Plan") which expanded the class of eligible
participants to include nonemployee directors. Accordingly, the Board (or the
Compensation Committee, as the case may be) may grant discretionary options to
nonemployee directors under the Incentive Plan. Notwithstanding that fact, the
Board continues to believe that the Nonemployee Directors' Plan as a
stand-alone, nondiscretionary plan, provides an efficient and certain component
of nonemployee director compensation which is an important factor in attracting,
retaining and motivating persons to serve as directors of the Company. In light
of the limited number of shares which remain to be issued pursuant to the
Nonemployee Directors' Plan and the desire of the Company to continue to grant
options pursuant to a formula plan to current and future directors as part of
their standard compensation package, the Board has recognized the need for an
additional number of shares of Common Stock which may be issued in connection
with awards made under the Nonemployee Directors' Plan.
In view of the foregoing, the Board of Directors believes that it is
appropriate to increase the number of shares of Common Stock that may be issued
pursuant to option awards granted under the Nonemployee Directors' Plan by
130,000 shares, from 120,000 to 250,000 shares of Common Stock (subject to
adjustment as provided in the Plan). The Board believes that such increase
should be sufficient to ensure the operation of the Nonemployee Directors' Plan
for the current nonemployee directors as well as providing the Company with the
needed flexibility to grant such options to new nonemployee directors should the
size of the Board expand.
The Company has registered with the SEC on a Form S-8 Registration
Statement the 120,000 shares of Common Stock currently issuable under the
Nonemployee Directors' Plan. If this Proposal 2 is approved by the stockholders,
the Board intends to cause the additional shares of Common Stock that will
become available for issuance under the Amended and Restated Nonemployee
Directors' Plan to be registered on a Form S-8 Registration Statement to be
filed with the SEC at the Company's expense.
Other Amendments. In light of amendments to Rule 16b-3 promulgated under
the Exchange Act ("Rule 16b-3"), the requirements for employee benefit plan
administration have been liberalized. As a result, the need to establish a
separate nondiscretionary plan for nonemployee directors to receive stock
options so as to not disqualify them from serving on the stock option committee
administering the discretionary plans (thereby allowing awards granted under
such discretionary plans to qualify for the exemptions afforded under Rule
16b-3), is no longer present. As noted above, the Board continues to believe
that the use of a separate plan for nonemployee directors which automatically
grants options to nonemployee directors still has merit as an element of their
overall compensation.
Currently, the Nonemployee Directors' Plan has the following terms:
- Administration. The Nonemployee Directors' Plan is administered by a
committee consisting of all directors who are not eligible to participate
in the Plan and the Chief Financial Officer.
11
<PAGE> 15
- Nontransferability. The Nonemployee Directors' Plan now provides that an
option is not transferable by the optionee other than by will or by the
laws of descent and distribution or a qualified domestic relations order
and that such option (in whole or in part, as the case may be) may be
exercised only by the optionee, such optionee's legal representative or
permitted successor or a permitted transferee.
The Amended and Restated Nonemployee Directors' Plan would provide as
follows:
- Administration. The Chief Financial Officer has been eliminated as a
member of the committee which administers the Plan. In addition, the
sentence in the Administration Section of the Plan stating that "[t]he
Committee shall not have the authority to take any action or make any
determination that would materially increase the benefits accruing to
participants under the Plan" was eliminated in light of changes to the
securities laws or regulations relating to the former stockholder
approval requirements of Rule 16b-3.
- Exercisability and Terms of Option. The provision of the Plan regarding
vesting of options automatically granted to optionees under Section
5(b)(ii) of the Plan, namely when a nonemployee director is elected to a
new term of office at an annual meeting of stockholders of the Company,
has been revised. The revised provision states that such option shall
vest in three equal annual installments commencing on the first
anniversary of the date of grant, provided however that the third pro
rata installment shall vest on the earlier of (a) the third anniversary
of the date of grant or (b) the date of the annual meeting held during
the calendar year of the third anniversary of the date of grant. The
language regarding the pro-rata vesting commencing on the first
anniversary of the date of grant ratifies the current administrative
position which has been taken under the Nonemployee Directors' Plan. The
new provision relating to the third installment clarifies the original
intent of the Company to ensure that the nonemployee director's third
installment vest in the situation where the Company's annual meeting date
is advanced before the anniversary date of the annual meeting of
stockholders on the date of grant.
- Nontransferability. A provision has been added allowing an option (or a
portion thereof) to be transferred by the optionee, as provided in the
stock option agreement, to a transferee who may sell shares of Common
Stock underlying such option pursuant to the rules and regulations
relating to use of a Registration Statement on Form S-8 under the
Securities Act of 1933, as amended.
- Termination. The provision which provides for the award of options in the
situation in which the number of options to be granted exceed the number
of remaining options available under the Plan has been more clearly
stated. No substantive change has been made.
- Amendment. The restrictions relating to amendments which were no longer
necessary as a result of changes in the securities laws or regulations,
or the interpretation thereof, have been eliminated.
Plan Benefits. Robert Pfannkuch, Stephen V. Sedmak, Jeffrey I. Scheinrock and
John Tu are currently the only nonemployee directors of the Company and the only
current eligible participants in the Amended and Restated Nonemployee Directors'
Plan. Because they are eligible to participate in the Nonemployee Directors'
Plan, they have an interest in this Proposal 2. As of the Record Date, the
above-referenced nonemployee directors, as a group, have been granted options to
purchase 60,000 shares of Common Stock under the Plan.
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF UNITS
(SECURITIES UNDERLYING
NAME DOLLAR VALUE ($) OPTIONS GRANTED)
---- ---------------- ----------------------
<S> <C> <C>
Nonemployee Directors as a Not determinable at this 10,000 upon initial election
Group. time. to the Board (nonemployee
director who first becomes a
member of the Board);
additional 15,000 upon each
re-election to the Board.
</TABLE>
12
<PAGE> 16
In connection with the Annual Meeting, Stephen V. Sedmak is the only
nonemployee director nominee eligible to receive options under the Plan. If Mr.
Sedmak is elected, he will receive a non-statutory option to purchase 15,000
shares of Common Stock under the Nonemployee Directors' Plan at an exercise
price of the fair market value on the date of grant, vesting one-third per year
commencing on the first anniversary of, and an expiration date of 10 years
after, the date of the Annual Meeting. The above-referenced grant will occur
whether or not the Amended and Restated Nonemployee Directors' Plan is approved
because 35,000 shares of Common Stock remain available for grant under the
current Nonemployee Directors' Plan. Other current nonemployee directors who
become nominees for re-election to the Board and who are elected shall
automatically receive grants similar to Mr. Sedmak's (to the extent sufficient
shares of Common Stock under the Plan are available) pursuant to the Nonemployee
Directors' Plan and/or the Amended and Restated Nonemployee Directors' Plan, as
applicable.
The following table shows stock option grants to nonemployee directors made
in Fiscal 1998 pursuant to the Nonemployee Directors' Plan.
OPTION GRANTS TO NONEMPLOYEE DIRECTORS
UNDER THE COMPANY'S 1996 NONEMPLOYEE DIRECTORS' PLAN IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
DOLLAR VALUE
--------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
NUMBER OF SECURITIES OPTION TERM
UNDERLYING OPTIONS EXERCISE EXPIRATION --------------------
GRANTED PRICE DATE 5% 10%
-------------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
John AuYeung(2).................... 15,000 $5.875 06/11/08 $55,519 $140,119
Robert Pfannkuch(3)................ 10,000 $5.375 06/17/08 $33,862 $ 85,462
John Tu(2)......................... 15,000 $5.875 06/11/08 $55,519 $140,119
</TABLE>
- ---------------
(1) Consistent with SEC regulations, we have used a 5% and 10% assumed rate of
appreciation over the ten year option term. This does not represent the
Company's estimate or projection of the future Common Stock price. If the
Common Stock does not appreciate, the named nonemployee directors will
receive no benefit from the options.
(2) Options granted to Messrs. AuYeung and Tu, respectively, in connection with
their re-election as directors at the 1998 annual meeting of stockholders.
(3) Options granted to Mr. Pfannkuch in connection with his election as a
director by the Board on June 17, 1998.
If this Proposal 2 is not approved by the stockholders at the Annual
Meeting, the Nonemployee Directors' Plan will remain in effect; however, as
stated above, only 35,000 shares of Common Stock remain available for grant as
of the Record Date. If the proposal is approved by the stockholders at the
Annual Meeting, the stockholders may be minimally diluted upon the exercise of
stock options granted under the Amended and Restated Nonemployee Directors'
Plan.
