<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to___________
COMMISSION FILE NUMBER 0-21123
SRS LABS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 33-0714264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 442-1070
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGES SINCE LAST REPORT)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: as of October 31, 1999,
11,714,609 shares of the issuer's common stock, par value $.001 per share, were
outstanding, including 36,100 shares of the issuer's common stock designated as
treasury stock.
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<PAGE> 2
SRS LABS, INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) for
the three months and nine months ended September 30, 1999
and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (Unaudited) 6
Notes to the Interim Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 22
Item 2. Changes in Securities and Use of Proceeds. 22
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURES 23
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SRS LABS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,565,940 $ 12,341,242
Investments available for sale 3,006,045 1,519,425
Accounts receivable, net 4,732,727 5,320,686
Inventories, net 4,367,025 4,632,968
Prepaid expenses and other current assets 1,031,224 3,244,233
Deferred income taxes 17,456 17,456
------------ ------------
TOTAL CURRENT ASSETS 22,720,417 27,076,010
Investments available for sale 7,889,687 10,570,192
Furniture, fixtures & equipment, net 1,175,949 1,219,433
Intangible assets, net 5,819,299 6,669,671
------------ ------------
TOTAL ASSETS $ 37,605,352 $ 45,535,306
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,855,125 $ 10,632,505
Accrued liabilities 1,418,786 422,843
Line of credit 8,028,444 8,000,000
Income taxes payable 393,225 376,545
------------ ------------
TOTAL CURRENT LIABILITIES 12,695,580 19,431,893
Deferred income taxes 31,240 31,240
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock - $.001 par value; 56,000,000 shares
authorized; 11,714,609 (at September 30, 1999)
and 11,688,893 (at December 31, 1998) shares issued
and outstanding 11,715 11,689
Additional paid-in capital 39,227,213 39,170,103
Deferred stock option compensation 461,324 313,302
Cumulative other comprehensive income 52,082 141,389
Retained deficit (14,744,771) (13,564,310)
Less treasury stock at cost, 36,100 (at September 30,
1999) and zero (at December 31, 1998) shares (129,031) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,878,532 26,072,173
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,605,352 $ 45,535,306
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Chip and licensing revenue 4,829,847 $ 3,935,479 $ 12,923,851 $ 11,341,907
Product and component sales 5,174,772 7,382,323 13,001,555 18,658,661
----------- ----------- ------------ ------------
TOTAL REVENUES 10,004,619 11,317,802 25,925,406 30,000,568
COST OF SALES 6,064,191 7,810,345 16,242,610 19,596,284
----------- ----------- ------------ ------------
GROSS MARGIN 3,940,428 3,507,457 9,682,796 10,404,284
Sales and marketing 1,351,882 1,176,466 4,025,818 3,876,993
Research and development 866,149 577,816 2,295,510 1,576,526
General and administrative 1,494,879 1,536,407 5,044,255 4,157,535
Acquired in-process research and development -- -- -- 18,510,378
----------- ----------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS 227,518 216,768 (1,682,787) (17,717,148)
OTHER INCOME, NET 190,728 11,728 396,131 394,126
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT) 418,246 228,496 (1,286,656) (17,323,022)
INCOME TAX EXPENSE (BENEFIT) 107,824 36,986 (105,843) (24,020)
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ 310,422 $ 191,510 $ (1,180,813) $(17,299,002)
=========== =========== ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 0.03 $ 0.02 $ (0.10) $ (1.53)
=========== =========== ============ ============
Diluted $ 0.03 $ 0.02 $ (0.10) $ (1.53)
=========== =========== ============ ============
WEIGHTED AVERAGE SHARES USED IN THE
CALCULATION OF NET INCOME (LOSS) PER
COMMON SHARE
Basic 11,682,336 11,619,090 11,683,634 11,339,653
=========== =========== ============ ============
Diluted 12,108,558 11,619,090 11,683,634 11,339,653
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------------
1999 1998 1999 1998
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 310,422 $191,510 $(1,180,813) $(17,299,002)
Other comprehensive loss
Unrealized (loss) gain on investments
available for sale, net of tax (18,477) 41,422 (89,307) (16,336)
--------- -------- ----------- ------------
Comprehensive income (loss) $ 291,945 $232,932 $(1,270,120) $(17,315,338)
========= ======== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,180,813) $(17,299,002)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,572,928 1,300,758
Deferred income taxes -- (335,000)
Write-off of acquired in-process research and development -- 18,510,378