The Amended and Restated Nonemployee Directors' Plan is set forth in full
as Appendix A to this Proxy Statement and is summarized below. Such Summary is
not intended to be complete and reference should be made to Appendix A for a
complete statement of the terms and provisions of the Amended and Restated
Nonemployee Directors' Plan. Capitalized terms used in this Summary and not
otherwise defined shall have the meanings ascribed to such terms in the Amended
and Restated Nonemployee Directors' Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE AMENDED AND RESTATED NONEMPLOYEE DIRECTORS' PLAN. THE AFFIRMATIVE VOTE OF
THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON OR
REPRESENTED BY PROXY AT THE ANNUAL MEETING AND ENTITLED TO VOTE ON THIS PROPOSAL
IS REQUIRED FOR APPROVAL OF THIS PROPOSAL.
13
<PAGE> 17
SUMMARY OF THE AMENDED AND RESTATED NONEMPLOYEE DIRECTORS' PLAN
Purpose
The purpose of the Plan remains the same, namely, to attract, retain and
compensate highly qualified individuals who are not current employees of the
Company to serve as members of the Board of Directors and to enable them to
increase their ownership of shares of Common Stock. The Plan allows these
directors to have a greater personal financial stake in the Company through the
ownership of Common Stock, in addition to underscoring their common interest and
identification with stockholders in increasing the value of Common Stock.
Plan Limits
The maximum number of shares of Common Stock with respect to which options
may be granted under the Plan may not exceed 250,000 shares, which may be shares
of original issuance or treasury shares or a combination thereof. These limits
are subject to adjustments for stock splits, stock dividends, recapitalizations
and other similar events as provided in the Plan. In the event that any option
granted under the Plan shall terminate, expire, or, with the consent of the
optionee, be canceled as to any shares of Common Stock, without having been
exercised in full, new options may be granted with respect to such shares
without again being charged against the maximum share limitations. Upon the
payment of any option price by the transfer to the Company of Common Stock,
there shall be deemed to have been issued or transferred only the net number of
shares actually issued or transferred by the Company. No fractional shares will
be issued pursuant to options granted under the Plan. Any fractional share
resulting from an adjustment made under the Plan shall be eliminated.
Awards
Each nonemployee director who was in office prior to the date of the
closing of the initial public offering of the Common Stock (the "IPO Date")
pursuant to the Registration Statement on Form SB-2 of the Company filed with
the SEC pursuant to the Securities Act of 1933 and remained in office as of the
IPO Date was granted an option to purchase 10,000 shares of Common Stock.
Each nonemployee director who first becomes a member of the Board after the
IPO Date will be granted an option to purchase 10,000 shares of Common Stock
automatically upon election to the Board of Directors.
Each nonemployee director will be granted an option to purchase 15,000
additional shares of Common Stock automatically on the close of business of the
day of the Company's annual meeting of stockholders at which such nonemployee
director is elected or re-elected.
All options granted under the Plan shall be non-statutory options not
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended.
Exercise Price and Payment
Options under the Plan provide the right to purchase shares of Common Stock
at a price equal to 100% of the fair market value of such shares on the date of
the grant. The option price is payable in cash, shares of Common Stock already
owned by the optionee, or any combination of cash and shares of Common Stock
which in the aggregate are equal in value to the purchase price. Any grant of
options shall provide for the deferred payment of the option price on the sale
of some or all of the shares obtained from the exercise. As of the Record Date,
the fair market value of the Common Stock was $2.75 per share.
Vesting
Except in the case of cessation of service as described below, each option
for 10,000 shares automatically granted to a nonemployee director who was in
office prior to the IPO Date or who first becomes a member of the Board after
the IPO Date shall be exercisable in full on the date of grant and each other
option automatically granted under the Plan will vest 33 1/3 percent after 1
year from date of grant, 66 2/3 percent after 2 years from date of grant and 100
percent after 3 years from date of grant, provided, however, that
14
<PAGE> 18
notwithstanding anything to the contrary, the third installment shall vest on
the earlier of (a) the third anniversary of the date of grant or (b) the date of
the Company's annual meeting of stockholders held during the calendar year of
the third anniversary of the date of grant. Each option granted under the Plan
will expire 10 years from the date of grant and will be subject to earlier
termination as described below. If a nonemployee director subsequently becomes
an employee of the Company while remaining a member of the Board, any options
held under the Plan by such individual at the time of such commencement of
employment will not be affected thereby.
Cessation of Service
Except as provided in the Plan, no option will be exercisable after the
date of cessation of an optionee's service as a director of the Company. Upon
the death of an optionee at any time, all of the then outstanding options of
such optionee will become immediately exercisable. If an optionee's service as a
director ceases for any reason, such exercisable options may be exercised by the
optionee within one year after such cessation of service. If an optionee dies
within such one-year period, or if cessation of his or her service is due to
such optionee's death, such options may be exercised at any time within one year
after such death by the optionee's executor or administrator or by his or her
distributee to whom such options may have been transferred by will or by the
laws of descent and distribution. In no event may an option be exercised beyond
its expiration date.
Administration
The Plan is administered by a committee consisting of all directors who are
not eligible to participate in the Plan (the "Committee"). Subject to the
provisions of the Plan, the Committee, is authorized to interpret the Plan, to
establish, amend and rescind any rules and regulations relating to the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The Committee has no discretion with respect to the eligibility or
selection of directors to receive options under the Plan, the times at which
options will be granted or will become exercisable, the number of shares subject
to any such options or the Plan, or the purchase price thereunder, except for
adjustments as described below.
Eligibility
All members of the Board of Directors who are not current employees of the
Company or any of its subsidiaries at the time of an option award are eligible
to participate in the Plan. As of the Record Date, there were four nonemployee
directors of the Company.
Transferability
Options awarded under the Plan will not be transferable by a participant
other than (a) by will or the laws of descent and distribution, (b) pursuant to
a qualified domestic relations order or (c) to a transferee, as provided in the
option agreement, who may sell shares of Common Stock upon exercise of such
option pursuant to the rules and regulations relating to use of a Registration
Statement on Form S-8 under the Securities Act of 1933, as amended.
Adjustments
The Board of Directors is required to make or provide for adjustments in
the option price; the number or kind of shares or other securities covered by
outstanding options; the number or kind of shares of the Company's capital stock
or other securities which may be acquired pursuant to options granted under the
Plan; and the number of such securities to be awarded to each optionee as the
Board of Directors in its sole discretion, exercised in good faith, determines
is equitably required to prevent dilution or enlargement of rights of optionees
that would otherwise result from (a) any stock dividend, stock split,
combination of shares, issuance of rights or warrants to purchase stock,
spin-off, recapitalization or other changes in the capital structure of the
Company, (b) any merger, consolidation, reorganization or partial or complete
liquidations, or (c) any other corporate transaction or event having an effect
similar to any of the foregoing. In the event of any such transaction or event,
the Board of Directors may provide in substitution for any or all outstanding
options under the Plan such alternative consideration (including securities of
another issuer) as it may in good
15
<PAGE> 19
faith determine to be equitable under the circumstances and may require in
connection therewith the surrender of all options so replaced. In any case, such
substitution of securities shall not require the consent of any person who is
granted options pursuant to the Plan. The determination of the Board of
Directors as to what adjustments will be made, and the extent thereof, will be
final, binding and conclusive.
Amendments, Termination and Miscellaneous
The Board of Directors, at any time and from time to time, may amend,
suspend or terminate the Plan; provided, however, that (a) except as expressly
authorized by the Plan, no such amendment shall increase the maximum number of
shares specified in Section 2 of the Plan without the further approval of the
stockholders of the Company and (b) amendments revising the amount, price or
timing of option awards shall not be made more frequently than once every six
months unless necessary to comply with the Code, the Employee Retirement Income
Security Act, or the rules thereunder. Without the written consent of the
optionee, no amendment, suspension or termination of the Plan can adversely
affect any option previously granted under the Plan, but it will be conclusively
presumed that any adjustment as described in the preceding paragraph does not
adversely affect any such right.
The Plan will terminate at such time as all of the shares of Common Stock
authorized thereunder have been granted, unless further amended to increase the
number of shares. In the event that at any future grant date, the aggregate
number of options to be granted at such time exceeds the remaining options
available under the Plan as determined in accordance therewith, the remaining
options available will be granted to the nonemployee director entitled to such
grant, and if there is more than one nonemployee director, then the remaining
options shall be granted to such nonemployee directors on a pro-rata basis.
Termination of the Plan, however, will not affect outstanding options granted
prior to such termination, and all unexpired options will continue in full force
and operation after termination of the Plan, except as they lapse or terminate
by their own terms and conditions. The terms of the Plan will continue to apply
to such options.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the Federal income tax
consequences of certain transactions under the Amended and Restated Nonemployee
Directors' Plan. This summary is not intended to be complete and does not
describe state or local tax consequences.
Tax Consequences to Participants
In general, (a) no income will be recognized by an optionee at the time an
option is granted; (b) at the time of exercise of an option, ordinary income
will be recognized by the optionee in an amount equal to the difference between
the option price paid for the shares and the fair market value of the shares, if
unrestricted, on the date of exercise; and (c) at the time of sale of shares
acquired pursuant to the exercise of a nonqualified option, appreciation (or
depreciation) in value of the shares after the date of exercise will be treated
as either short-term or long-term capital gain (or loss) depending on how long
the shares have been held.
In limited circumstances where the sale of stock received as a result of a
grant or award could subject a director to suit under Section 16(b) of the
Exchange Act, the tax consequences to the director may differ from the tax
consequences described above. In these circumstances, unless a special election
under Section 83(b) of the Code has been made, the principal difference (in
cases where the director would otherwise be currently taxed upon his receipt of
the stock) usually will be to postpone valuation and taxation of the stock
received so long as the sale of the stock received could subject the director to
suit under Section 16(b) of the Exchange Act, but no longer than six months.
Tax Consequences to the Company
To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company will be entitled to a corresponding
deduction provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code.
16
<PAGE> 20
COMPENSATION OF EXECUTIVE OFFICERS
We are required by the SEC to disclose compensation paid by the Company
during the last three fiscal years to (a) the Company's Chief Executive Officer;
(b) the Company's four most highly compensated executive officers, other than
the Chief Executive Officer, who were serving as executive officers at the end
of Fiscal 1998; and (c) up to two additional individuals for whom such
disclosure would have been provided under clause (a) and (b) above but for the
fact that the individual was not serving as an executive officer of the Company
at the end of Fiscal 1998.
Accordingly, the following table discloses compensation paid by the Company
during the last three fiscal years to (a) Mr. Yuen, the Company's Chief
Executive Officer; (b) Messrs. Wan, AuYeung and Parkinson and Ms. Biski, the
four most highly-compensated executive officers, other than the Chief Executive
Officer, who were serving as executive officers at the end of Fiscal 1998: and
(c) Mr. Sedmak, who would have been among the four most highly-compensated
executive officers but for the fact that he was not serving as an executive
officer at the end of Fiscal 1998. We refer to all of these officers as the
"Named Executive Officers." The Company first became a reporting Company,
pursuant to Section 13(a) of the Exchange Act, during Fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) SECURITIES
-------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARS (#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C.K. Yuen............ 1998 $281,250 $ 1,000 -- 110,000 --
Chairman of the Board 1997 225,000 1,147 -- 167,762 --
and Chief Executive
Officer 1996 87,504 -- -- 112,762 --
Thomas W.T. Wan(2).......... 1998 144,228 -- 43,787(3) 285,000 --
Vice President of SRS
Labs, 1997 -- -- -- -- --
Inc., Chief Executive
Officer 1996 -- -- -- -- --
of Valence Technology Inc.
John AuYeung, Ph.D.(4)...... 1998 75,000 95,500 -- 225,000(5) --
Executive Vice President, 1997 -- -- -- -- --
Chief Operating Officer 1996 -- -- -- -- --
and Secretary
Thomas R. Parkinson(6)...... 1998 145,577 30,500 -- 285,000 --
President and Chief 1997 -- -- -- -- --
Operating Officer 1996 -- -- -- -- --
Janet M. Biski(7)........... 1998 142,500 1,000 -- 110,000 --
Vice President, Chief 1997 100,833 27,577 -- 92,588 --
Financial Officer,
Treasurer 1996 77,084 28,214 -- 37,588 --
and Secretary
Stephen V. Sedmak(8)........ 1998 105,236 -- -- 95,000(9) 1,439(10)
President and Chief 1997 180,000 46,325 -- 192,315 1,919(10)
Operating Officer 1996 135,581 33,738 -- 137,315 1,919(10)
</TABLE>
- ---------------
(1) Portions of Ms. Biski's salary in Fiscal 1998, 1997 and 1996 were deferred
under the Company's 401(k) Plan. A portion of Mr. Sedmak's bonus earned in
Fiscal 1996 was deferred and paid to Mr. Sedmak in Fiscal 1997.
(2) Mr. Wan became an executive officer of the Company on March 2, 1998 in
connection with the Company's acquisition of Valence Technology Inc. All
compensation amounts payable to Mr. Wan pursuant to his employment
agreement are in Hong Kong dollars; for purposes of disclosure in this
table, all compensation amounts are expressed in U.S. dollars at a
conversion rate of 7.75 Hong Kong dollars to 1 U.S. dollar.
(Footnotes continued on the next page.)
17
<PAGE> 21
(Footnotes continued from preceding page.)
(3) The amount attributable to perquisites includes a $38,710 housing
allowance; the remaining perquisites and the related amounts do not meet
the disclosure threshold established by the SEC.
(4) Dr. AuYeung became an executive officer and an employee of the Company on
July 1, 1998. Dr. AuYeung has been a director of the Company since May 1996
and as such was, prior to July 1, 1998, compensated as a nonemployee
director of the Company. In Fiscal 1998, Dr. AuYeung earned $250 as a
nonemployee director which is not included in the amount set forth in the
Summary Compensation Table. See "Information About the Board of Directors
and Committees of the Board -- Compensation of Directors."
(5) Of the aggregate amount of securities underlying options granted to Dr.
AuYeung, 15,000 represent shares of Common Stock underlying an option grant
award to Dr. AuYeung as a nonemployee director of the Company.
(6) Mr. Parkinson became an executive officer and employee of the Company on
July 7, 1998 and resigned as an executive officer and employee of the
Company effective February 5, 1999.
(7) Ms. Biski resigned as an executive officer and employee of the Company
effective April 16, 1999.
(8) Mr. Sedmak resigned as an executive officer and employee of the Company
effective July 7, 1998. Mr. Sedmak remains a nonemployee director of the
Company and serves as Vice Chairman of the Board and, as such, is
compensated as a nonemployee director. In Fiscal 1998, Mr. Sedmak earned
$250 as a nonemployee director which is not included in the amount set
forth in the Summary Compensation Table. See "Information About the Board
of Directors and Committees of the Board -- Compensation of Directors."
(9) Of the aggregate amount of securities underlying options granted to Mr.
Sedmak, 20,000 represent shares of Common Stock underlying an option grant
award to Mr. Sedmak as a nonemployee director of the Company.
(10) Premiums for term life insurance paid by the Company on behalf of Mr.
Sedmak. In Fiscal 1998, such payment was made only for the first three
quarters of the year.
18
<PAGE> 22
STOCK OPTIONS
Stock Option Grants. The following table shows stock option grants to the
Named Executive Officers during Fiscal 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
------------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. K. Yuen..... 25,000(4) 0.93% $6.875 01/29/08 $108,281 $ 273,281
25,000(4) 0.93% 6.375 02/12/08 100,406 253,406
25,000(4) 0.93% 5.375 06/16/08 84,656 213,656
35,000(5) 1.30% 2.6875 12/23/08 59,259 149,539
Thomas W.T. Wan....... 177,280(4) 6.61% 5.50 07/07/08 614,275 1,550,314
72,720(6) 2.71% 5.50 07/07/08 251,975 635,936
35,000(5) 1.30% 2.6875 12/23/08 59,259 149,559
John AuYeung.......... 102,280(4) 3.81% 5.50 07/07/08 354,400 894,439
72,720(6) 2.71% 5.50 07/07/08 251,975 635,936
35,000(5) 1.30% 2.6875 12/23/08 59,259 149,559
15,000(7) 0.56% 5.875 06/11/08 55,519 140,119
Thomas R. Parkinson... 177,280(4) 6.61% 5.50 07/07/08 614,275 1,550,314
72,720(6) 2.71% 5.500 07/07/08 251,975 635,936
35,000(5) 1.30% 2.6875 12/23/08 59,259 149,559
Janet M. Biski........ 25,000(4) 0.93% 6.875 01/29/08 108,281 273,281
25,000(4) 0.93% 6.375 02/12/08 100,406 253,406
25,000(4) 0.93% 5.375 06/16/08 84,656 213,656
35,000(5) 1.30% 2.6875 12/23/08 59,259 149,559
Stephen V. Sedmak..... 25,000(4) 0.93% 6.875 01/29/08 108,281 273,281
25,000(4) 0.93% 6.375 02/12/08 100,406 253,406
25,000(4) 0.93% 5.375 06/16/08 84,656 213,656
20,000(5)(8) 0.75% 2.6875 12/23/08 59,259 149,559
</TABLE>
- ---------------
(1) Upon a change in control of the Company (as defined in the stock option
agreements relating to the respective plans), the options shall,
notwithstanding the installment vesting provisions, become immediately
exercisable in full.