Realized gain on sales of investments available for sale -- (77,438)
Amortization of premium on investments available for sale 42,515 39,464
Accretion of consideration due on asset purchase -- 8,196
Increase in deferred stock option compensation 148,022 75,406
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Accounts receivable 587,959 1,560,735
Inventories 265,943 (307,698)
Prepaid expenses and other current assets 2,213,009 (437,722)
Accounts payable (7,777,380) (1,750,143)
Accrued liabilities 995,943 695,550
Income taxes payable 79,094 (467,447)
------------ ------------
Net cash (used in) provided by operations (3,052,780) 1,516,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (330,851) (166,042)
Proceeds from sales of investments available for sale -- 8,317,572
Cash paid for acquisitions, less cash acquired -- (6,911,216)
Proceeds from investment maturities
1,000,001 --
Expenditures related to patents (348,221) (576,830)
------------ ------------
Net cash provided by investing activities 320,929 663,484
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 28,444 8,000,000
Payments on subsidiary debt -- (6,846,737)
Payment of consideration due on asset purchase -- (91,707)
Repurchase of common stock (129,031) --
Proceeds from exercise of stock options 57,136 168,371
------------ ------------
Net cash (used in) provided by financing activities (43,451) 1,229,927
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,775,302) 3,409,448
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,341,242 4,446,753
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,565,940 $ 7,856,201
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 364,085 $ 239,716
Income taxes $ -- $ 640,000
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
SRS LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- --------
<S> <C> <C>
Additional consideration accrued for asset purchase $ -- $ 8,196
Unrealized gain (loss) on investments, net $ (89,307) $(16,336)
</TABLE>
The Company acquired the stock of Valence Technology Inc. ("Valence") during
March 1998 (Note 2) and issued 1,680,611 shares of common stock in payment of
$12,105,778 of the acquisition price.
In conjunction with the acquisition, certain liabilities were assumed as
follows:
Fair value of assets acquired $ 14,076,279
Acquired in-process research and development costs 17,471,668
Acquired intangible assets 5,910,400
Total consideration, including acquisition costs (21,879,033)
------------
Liabilities assumed $ 15,579,314
============
The Company issued 125,000 shares of common stock in consideration for certain
non-competition agreements with the key employees of Valence. The shares have an
ascribed fair value of $900,400 (Note 2).
In February 1998, the Company issued 25,000 shares of common stock and warrants
to purchase 100,000 shares of common stock in conjunction with the acquisition
of Voice Intelligibility Processor ("VIP"). The shares and warrants have an
ascribed fair value of $176,575 and $341,957, respectively (Note 2).
In May 1998, the Company issued 35,294 shares of common stock in conjunction
with the acquisition of certain rights associated with the Circle Surround
technology. The shares have an ascribed fair value of $300,000 (Note 2).
In January 1999, the Company received certain computer equipment and a fully
paid-up license for MPEG-1 Technology Core from DVS Inc. in payment for $300,000
of license fees due to the Company for the use of its technologies.
7
<PAGE> 8
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL/BASIS OF PRESENTATION
SRS Labs, Inc. is a developer and provider of technology solutions for the
consumer electronics, computer, game and telecommunications markets. The
Company's principal business activities in these markets include:
o Developing and licensing audio and voice technologies to consumer
electronic manufacturers and semiconductor manufacturers around the world;
and
o Through its subsidiary, Valence Technology Inc. and its foreign
subsidiaries, designing and selling technology solutions through custom
application specific integrated circuits ("ASICs") to consumer electronic
manufacturers; and designing, distributing and manufacturing components,
sub-assemblies and electronics products for manufacturers and retailers
within the Company's targeted markets.
The accompanying interim consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of December 31, 1998) in conformity with generally accepted accounting
principles for interim financial information and with the rules and regulations
of the U.S. Securities and Exchange Commission. In the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Therefore, the interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998. Current and future financial statements
may not be directly comparable to the Company's historical financial statements.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.