(2) All options were granted at the fair market value on the date of grant.
(3) We are required by the SEC to use 5% and 10% assumed rate of appreciation
over the ten year option term. This does not represent the Company's
estimate or projection of the future Common Stock price. If the Common Stock
does not appreciate, the Named Executive Officers will receive no benefit
from the options.
(4) Nonqualified stock options which vest pro rata over a four-year period from
the date of grant.
(5) Nonqualified stock options, 25% of which vest on the date of grant and the
remainder of which vest in three equal annual installments commencing
December 23, 1999.
(6) Incentive stock options which vest pro rata over a four-year period from the
date of grant.
(7) Nonqualified stock options which vest over a three-year period from the date
of grant, granted to Dr. AuYeung as a nonemployee director of the Company.
(8) Options granted to Mr. Sedmak as a nonemployee director of the Company.
19
<PAGE> 23
Option Exercises/Fiscal Year End Value. The following table shows stock
option exercises and the value of unexercised stock options held by the Named
Executive Officers during Fiscal 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES VALUE FY-END(#) FY-END($)(1)
ACQUIRED ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C.K. Yuen..... -- $ -- 238,061 241,940 $ 88,039 $51,221
Thomas W.T. Wan...... -- -- 8,750 276,250 8,203 24,609
John AuYeung......... -- -- 18,750 216,250 8,203 24,609
Thomas R.
Parkinson.......... -- -- 8,750 276,250 8,203 24,609
Janet M. Biski....... -- -- 86,380 163,621 59,279 33,706
Stephen V. Sedmak.... -- -- 359,189 215,811 712,844 27,368
</TABLE>
- ---------------
(1) Represents the positive difference between the closing price of the Common
Stock on Thursday, December 31, 1998 (the last stock trading day of the
Fiscal Year) and the exercise price of the options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Each of Messrs. Yuen and Sedmak entered into an employment agreement with
the Company effective as of July 1, 1996. Such agreements provided for a fixed
base salary, with annual increases and performance bonuses at the discretion of
the Board of Directors. The respective agreements provided for base salaries for
(a) Mr. Yuen of $175,000 per year commencing July 1, 1996 and $225,000 per year
for the 12-month period commencing January 1, 1997; and (b) Mr. Sedmak of
$145,000 per year commencing July 1, 1996 and $180,000 per year for the 12-month
period commencing January 1, 1997; such base salaries to be adjusted,
thereafter, by the Board of Directors, but not to be reduced below the initial
base salaries provided in the agreements. Mr. Yuen's employment agreement
provided that he should devote at least 40% of his time (based on an average
eight hour work day) to the business of the Company. Mr. Yuen is permitted to
directly engage in other business activities provided such activities are not
competitive with the Company. The employment agreements with both Mr. Yuen and
Mr. Sedmak could be terminated by the Company for cause which is defined as (a)
the failure to follow the reasonable instructions of the Board of Directors, (b)
the material breach of any term of the employment agreement and failure to cure
such breach within 10 days after written notice thereof from the Company, or (c)
the misappropriation of assets of the Company or any subsidiary by the employee
resulting in a material loss to such entity. The employment agreements could be
terminated by the employee upon 60 days prior written notice.
The initial term of the employment agreements was two years for each of
Messrs. Yuen and Sedmak. The employment agreements automatically renew for
additional one year periods unless prior notice of termination is given by
either the Company or the employee. In the case of Mr. Yuen, his employment
agreement has been automatically renewed for an additional one year period.
During Fiscal 1998, the Compensation Committee of the Board of Directors
increased Mr. Yuen's base salary to $300,000 per year commencing April 1, 1998,
in light of Mr. Yuen's commitment to devote a significantly greater amount of
time to the business of the Company during such year than required under his
employment agreement. Effective April 1, 1999, Mr. Yuen voluntarily reduced his
base salary to $200,000, without the reduction in his time commitment to the
business of the Company. In the case of Mr. Sedmak, he resigned as an executive
officer and employee of the Company on July 7, 1998; accordingly, Mr. Sedmak's
employment agreement terminated as of July 7, 1998, without triggering a
severance benefit thereunder. In connection with Mr. Sedmak's termination as an
executive officer and employee of the Company, Mr. Sedmak's option agreements
were amended to provide (a) that the options granted to date thereunder would
continue to be exercisable and vest according to the vesting schedules set forth
therein as though Mr. Sedmak was still employed by the Company during the time
Mr. Sedmak remains a director of the Company, and (b) for the acceleration of
the vesting of
20
<PAGE> 24
all unvested options granted to date thereunder as of the date of any annual
meeting at which Mr. Sedmak's term as a director expires if the Board has not
nominated Mr. Sedmak for re-election at such meeting.
In the event the Company either terminates Mr. Yuen's employment agreement
at the end of the current term, or terminates such employment agreement during
the current term without cause, Mr. Yuen is entitled to receive his salary and
benefits for the remainder of the current term of his employment agreement plus
an additional period of 12 months. During such period, Mr. Yuen is obligated to
provide advisory services and may not compete with the Company. Mr. Yuen's
employment agreement also generally provides Mr. Yuen with compensation for the
remainder of the current term plus an additional period of 12 months and certain
other benefits and for the acceleration of the date of vesting for outstanding
stock options if Mr. Yuen is terminated or terminates his employment for certain
enumerated reasons within 90 days before or one year after a change in control
in the Company, as defined in the employment agreement.
Mr. Parkinson entered into a letter agreement (the "Letter Agreement") with
the Company effective as of June 4, 1998 which provided for a base monthly
salary of $25,000 commencing July 7, 1998, and a non-recoverable monthly draw
against bonus in the amount of $7,500 for his first 12 months of employment. In
addition, Mr. Parkinson was to receive stock options to purchase 250,000 shares
of Common Stock. The Letter Agreement could be terminated by either party
without cause upon a 90 days written notice or, in the case of the Company, a 90
days severance pay in lieu of such notice. On February 2, 1999, the Company and
Mr. Parkinson entered into a severance agreement (the "Severance Agreement"),
pursuant to which Mr. Parkinson resigned his employment as President and Chief
Operating Officer effective February 5, 1999. Pursuant to the Severance
Agreement, Mr. Parkinson received a 90 days severance pay in the amount of
$75,000, as well as reimbursement for certain living and moving expenses. In
addition, the Company agreed to accelerate vesting of 52,500 of Mr. Parkinson's
250,000 unvested stock option granted under the Incentive Plan in July 1998, and
extend to December 31, 1999 the post-termination of employment exercise period
with respect to such options and the 8,750 already vested stock options granted
under the Incentive Plan in December 1998.
Mr. Wan entered into an employment agreement with the Company and Valence
Technology Inc. ("Valence") effective March 2, 1998 and Dr. AuYeung entered into
an employment agreement with the Company effective July 1, 1998. The respective
agreements provide for base salaries for (a) Mr. Wan of H.K.$1,859,000 per year
commencing March 3, 1998; and (b) Dr. AuYeung of $150,000 per year commencing
July 1, 1998. In each case, such base salary may be adjusted by the Board of
Directors, but the base salary for any fiscal year may not be reduced below the
initial base salary provided in the agreement. Effective April 1, 1999, the
Board increased Dr. AuYeung's base salary to $180,000 in recognition of his
increased responsibilities in connection with his promotion to Chief Operating
Officer of the Company. Each agreement may be terminated by the Company (or, in
the case of Mr. Wan, also by Valence) for cause which is defined as (a) the
failure to follow the reasonable instructions of the Board of Directors of the
Company (or, in the case of Mr. Wan, also of Valence), (b) the material breach
of any term of the agreement and failure to cure such breach within 10 days
after written notice thereof from the Company (or, in the case of Mr. Wan, also
Valence), or (c) the misappropriation of the assets of the Company or any
subsidiary resulting in a material loss to such entity. Each agreement may be
terminated by the employee upon 60 days prior written notice and each agreement
automatically renews for additional one year periods unless prior notice of
termination is given by either the Company or the employee. In the event that
the Company (or, in the case of Mr. Wan, also Valence) terminates the agreement
either at the end of the current term or during the current term without cause,
the employee is entitled to receive his salary and benefits for the remainder of
the current term of the agreement plus an additional period of 12 months in the
case of Mr. Wan, and 6 months in the case of Dr. AuYeung. During such respective
periods, the employee is obligated to provide advisory services to the Company.