2. ACQUISITIONS
On March 2, 1998, the Company acquired (the "Acquisition") all of the
outstanding shares of capital stock of Valence Technology Inc., a British Virgin
Islands holding company with its principal business operations in Hong Kong and
China ("Valence"). Valence, which conducts its business through its subsidiaries
based in Hong Kong and China, is engaged in the following business activities:
(i) the development and marketing of technology in the form of integrated
circuits (ASICs) to consumer electronic manufacturers and (ii) the sale of
consumer electronic and telecommunications products and components. The
aggregate purchase price of $19,500,000 consisted of approximately $7,400,000 in
cash and 1,680,611 shares of the Company's common stock with a fair value of
$12,105,778. The Company's consolidated statement of operations for the nine
months ended September 30, 1998 includes a charge of $17.5 million for the
write-off of acquired in-process research and development expense associated
with the Valence acquisition. The acquisition was accounted for as a purchase
having an effective date of February 1, 1998. In connection with such
acquisition, three of the four management shareholders and their respective sole
shareholders, each of whom was a key employee of Valence or one of its
subsidiaries, entered into non-competition agreements with the Company. In
consideration for these agreements and for a nominal cash payment equal to the
par value of the shares, the Company issued 125,000 additional shares of its
common stock in the aggregate to such three shareholders.
8
<PAGE> 9
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following summarizes the consideration granted for the acquisition of
Valence and the non-compete agreements, the allocation of the purchase price and
other purchase accounting adjustments:
Cash $ 7,394,222
Common stock 13,006,178
-------------
Total purchase price 20,400,400
Deficiency in net assets acquired 1,503,035
Acquisition costs 1,478,633
-------------
Excess of purchase price over net assets acquired $ 23,382,068
=============
Allocation to:
In-process research and development $ 17,471,668
Intangible assets 5,910,400
-------------
$ 23,382,068
=============
The resulting intangible assets are being amortized on a straight-line
basis over periods ranging from three to eleven years.
On February 28, 1998, the Company acquired certain rights to a proprietary
technology, Voice Intelligibility Processor, ("VIP") from a third party. The
aggregate consideration, including acquisition costs, was $1,138,710 and was
comprised of $620,178 in cash, 25,000 shares of the Company's common stock with
a fair value of $176,575 and warrants to purchase 100,000 shares of the
Company's common stock at $9.47 per share with a fair value of $341,957. The
purchase price allocated to in-process research and development was charged to
the Company's operations, resulting in a charge of $1,038,710. The remainder of
the purchase price was allocated to an intangible asset and is being amortized
over eight years.
On May 21, 1998, the Company acquired certain rights to a proprietary
technology, Circle Surround, from a third party. The aggregate consideration,
including acquisition costs, was $834,985 and was comprised of $534,985 in cash
and 35,294 shares of the Company's common stock with a fair value of $300,000.
The purchase price was allocated to an intangible asset and is being amortized
over ten years.
3. INVESTMENTS AVAILABLE FOR SALE
The Company has classified its investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115. As
of September 30, 1999, the Company's available-for-sale investments had a cost
of $10,807,458 and an estimated fair value of $10,895,732, based on quoted
market prices. The unrealized gains on these investments of $88,274, net of
income taxes of $36,192, are reported as cumulative other comprehensive income
in the accompanying consolidated balance sheets.
4. INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of
cost or net realizable value. Cost is calculated using the weighted average
method and is comprised of material costs and, where applicable, subcontracting
and overhead costs that have been incurred in bringing the inventories to their
present location and condition. Net realizable value represents the estimated
selling price less estimated costs to completion and costs to be incurred in
selling and distribution.
5. NET INCOME (LOSS) PER COMMON SHARE
The Company computes earnings per share (EPS) in accordance with SFAS No.
128, "Earnings per Share". SFAS No. 128 requires the Company to disclose basic
and diluted earnings per share.
9
<PAGE> 10
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
7. STOCKHOLDERS' EQUITY
During the fiscal year ended December 31, 1998 ("Fiscal 1998"), the
Company's Board of Directors authorized the repurchase of up to 500,000 of the
outstanding shares of the Company's common stock. As of September 30, 1999,
36,100 shares had been repurchased at a cost of $129,031. Such repurchased
shares are reflected as treasury stock in the accompanying consolidated balance
sheets.