In the case of Mr. Wan, during such period, he also may not compete with the
Company or its subsidiaries. The agreement also provides the employee with
compensation for the remainder of the current term plus an additional 12 months
in the case of Mr. Wan and 6 months in the case of Dr. AuYeung and certain other
benefits and for the acceleration of the date of vesting for outstanding stock
options if the employee is terminated or terminates his employment for certain
enumerated reasons within 90 days before or one year after a change in control
in the Company, as defined therein.
21
<PAGE> 25
In addition to the agreements with Messrs. Yuen, Sedmak, Parkinson, Wan and
AuYeung, certain of the Company's plans contain termination or change of control
provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In Fiscal 1998, John AuYeung served as a member of the Company's
Compensation Committee through June 30, 1998 as a nonemployee director. On July
1, 1998, Dr. AuYeung became an executive officer of the Company. From July 1,
1998, through the remainder of Fiscal 1998, the Board of Directors performed the
functions of the Compensation Committee. As directors of the Company, the
following officers/directors participated in deliberations concerning
compensation of executive officers: John AuYeung, Stephen V. Sedmak (an officer
during Fiscal 1998 until July 7, 1998), Thomas W.T. Wan and Thomas C.K. Yuen.
REPORT ON EXECUTIVE COMPENSATION
This Report on Executive Compensation shall not be deemed incorporated by
any general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
Until the end of June 1998, the Compensation Committee, comprised of John
AuYeung and John Tu, determined the compensation of all executive officers of
the Company, including Thomas C.K. Yuen, the Company's Chief Executive Officer;
thereafter, the Board of Directors assumed the duties of the Compensation
Committee. All of the members of the Compensation Committee were nonemployee
directors of the Company at the time of their service on that Committee.
The Compensation Committee and the Board each viewed the compensation
process to be evolutionary. Recognizing that this is a complex area and that
there is no perfect program that meets the needs of every company, change should
be expected from time to time as the Board (or the Compensation Committee, as
the case may be) evaluates performance in a changing economic and regulatory
environment against the backdrop of the Company's evolution as a leading
provider of audio and voice enhancement technology solutions.
During Fiscal 1998, the Company's compensation philosophy for all of its
executive officers was based upon three primary themes: (a) offer base
compensation sufficient to attract and retain high quality management talent;
(b) provide variable compensation components (including short and long-term
incentive awards) which are linked with the performance of the Company and that
align executive remuneration with the interests of the stockholders; and (c)
provide a benefits package which is competitive with similarly situated
companies. Neither the Compensation Committee nor the Board (a) engaged an
outside compensation consultant to assist it in its compensation decisions in
Fiscal 1998; or (b) made compensation decisions based upon information related
to a specified peer group (including the peer group referenced under the caption
"Compensation of Executive Officers -- Performance Graph" in this Proxy
Statement).
TAX LAW LIMITS ON EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section
162(m)") limits deductions for certain executive compensation in excess of $1
million. Certain types of compensation in excess of $1 million are deductible
only if performance criteria related to such compensation are specified in
detail and stockholders have approved the compensation arrangements. The Company
believes that it is in the best interests of its stockholders to structure
compensation plans to achieve deductibility under Section 162(m), except where
the benefit of such deductibility is outweighed by the need for flexibility or
the attainment of other corporate objectives.
The Board will continue to monitor issues concerning the deductibility of
executive compensation and will take appropriate action if and when it is
warranted. Since corporate objectives may not always be consistent with the
requirements for full deductibility, the Board is prepared, if it deems
appropriate, to enter into compensation arrangements or pay compensation under
which payments may not be deductible under
22
<PAGE> 26
Section 162(m); such deductibility will not be the sole factor used by the Board
in ascertaining appropriate levels or modes of compensation.
In Fiscal 1998, since no executive officer of the Company was expected to
earn compensation of $1,000,000 or more (as calculated under Section 162(m)),
with the exception noted below, the Company did not take steps to avail itself
of potential deductions for executive officer compensation in excess of
$1,000,000. Grants of stock options to covered persons under Section 162(m) in
Fiscal 1998 by the Compensation Committee did, however, qualify for
deductibility.
COMPENSATION PROGRAM COMPONENTS
In Fiscal 1998, the components of the Company's executive compensation
program consisted of (a) base salary, (b) the opportunity to earn a year-end
bonuses determined under an incentive bonus program, (c) awards under the
Company's discretionary stock option plans, (d) individual merit bonuses, viewed
on a case-by-case basis, and (e) discretionary Company contributions under the
Company's SRS Labs, Inc. 401(k) Plan (the "401(k) Plan").
The only award of compensation to the Chief Executive Officer and the other
executive officers of the Company which was directly related to the Company's
performance was compensation to be earned under the Company's Annual
Supplemental Executive Bonus Plan. However, the Compensation Committee and the
Board, as applicable, also consider the Company's performance as a factor in
granting the number of stock options, annual base salary increases and
discretionary bonuses. Of course, the compensation benefits related to stock
option grants are related to the Company's performance as reflected in the price
of the Common Stock underlying the option.
Base Salary. In Fiscal 1998, effective April 1, 1998, the Compensation
Committee decided to increase the annual base salary of the Chief Executive
Officer from $225,000 to $300,000 and the base salaries of two of the Company's
executive officers, Janet M. Biski, the Company's Vice President, Chief
Financial Officer, Treasurer and Secretary, and Thomas W.T. Wan, the Company's
Vice President and Chief Executive Officer of its principal operating
subsidiary. Ms. Biski's annual base salary was increased from $100,833 to
$155,000 and Mr. Wan's annual base salary plus perquisites was increased from
$239,000 to $277,000. In the case of Mr. Yuen, the Compensation Committee
recognized Mr. Yuen's increased commitment of time to the Company as the
principal factor for the increase. In the cases of Ms. Biski and Mr. Wan, the
Compensation Committee decision was designed to better align compensation of
these executive officers with the compensation for similar positions in their
respective markets.
Incentive Bonus Plan. In Fiscal 1998, executive officers of the Company
were eligible to receive an incentive bonus under the Annual Supplemental
Executive Bonus Plan (the "Supplemental Plan"). The Supplemental Plan (a)
recognizes that management's contribution to stockholders returns comes from
maximizing earnings and the quality of those earnings, and (b) is designed to
provide a performance-based incentive for the Company's executive officers and
to attract and retain qualified personnel.
Under the Supplemental Plan, bonuses are paid based on a percentage of the
excess of the Company's actual operating profit for the applicable fiscal year
over targeted operating profit goals for that year. Bonus amounts under the
Supplemental Plan are divided equally among the Company's executive officers.
Executive officers who are employed for a portion of the applicable fiscal year
are entitled to a pro-rated bonus share, with the remaining bonus share being
returned to the pool to be divided equally among the other executive officers
who held their positions for the entire fiscal year.
The targets for the Supplemental Plan were established in Fiscal 1998 by
the Compensation Committee. The Supplemental Plan was administered by the
Compensation Committee through June 30, 1998 and by the Board of Directors for
the remainder of Fiscal 1998 and is subject to change or termination by the
Company at any time. In Fiscal 1998, no bonus amounts were earned by any
participant in the Supplemental Plan.
Stock Options. In Fiscal 1998, the Compensation Committee and the Board
awarded in the aggregate options to purchase 110,000 shares of Common Stock to
the Chief Executive Officer and options to purchase an aggregate of 985,000
shares of Common Stock to the Company's other executive officers (excluding an
23
<PAGE> 27
award of an option to purchase 15,000 shares of Common Stock granted to Dr.
AuYeung automatically under the Nonemployee Directors' Plan). To date, the
Compensation Committee and the Board have viewed the options program as a
necessary supplement to the base salary to provide a competitive compensation
package as well as a reward and an incentive for superior on-the-job
performance. See the table under this caption "Compensation of Executive
Officers -- Stock Options --Option/SAR Grants in Last Fiscal Year" herein.
Discretionary Bonus. In Fiscal 1998, the Board of Directors awarded two
discretionary bonuses related to the commencement of employment of two executive
officers; $30,000 to Thomas Parkinson, the Company's President and Chief
Operating Officer, and $95,000 to John AuYeung, the Company's Executive Vice
President. In addition, the Company awarded Christmas bonus payments to several
of its executive officers, including the Chief Executive Officer, in an amount
not exceeding $1,000 per officer. See "Compensation of Executive
Officers -- Summary Compensation Table."
401(k) Plan. In addition to the executive officers, all employees of the
Company who are at least 21 years of age and who have completed six months of
service are eligible to participate in the SRS Labs, Inc. 401(k) Plan (the
"401(k) Plan"), a plan which is intended to qualify under Sections 401(a) and
401(k) of the Code. Participants in the 401(k) Plan may make effective salary
reduction contributions to the 401(k) Plan of up to 15% of their annual
compensation, not to exceed $9,500 in Fiscal 1998, as adjusted for inflation. In
addition, the Company also may contribute additional amounts determined in its
sole discretion. The level of the Company's contributions is related to the
Company's financial ability to make a contribution and the competitive
compensation packages offered to employees at comparable companies. Employee
contributions and the Company contributions, if any, are fully vested and
nonforfeitable at all times. Benefits under the 401(k) Plan generally become
payable upon separation from service, retirement, death or disability. In Fiscal
1998, the Chief Executive Officer did not participate in the 401(k) Plan; only
Ms. Biski, Vice President, Chief Financial Officer, Treasurer and Secretary,
participated in the Plan. The Company did not make a contribution to the 401(k)
Plan in Fiscal 1998.
<TABLE>
<S> <C>
THE SRS LABS, INC. THE SRS LABS, INC.
COMPENSATION COMMITTEE BOARD OF DIRECTORS
John AuYeung (Chairman) John AuYeung
John Tu Robert Pfannkuch
Stephen V. Sedmak
Jeffrey I. Scheinrock
John Tu
Thomas W.T. Wan
Thomas C.K. Yuen
</TABLE>
24
<PAGE> 28
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Common Stock for the last three fiscal years with the cumulative total return on
(a) the S&P Smallcap 600 Index and (b) an index of eight (8) peer companies
selected by the Company. The peer group was selected by the Company with the
assistance of an outside compensation consultant. The search was limited to
publicly-traded companies in the audio enhancements and technology business with
market capitalizations of under $100 million. This peer group index is subject
to occasional change as the Company or its competitors change their focus, merge
or are acquired, undergo significant changes, or as new competitors emerge.
The comparisons in this table are required by the SEC and, therefore, are
not intended to forecast or be indicative of possible future performance of the
Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN(1)
<TABLE>
<CAPTION>
SRS S&P SMALLCAP 600 INDEX PEER COMPANY INDEX
--- ---------------------- ------------------
<S> <C> <C> <C>
8/9/96 100.00 100.00 100.00
12/31/96 107.81 112.16 85.07
12/31/97 92.98 139.67 135.98
12/31/98 45.31 136.74 66.71
</TABLE>
(1) The graph assumes that the value of the investment in the Common Stock and
in each index was $100 at August 9, 1996. The returns of each component
issuer in the peer group have been weighted according to the respective
issuer's stock market capitalization at the beginning of each period for
which a return is indicated.
(2) ACT Teleconferencing, Andrea Electronics Corp., Aureal Semiconductor Inc.,
NCT Group, Inc., Polk Audio, Inc., Q Sound Labs, Inc., Sensory Science
Corp., and Spatializer Audio Laboratories, Inc.
(3) SRS Labs, Inc. first became a reporting company, pursuant to Section 13(a)
of the Exchange Act, in August 1996. Its stock began to trade on August 9,
1996.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On June 1, 1994, the Company entered into a lease with Daimler Commerce
Partners, L.P. (the "Partnership") with respect to the Company's headquarters
facility which consisted of 11,700 square feet of office and warehouse space.
The general partner of the Partnership is Conifer Investments, Inc, the sole
stockholder of which is the Thomas Yuen Family Trust and the executive officers
of which include Mr. and Mrs. Yuen. The lease term commenced on June 1, 1994 and
expired on May 31, 1997. Prior to the expiration of the lease, the Company
entered into a new lease with the Partnership to lease 23,400 square feet of
space at
25
<PAGE> 29
the same facility. The new lease term commenced on June 1, 1997 and will expire
on May 31, 2000. At the time of expiration, the Company will have an option to
renew the new lease for two additional years commencing on June 1, 2000 and
terminating on May 31, 2002. Rent for the year beginning June 1, 1997 was 59
cents per square foot per month plus common area expenses, real property taxes,
utilities, insurance premiums, and maintenance. Pursuant to such leases, the
Company paid the Partnership rent of $165,672 during Fiscal 1998.
On February 24, 1998, the Company entered into two separate, but related,
stock purchase agreements pursuant to which the Company acquired all of the
outstanding capital stock of Valence Technology Inc. ("Valence"). The aggregate
purchase price paid by the Company for the Valence stock was $19,500,00, payable
$7,394,222 in cash and the remainder in 1,680,611 shares of Common Stock.
Pursuant to such transaction, two of Valence's stockholders, Thomrose Holdings
(BVI) Limited ("Thomrose") and Rayfa (BVI) Limited ("Rayfa"), received $567,795
and $538,047, respectively, and 709,429 and 672,260 shares of Common Stock,
respectively. Accordingly, Thomrose and Rayfa became principal stockholders of
the Company. In addition, the sole stockholder of Thomrose, Thomas W.T. Wan,
retained his position as an executive officer of Valence and became an executive
officer and a director of the Company, and the sole stockholder of Rayfa,
Raymond Choi, retained his position as an executive officer of one of Valence's
operating subsidiaries.
In connection with the acquisition of Valence, the Company issued to
Thomrose and Rayfa an additional 68,750 and 37,500 shares of Common Stock,
respectively, in consideration for such companies and their sole stockholders
(Messrs. Wan and Choi) entering into non-competition agreements with the Company
and Valence. In addition, Mr. Wan entered into an employment agreement with the
Company and Valence and Mr. Choi entered into an employment agreement with the
Company and Valence Semiconductor Design Limited ("VSD"), a subsidiary of
Valence, each effective March 3, 1998. Such employment agreements provide for
initial base salaries of H.K. $1,859,000 per year for Mr. Wan and H.K.
$1,430,000 per year for Mr. Choi. Such base salaries may be adjusted by the
Board of Directors, but may not be reduced below the initial base salaries
provided therein. The employment agreements may be terminated by the Company for
cause, which is defined as (a) the failure to follow the reasonable instructions
of the Board of Directors of Valence or VSD, as applicable, or the Company; (b)
the material breach of any term of the employment agreement and failure to cure
such breach within ten (10) days after written notice thereof to Valence or VSD,
as applicable, or the Company; or (c) the misappropriation of assets of the
Company or any subsidiary by the employee resulting in a material loss to such
entity. The employment agreements may be terminated by the employee upon 60 days
prior written notice. The initial term of each employment agreement is through
December 31, 2000. Each employment agreement automatically renews for additional
one year periods unless prior notice of termination is given by either the
Company or the employee. In the event that the Company either terminates the
employment agreement at the end of the current term, or terminates the
employment agreement during the current term without cause, the employee is
entitled to receive his salary and benefits for the remainder of the current
term of the employment agreement plus an additional period of twelve months.
During such period, the employee is obligated to provide advisory services to
the Company. Each employment agreement also generally provides the employee with
compensation for the remainder of the current term plus an additional period of
12 months and certain other benefits and for the acceleration of the date of
vesting for outstanding stock options if the employee is terminated or
terminates his employment for certain enumerated reasons within 90 days before
or one year after a change in control in the Company, as defined in each
employment agreement.
The Company entered into a license agreement (the "NuReality License") with
NuReality (dba for Atlantis Computers, Inc.), whereby the Company licenses
certain of its technologies to NuReality for use with multimedia products and
cartridge-based game accessories. The sole stockholder of NuReality is the
Thomas Yuen Family Trust, and the executive officers of NuReality include Mr.
and Mrs. Yuen. Pursuant to the NuReality License, NuReality paid the Company
royalties of $10,000 during Fiscal 1998.
In the opinion of management, the terms of the above-described agreements
are fair and reasonable and as favorable to the Company as those which could
have been obtained from unrelated third parties at the time of their execution.
26
<PAGE> 30
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and
greater-than-ten-percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during Fiscal 1998, and except as disclosed in the
following paragraph, the Company's officers, directors and
greater-than-ten-percent beneficial owners complied with all Section 16(a)
filing requirements.
The following persons made late filings of reports under Section 16(a) of
the Exchange Act that related to transactions that occurred during Fiscal 1998:
Robert Pfannkuch and John Tu, directors of the Company, each filed one late Form
4 in connection with their respective grants of stock options in December 1998.
In addition, the following persons each filed one amendment to their Form 5 in
connection with their respective grants of stock options in December 1998
(reporting transactions which should have been reported on or prior to February
15, 1999): John AuYeung, Executive Vice President, Chief Operating Officer,
Secretary and a director of the Company; Janet M. Biski, former Vice President,
Chief Financial Officer and Secretary of the Company; Thomas R. Parkinson, a
former executive officer of the Company; Jeffrey I. Scheinrock, a director of
the Company; Stephen V. Sedmak, a director of the Company; Thomas W.T. Wan, Vice
President and a director of the Company; Misako Yuen, co-trustee of the Thomas
Yuen Family Trust; and Thomas C.K. Yuen, Chairman, Chief Executive Officer, a
director of the Company and co-trustee of the Thomas Yuen Family Trust.