8. SEGMENT INFORMATION
The Company operates in two business segments: (i) the development and
marketing of technology either in the form of integrated circuits through
Valence (ASICs) or the licensing of technologies developed by the Company to
consumer electronic manufacturers and semiconductor manufacturers and (ii) the
sale of consumer electronic products and components. The Company does not
allocate operating expenses or specific assets to these segments. Therefore,
segment information includes only net revenues, cost of sales and gross margin.
Prior to the acquisition of Valence, the Company operated in the single business
segment of licensing audio technologies.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
---------------------------------------
Chips and Product and
Licensing Component Sales Total
---------- --------------- -----------
<S> <C> <C> <C>
Net revenues $4,831,772 $5,172,847 $10,004,619
Cost of sales 1,227,489 4,836,702 6,064,191
---------- ---------- -----------
Gross margin $3,604,283 $ 336,145 $ 3,940,428
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
---------------------------------------
Chips and Product and
Licensing Component Sales Total
---------- --------------- -----------
<S> <C> <C> <C>
Net revenues $3,935,479 $7,382,323 $11,317,802
Cost of sales 878,958 6,931,387 7,810,345
---------- ---------- -----------
Gross margin $3,056,521 $ 450,936 $ 3,507,457
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------
Chips and Product and
Licensing Component Sales Total
----------- --------------- -----------
<S> <C> <C> <C>
Net revenues $12,925,776 $12,999,630 $25,925,406
Cost of sales 3,854,755 12,387,855 16,242,610
----------- ----------- -----------
Gross margin $ 9,071,021 $ 611,775 $ 9,682,796
=========== =========== ===========
</TABLE>
10
<PAGE> 11
SRS LABS, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------
Chips and Product and
Licensing Component Sales Total
----------- --------------- -----------
<S> <C> <C> <C>
Net revenues $11,341,907 $18,658,661 $30,000,568
Cost of sales 2,732,736 16,863,548 19,596,284
----------- ----------- -----------
Gross margin $ 8,609,171 $ 1,795,113 $10,404,284
=========== =========== ===========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SRS Labs, Inc. is a developer and provider of technology solutions for the
consumer electronics, computer, game and telecommunications markets. The
Company's principal business activities in these markets include:
o Developing and licensing audio and voice technologies to consumer
electronic manufacturers and semiconductor manufacturers around the world;
and
o Through its subsidiary, Valence Technology Inc. and its foreign
subsidiaries, designing and selling technology solutions through custom
application specific integrated circuits ("ASICs") to consumer electronic
manufacturers; and designing, distributing and manufacturing components,
sub-assemblies and electronics products for manufacturers and retailers
within the Company's targeted markets.
From the Company's inception in 1993 until February 1998, the Company
derived substantially all of its revenue from royalties received from technology
licenses. On March 2, 1998, the Company acquired all of the outstanding capital
stock of Valence Technology Inc., a British Virgin Islands holding company with
its principal business operations in Hong Kong and China ("Valence") for an
aggregate purchase price, excluding non-compete agreements and acquisition
costs, of $19,500,000 consisting of approximately $7,400,000 in cash and
approximately 1,680,611 shares of the Company's common stock, $.001 par value
per share (the "Common Stock"). The acquisition was accounted for as a purchase
with an effective date of February 1, 1998. The acquisition of Valence had a
material impact on the Company's financial statements for the fiscal year ended
December 31, 1998 ("Fiscal 1998") and will continue to have a material impact
for the reporting periods thereafter; accordingly, current and future financial
statements may not be directly comparable to the Company's historical financial
statements.
SRS Labs, Inc. currently operates in two business segments: (a) the
development and marketing of technology in the forms of integrated circuits
designed and distributed through Valence and the licensing of technologies
developed by the Company to consumer electronic manufacturers and semiconductor
manufacturers and (b) the sale of consumer electronic products and components. A
summary of the Company's operations and activities by business segment is
included in the notes to the interim consolidated financial statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues
Chip and licensing revenue consists of design fees and sales of custom
application specific integrated circuits (ASICs) by Valence to consumer
electronic manufacturers and sales of general purpose ASICs designed by the
Company under the brand name ASP Microelectronics. Licensing revenues are
royalties and technology transfer fees that are currently generated primarily
from the license of the Company's audio technologies. License and royalty
agreements generally provide for the license of technologies for a specified
period of time for either a single fee or a fee based on the number of units
distributed by the licensee. Product and component sales primarily represent the
distribution of semiconductor products, manufacturing components and
sub-assemblies to consumer electronic manufacturers for the Hong Kong and China
markets. Certain sub-assemblies sold by the Company are incorporated in
electronic home entertainment products under the Valence brand name.
Total revenues for the three months ended September 30, 1999 were
$10,004,619 compared to $11,317,802 for the three months ended September 30,
1998. Excluding chip design revenue, licensing revenue decreased 36.8% from the
same period last year due to the following factors: (a) the shift in the PC
market to lower cost models which cannot bear the cost of performance
enhancement technologies such as those offered by SRS Labs; (b) the Asian
financial crisis which reduced demand for consumer electronics products in the
region and negatively impacted the sales of semiconductor ICs that include the
Company's audio technologies; (c) the trend by consumer
12
<PAGE> 13
electronic manufacturers to initially adopt the Company's new technologies into
their higher end models with limited volume potential for the short-term; and
(d) the absence of technology transfer fees due to the overall economic
conditions in Asia and Europe. The licensing revenue decrease was offset by an
increase of 62.2% in the custom ASIC chip design and chip sales related to
Valence's activities. Revenue from product and component sales decreased to
$5,174,772 for the quarter ended September 30, 1999 from $7,382,323 for the same
prior year quarter primarily due to the Company's decision to focus on higher
margin revenue and de-emphasize the lower margin distribution activities.
Gross Margin
Cost of sales consists primarily of fabrication costs, assembly and test
costs, and the cost of materials and overhead from operations. Gross margin as a
percentage of total revenue for the three months ended September 30, 1999
increased to 39.4% from 31.0% for the same period in fiscal 1998. The increase
resulted from the shift in the Company's revenue base towards higher margin chip
and licensing sales and away from lower margin sales from the distribution of
components. The Company is continuing efforts to focus on higher margin
activities, but expects that gross margins in future quarters will continue to
be heavily impacted by the cost of procuring and manufacturing products for
sale.
Sales and Marketing
Sales and marketing expenses consist primarily of employee salaries and
sales consultants' fees and related expenses, sales commissions and product
promotion. Sales and marketing expenses were $1,351,882 for the three months
ended September 30, 1999 compared to $1,176,466 for the same prior year period,
an increase of 14.9%. The increase was primarily due to an increase in headcount
and additional selling expenses related to higher chip sales. As a percentage of
total revenues, sales and marketing expenses increased to 13.5% for the quarter
ended September 30, 1999 from 10.4% for the same prior year quarter.
Research and Development
Research and development expenses consist of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs for engineering materials and supplies. Research and development expenses
were $866,149 for the three months ended September 30, 1999 compared to $577,816
for the same prior year period, an increase of 49.9%. The increase is primarily
attributable to headcount added to develop, enhance and implement new audio and
voice technologies and to develop software and Internet applications for the
Company's technologies. As a percentage of total revenues, research and
development expenses increased to 8.7% for the quarter ended September 30, 1999
from 5.1% for the same prior year quarter. Management believes research and
development expenses will increase in the future to support the Company's
product development efforts.
General and Administrative
General and administrative expenses consist primarily of employee-related
expenses, legal costs associated with the administration of intellectual
property and other professional fees. General and administrative expenses were
$1,494,879 for the three months ended September 30, 1999 compared to $1,536,407
for the same prior year period, a decrease of 2.7%. The decrease was primarily
attributable to corporate headcount reductions and management's efforts to
better manage outside professional fees. As a percentage of total revenues,
general and administrative expenses increased to 14.9% for the quarter ended
September 30, 1999 from 13.6% for the same prior year quarter.
As part of the Valence acquisition, the Company allocated a portion of the
purchase price to various intangible assets totaling approximately $5,910,400.