RELATIONSHIP OF THE COMPANY WITH
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors selected the firm of Deloitte & Touche LLP
("Deloitte & Touche"), independent certified public accountants, as auditors for
Fiscal 1998 and has selected such firm to act as auditors for the fiscal year
ending December 31, 1999. During Fiscal 1998, Deloitte & Touche also was engaged
by the Company to provide certain consulting services. Representatives of
Deloitte & Touche are expected to be present at the Annual Meeting, will have
the opportunity to make a statement if they desire to do so, and are expected to
be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If you want us to consider including a proposal in the Company's proxy
materials relating to the annual meeting of stockholders to be held in the year
2000, you must submit such proposal to the Company no later than December 31,
1999. If such proposal is in compliance with all of the requirements of Rule
14a-8 under the Exchange Act, we will include it in the proxy statement and set
it forth on the form of proxy issued for such annual meeting of stockholders.
You should direct any such stockholder proposals to the attention of the
Secretary of the Company at the address of the Company set forth on the first
page of this Proxy Statement. Also see "Voting Rights and Solicitation of
Proxies -- Nominations for Directors" for a discussion relating to the Company's
advance notice Bylaw concerning nominations of directors.
With respect to any proposal that a stockholder of the Company presents at
the annual meeting of stockholders to be held in the year 2000 that is not
submitted for inclusion in the Company's proxy materials pursuant to Rule 14a-8
under the Exchange Act, the proxy for such annual meeting of stockholders will
confer discretionary voting authority to vote on such stockholder proposal
unless (a) the Company is notified of such proposal no later than March 23,
2000, and (b) the proponent complies with the other requirements set forth in
Rule 14a-4 under the Exchange Act.
27
<PAGE> 31
ANNUAL REPORT
YOU MAY OBTAIN, WITHOUT CHARGE, A COPY OF THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR, INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENT SCHEDULES REQUIRED TO BE FILED WITH THE SEC PURSUANT TO RULE 13A-1 OF
THE EXCHANGE ACT. YOU MAY ALSO OBTAIN COPIES OF EXHIBITS TO THE FORM 10-K, BUT
WE WILL CHARGE A REASONABLE FEE TO STOCKHOLDERS REQUESTING SUCH EXHIBITS. YOU
SHOULD DIRECT YOUR REQUEST IN WRITING TO THE COMPANY AT THE ADDRESS OF THE
COMPANY SET FORTH ON THE FIRST PAGE OF THIS PROXY STATEMENT, ATTENTION: MR. JOHN
AUYEUNG, EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND SECRETARY.
By Order of the Board of Directors,
/s/ John AuYeung
--------------------------------------
John AuYeung
Executive Vice President,
Chief Operating Officer and Secretary
Santa Ana, California
April 29, 1999
28
<PAGE> 32
APPENDIX A
SRS LABS, INC. AMENDED AND RESTATED
1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
SECTION 1. PURPOSE.
The purpose of the SRS Labs, Inc. Amended and Restated 1996 Nonemployee
Directors' Stock Option Plan (the "Plan") is to attract, retain and compensate
highly qualified individuals to serve as members of the Board of Directors (the
"Board") of SRS Labs, Inc. (the "Company") who are not current employees of the
Company and to enable them to increase their ownership of shares of Common
Stock, par value $.001 per share, of the Company ("Common Stock"). The Plan will
be beneficial to the Company and its stockholders since it will allow these
directors to have a greater personal financial stake in the Company through the
ownership of Common Stock, in addition to underscoring their common interest and
identification with stockholders in increasing the value of Common Stock.
SECTION 2. SHARES SUBJECT TO PLAN.
The total number of shares of Common Stock with respect to which options
may be granted under the Plan shall not exceed 250,000 (as adjusted pursuant to
Section 7 hereof). Shares issued upon exercise of options granted under the Plan
may be either authorized and previously unissued shares, issued shares which
have been reacquired by the Company, or any combination thereof. In the event
that any option granted under the Plan shall terminate, expire or, with the
consent of the optionee, be canceled as to any shares of Common Stock, without
having been exercised in full, new options may be granted with respect to such
shares without again being charged against the maximum share limitations set
forth above in this Section 2.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by a committee consisting of all directors
who are not eligible to participate in the Plan (the "Committee"). Subject to
the provisions of the Plan, the Committee shall be authorized to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to the
Plan, and to make all other determinations necessary or advisable for the
administration of the Plan. The Committee shall have no discretion with respect
to the eligibility or selection of directors to receive options under the Plan,
the times at which options shall be granted or shall become exercisable, the
number of shares subject to any such options or the Plan, or the purchase price
thereunder, except for adjustments as described in Section 7. The determination
of the Committee in the administration of the Plan, as described herein, shall
be final and conclusive and binding upon all persons, including, without
limitation, the Company, its shareholders, and persons granted options under the
Plan. The Secretary of the Company shall be authorized to implement the Plan in
accordance with its terms and to take such actions of a ministerial nature as
shall be necessary to effectuate the intent and purposes hereof. The validity,
construction, and effect of the Plan and any rules and regulations relating to
the Plan shall be determined in accordance with the internal substantive laws of
the State of Delaware.
SECTION 4. ELIGIBILITY.
All members of the Board who are not current employees of the Company or
any of its subsidiaries at the time of an option award ("Nonemployee Directors")
are eligible to participate in the Plan.
SECTION 5. OPTION AWARDS.
(a) Initial Awards After the IPO. Each Nonemployee Director who was in
office prior to the IPO Date and remains in office as of the IPO Date shall be
granted options to purchase 10,000 shares of Common Stock. Such options shall be
granted on the IPO Date. For purposes of the Plan, "IPO Date" means the date of
the closing of the initial public offering of Common Stock pursuant to the
Registration Statement on Form SB-2
A-1
<PAGE> 33
(Registration No. 333-4974-LA) of the Company filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933 (the "IPO").
(b) Future Awards.
(i) Each Nonemployee Director who first becomes a member of the Board
after the IPO Date shall be granted an option to purchase 10,000 shares of
Common Stock (as adjusted pursuant to Section 7 hereof) automatically upon
election to the Board.
(ii) Each Nonemployee Director shall be granted an option to purchase
15,000 shares of Common Stock (as adjusted pursuant to Section 7 hereof)
automatically effective as of the close of business on the date of each of
the Company's Annual Meeting of Stockholders at which such Nonemployee
Director is elected a Nonemployee Director.
(c) Non-Statutory Stock Options. All options granted under the Plan shall
be non-statutory options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each option granted
under the Plan shall provide that such option shall not be treated as an
"incentive stock option," as that term is defined in Section 422(b) of the Code.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
All options granted under the Plan shall be evidenced by stock option
agreements in writing (hereinafter referenced to as "option agreements"), in
such form as the Committee may from time to time approve, executed on behalf of
the Company by the Chairman of the Board, the President or any other authorized
officer of the Company. Each option agreement shall be subject to the Plan, and,
in addition to such other terms and conditions as the Committee may deem
desirable, shall provide in substance as follows:
(a) Purchase Price. The purchase price per share of Common Stock for which
each option is exercisable shall be equal to 100% of the fair market value of a
share of Common Stock as of the date such option is granted ("Fair Market
Value"). Such Fair Market Value shall be, for any date, (i) the closing price of
Common Stock on such date, if available, or, if there are no sales of Common
Stock on such date or if a closing sales price is not available, (ii) the
average of the "bid" and "asked" prices of Common Stock on such date, in each
case as reported by the National Association of Securities Dealers Automated
Quotation System or any national securities exchange on which Common Stock is
then traded, or if (i) or (ii) are not available, the fair market value on such
date as determined by the Committee in accordance with applicable law and
regulations. The option price shall be subject to adjustment as provided in
Section 7 hereof.
(b) Exercisability and Terms of Options. Subject to Section 6(c) hereof,
each option granted pursuant to Section 5(a) and 5(b)(i) hereof shall be
exercisable in full on the date of grant, and each option granted pursuant to
Section 5(b)(ii) hereof shall be exercisable in three equal annual installments
commencing on the first anniversary of the date of grant, provided, however,
that notwithstanding anything to the contrary, the third installment shall vest
on the earlier of (i) the third anniversary of the date of grant or (ii) the
date of the Company's annual meeting of stockholders held during the calendar
year of the third anniversary of the date of grant. Each option granted under
the Plan shall expire 10 years from the date of grant and shall be subject to
earlier termination as hereinafter provided. If a Nonemployee Director
subsequently becomes an employee of the Company while remaining a member of the
Board, any options held under the Plan by such individual at the time of such
commencement of employment shall not be affected thereby.