This amount was capitalized and is being amortized on a straight line basis over
periods ranging from three to eleven years with the related amortization expense
of $332,796 and $326,497 for the quarters ended September 30, 1999 and September
30, 1998, respectively, included in general and administrative expenses. See
Note 2 of the notes to the interim consolidated financial statements for more
information concerning the purchase price allocation associated with the Valence
acquisition.
13
<PAGE> 14
Other Income, Net
Net other income consists primarily of interest income, interest expense,
realized gains and losses on the sale of investments and foreign currency
transaction gains and losses. Net other income was $190,728 for the three months
ended September 30, 1999 compared to $11,728 for the same prior year period, a
increase of 1,526.3%. The increase is primarily attributable to higher average
cash and investment balances during the current year quarter as compared to the
prior year quarter, lower interest expense during the current year quarter
compared to the comparable prior year period and the recognition of foreign
exchange gain during the current quarter compared to none in the comparable
prior year period.
Provision for Income Taxes
The income tax provision for the three months ended September 30, 1999 was
$107,824 compared to $36,986 for the same prior year period. During the third
quarter of 1999, the Company recognized no additional tax benefit in connection
with taxable losses related to domestic operations and recorded a tax provision
at statutory tax rates in the Asian countries where Valence has its principal
business operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Impact of Valence Acquisition
The Company's consolidated financial results for the nine month period
ended September 30, 1998 include the results of the Valence operations beginning
as of February 1, 1998. Accordingly, results for the nine months ended September
30, 1999 may not be directly comparable to the results for the nine months ended
September 30, 1998.
Revenues
Total revenues for the nine months ended September 30, 1999 were
$25,925,406 compared to $30,000,568 for the nine months ended September 30,
1998. Excluding chip design revenue, licensing revenue decreased 37.0% from the
same period last year due to the following factors: (a) the shift in the PC
market to lower cost models which cannot bear the cost of performance
enhancement technologies such as those offered by SRS Labs; (b) the Asian
financial crisis which reduced demand for consumer electronics products in the
region and negatively impacted the sales of semiconductor ICs that include the
Company's audio technologies; (c) the trend by consumer electronic manufacturers
to initially adopt the Company's new technologies into their higher end models
with limited volume potential for the short-term; and (d) and the absence of
technology transfer fees due to the economic conditions in Europe and Asia. The
licensing revenue decrease was offset by an increase of 45.2% in the custom ASIC
chip design and chip sales related to Valence's activities. Revenue from product
and component sales decreased to $13,001,555 for the nine months ended September
30, 1999 from $18,658 ,661 for the same prior year period primarily due to the
Company's decision to focus on higher margin revenue and de-emphasize certain
lower margin distribution activities.
Gross Margin
Gross margin as a percentage of total revenue for the nine months ended
September 30, 1999 increased to 37.3% from 34.7% for the same period in 1998.
The increase resulted from the shift in the Company's revenue base towards ASIC
and general purpose IC chip sales, which have significantly higher margins than
the Company's distribution revenue base. The Company expects that gross margins
in future quarters will continue to be impacted by the cost of procuring and
manufacturing products for sale.
Sales and Marketing
Sales and marketing expenses were $4,025,818 for the nine months ended
September 30, 1999 compared to $3,876,993 for the same prior year period, a
increase of 3.8%. During the nine-month period ended September 30, 1999, sales
and marketing expenses included the cost for additional headcount needed to
promote the Company's new technologies and increased promotional activities
related to product sales in China. These increases were
14
<PAGE> 15
partially offset by reductions in cooperative advertising activities related to
the Company's technologies and in travel expenses for sales and marketing
personnel. As a percentage of sales, sales and marketing expenses increased to
15.5% for the nine-month period ended September 30, 1999 from 12.9% for the same
prior year period, primarily due to the lower revenue base.
Research and Development
Research and development expenses were $2,295,510 for the nine months ended
September 30, 1999 compared to $1,576,526 for the same prior year period, an
increase of 45.6%. The increase is primarily attributable to headcount added to
support the increased ASIC design activity, to develop, enhance and implement
new audio and voice technologies and to develop software and Internet
applications for the Company's technologies. As a percentage of total revenues,
research and development expenses increased to 8.9% for the nine-month period
ended September 30, 1999 from 5.3% for the same prior year period.