(c) Cessation of Service. Except as hereinafter set forth, no option shall
be exercisable after the date of cessation of an optionee's service as a
director of the Company. Upon the death of an optionee at any time, all of the
then outstanding options of such optionee shall become immediately exercisable.
If an optionee's service ceases for any reason, such optionee's exercisable
options may be exercised by the optionee within one year after such cessation of
service. If an optionee shall die within such one-year period, or if cessation
of his or her service shall have been due to such optionee's death, such options
may be exercised at any time within one year after such death by the optionee's
executor or administrator or by his or her distributee to whom such options may
have been transferred by will or by the laws of descent and distribution. The
foregoing provisions shall not extend the period during which an option may be
exercised beyond the date it expires by its terms.
A-2
<PAGE> 34
(d) Manner of Exercise. Each option agreement shall provide that any option
therein granted shall be exercisable only by giving in each case written notice
of exercise, accompanied by full payment of the purchase price either (i) in
cash (including check, bank draft, or money order, or wire or other transfer of
funds, or advice of credit to the Company), (ii) in shares of Common Stock with
a fair market value at the time of exercise that is equal to the purchase price
or (iii) any combination of cash and shares of Common Stock which in the
aggregate are equal in value to the purchase price. At the discretion of the
Committee, the option agreement may provide that shares of Common Stock may be
issued in the name of the optionee and another person jointly with the right of
survivorship. All grants will provide for a deferred payment of the purchase
price from the proceeds of sale through a bank or broker on the date of exercise
of some or all of the shares of Common Stock to which the exercise relates.
(e) Nontransferability. Each option agreement shall provide that any option
therein granted is not transferable by the optionee other than (i) by will or by
the laws of descent and distribution, (ii) pursuant to a qualified domestic
relations order, or (iii) as provided in the option agreement, to a transferee
who may sell shares of Common Stock upon exercise of such option pursuant to the
rules and regulations relating to use of a Registration Statement on Form S-8
under the Securities Act of 1933, as amended (or any successor form). Such
option (in whole or in part, as the case may be) may be exercised only by the
optionee, such optionee's legal representative or permitted successor or a
permitted transferee.
SECTION 7. ADJUSTMENT UPON CHANGES IN STOCK.
The Board of Directors shall make or provide for such adjustments in the
option price and in the number or kind of shares or other securities (including
shares or other securities of another issuer) covered by outstanding options as
the Board of Directors in its sole discretion, exercised in good faith, shall
determine is equitably required to prevent dilution or enlargement of rights of
optionees that would otherwise result from (a) any stock dividend, stock split,
combination of shares, issuance of rights or warrants to purchase stock,
spin-off, recapitalization or other changes in the capital structure of the
Company, (b) any merger, consolidation, reorganization or partial or complete
liquidations, or (c) any other corporate transaction or event having an effect
similar to any of the foregoing. The Board of Directors also shall make or
provide for such adjustment in the number or kind of shares of the Company's
capital stock or other securities (or in shares or other securities of another
issuer) which may be acquired pursuant to options granted under the Plan and the
number of such securities to be awarded to each optionee as the Board of
Directors in its sole discretion, exercised in good faith, shall determine is
appropriate to reflect any transaction or event described in the preceding
sentence. In the event of any such transaction or event, the Board of Directors
may provide in substitution for any or all outstanding options under the Plan
such alternative consideration (including securities of any surviving entity) as
it may in good faith determine to be equitable under the circumstances and may
require in connection therewith the surrender of all options so replaced. In any
case, such substitution of securities shall not require the consent of any
person who is granted options pursuant to the Plan. The determination of the
Board of Directors as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
SECTION 8. FRACTIONAL SHARES.
No fractional shares shall be issued pursuant to options granted hereunder
and any fractional share resulting from an adjustment pursuant to Section 7
hereof shall be eliminated.
SECTION 9. GOVERNMENT REGULATIONS.
The Plan, the grant and exercise of options hereunder, and the Company's
obligation to sell and deliver shares of stock pursuant to any such exercise,
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any regulatory or government agency as shall be
required. The Company shall not be required to issue or deliver any certificate
or certificates for shares of Common Stock prior to (i) the inclusion of such
shares for quotation on the National Association of Securities Dealers Automated
Quotation System and (ii) the completion of any registration or other
qualification of such shares under any
A-3
<PAGE> 35
state or federal law or rulings or regulations of any government body, which the
Company shall, in its sole discretion, determine to be necessary or advisable.
SECTION 10. TERM OF THE PLAN.
The Plan shall become effective immediately upon the closing of the IPO
(the "Effective Date"). The Plan shall terminate at such time as all of the
shares of Common Stock authorized under Section 2 hereof have been granted. In
the event that at any future grant date as determined under Section 5 hereof,
the aggregate number of options to be granted at such time exceed the remaining
options available under the Plan as determined in accordance with Section 2
hereof, the remaining options available shall be granted to the Nonemployee
Director entitled to such grant, and if there is more than one such Nonemployee
Director, then the remaining options shall be granted equally to such
Nonemployee Directors on a pro-rata basis. Termination of the Plan, however,
shall not affect outstanding options which have been granted prior to such
termination, and all unexpired options shall continue in full force and
operation after termination of the Plan, except as they shall lapse or terminate
by their own terms and conditions, and the terms of the Plan shall continue to
apply to such options.
SECTION 11. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board of Directors, at any time and from time to time, may amend,
suspend or terminate the Plan; provided, however, that (i) except as expressly
authorized by the Plan, no such amendment shall increase the maximum number of
shares specified in Section 2 of the Plan without the further approval of the
shareholders of the Company and (ii) amendments revising the amount, price or
timing of option awards shall not be made more frequently than once every six
months unless necessary to comply with the Code, the Employee Retirement Income
Security Act, or the rules thereunder.
(b) Without the written consent of the optionee, no amendment, suspension
or termination of the Plan shall adversely affect any option previously granted
under the Plan, but it shall be conclusively presumed that any adjustment as
provided in Section 7 does not adversely affect any such right.
SECTION 12. NO RIGHT TO CONTINUE AS DIRECTOR.
Neither the Plan, nor the granting of an option nor any other action taken
pursuant to the Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that a director has a right to continue as a
director for any period of time, or at any particular rate of compensation.
A-4
<PAGE> 36
PROXY PROXY
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
SRS LABS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE
The undersigned stockholder(s) of SRS Labs, Inc., a Delaware corporation (the
"Company"), hereby appoints Thomas C.K. Yuen, John AuYeung, or either of them,
proxies, each with full power of substitution, for and in the name of the
undersigned at the Annual Meeting of Stockholders of the Company to be held on
June 10, 1999, and at any and all adjournments thereof, to vote all shares of
the capital stock of said Company held of record by the undersigned on April 16,
1999, as if the undersigned were present and voting the shares.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN
THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR PROPOSAL 2, FOR THE
NOMINEES NAMED IN PROPOSAL 1 ON THE REVERSE SIDE AND IN ACCORDANCE WITH THEIR
DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
(CONTINUED AND TO BE VOTED, SIGNED AND DATED ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 37
SRS LABS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [ ]
THE LISTED NOMINEES AND THE PROPOSAL HAVE BEEN PROPOSED BY THE COMPANY. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED AND "FOR"
THE LISTED PROPOSAL.
1. ELECTION OF DIRECTORS:
<TABLE>
<CAPTION>
For All
Except as
Indicated
Withhold to the
Nominees for election to the Board of Directors as Class III Directors: For All All Contrary
Stephen V. Sedmak and Thomas C.K. Yuen [ ] [ ] [ ]
<S> <C> <C> <C>
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
NOMINEE, WRITE THE NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
--------------------------------------------------------------------
2. Proposal to approve the Amended and Restated SRS Labs, Inc. 1996 For Against Abstain
Nonemployee Directors' Stock Option Plan. [ ] [ ] [ ]
3. The proxies are authorized to vote in their discretion upon such
other business as may properly come before the meeting.
</TABLE>
I PLAN TO ATTEND THE MEETING [ ]
Please date this Proxy and sign exactly as your
name appears hereon. When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title. If there is more than
one trustee, all should sign. All joint owners
should sign.
--------------------------------------------------
Signature
--------------------------------------------------
Signature
Dated: , 1999
------------------------------
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