General and Administrative
General and administrative expenses were $5,044,255 for the nine months
ended September 30, 1999 compared to $4,157,535 for the same prior year period,
an increase of 21.3%. The increase was primarily attributable to increased
headcount added to subsidiary operations to support new business development,
costs incurred for due diligence activities related to potential acquisitions
that did not occur and higher costs associated with year end reporting
activities required of a public company due to the expanded scope of the
Company's operations. As a percentage of total revenues, general and
administrative expenses increased to 19.5% for the nine month period ended
September 30, 1999 from 13.9% for the same prior year period.
Amortization expense related to intangible assets associated with the
Valence acquisition was $998,388 and $860,291 for the nine-month periods ended
September 30, 1999 and 1998, respectively, and is included in general and
administrative expenses. See Note 2 of the notes to the interim consolidated
financial statements for more information concerning the purchase price
allocation associated with the Valence acquisition.
Acquired In-Process Research and Development
The Company's Consolidated Statement of Operations for the nine months
ended September 30, 1998 includes the one-time charge of $18,510,378 for the
write-off of acquired in-process research and development expenses associated
with the Valence acquisition and the acquisition of certain assets associated
with the VIP technology. The in-process research and development expenses arose
from new product projects that were under development at the date of the
acquisition and expected to eventually lead to new products but had not yet
established technological feasibility and for which no future alternative use
was identified. The valuation of the in-process research and development
projects was based upon the discounted expected future net cash flows of the
products over the products' expected lives, reflecting the estimated stages of
completion of the projects and the estimated costs to complete the projects.
New product development projects underway at Valence at the time of the
Valence acquisition included, among others, (a) ASICs for consumer electronics,
computing and voice and audio applications, (b) home entertainment systems, (c)
digital multimedia players and (d) digital power amplifiers. The Company
estimated that these projects were approximately 63% complete at the date of
acquisition and estimated that the cost to complete these projects will
aggregate approximately $7 million and will be incurred over a three-year
period.
New product development projects utilizing the VIP technology at the time
of the VIP acquisition included, among others, digital and analog sound
reinforcement, wireless and non-wireless telecommunications applications,
hearing aid applications, headphone and microphone applications. The Company
estimated that these projects were approximately 62% complete at the date of
acquisition and estimated that the cost to complete these projects will
aggregate approximately $525,000 and will be incurred over a two-year period.
Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly,
15
<PAGE> 16
continued economic feasibility of developed technologies, customer acceptance,
customer demand and customer qualification of such new technology and general
competitive conditions in the industry. There can be no assurance that the
acquired in-process research and development projects will be pursued or
successfully completed and commercially introduced.
Other Income, Net
Net other income consists primarily of interest income, interest expense,
realized gains and losses on the sale of investments and foreign currency
transaction gains and losses. Net other income was $396,131 for the nine months
ended September 30, 1999 compared to $394,126 for the same prior year period, an
increase of .5%.
Provision for Income Taxes
The income tax benefit for the nine months ended September 30, 1999 was
$(105,843) compared to $(24,020) for the same prior year period. Related to
domestic operations, the Company recognized tax benefits in connection with
federal refundable taxes which could be recovered through a net operating loss
carry back. In addition, the Company recorded a tax provision at statutory tax
rates in the Asian countries where Valence has its principal business
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity at September 30, 1999 consisted
of cash, cash equivalents and investments aggregating $20.5 million, as well as
borrowings available under its credit facility. At December 31, 1998, the
Company had cash, cash equivalents and long term investments of approximately
$24.4 million, as well as borrowings available under its credit facility.
The Company has primarily financed its operations through the cash provided
by its operations and proceeds from its initial public offering of Common Stock
in August 1996. The Company's operating activities utilized $(3,052,780) in cash
for the nine months ended September 30, 1999 and provided $1,516,037 for the
nine months ended September 30, 1998. The use of cash in operations for the
nine-month period ended September 30, 1999 was primarily due to the reduction in
accounts payable related to major suppliers of the Company's component
distribution business, as well as the Company's loss from operations. Partially
offsetting this decrease was an increase in cash due to a reduction in accounts
receivable and other current assets that resulted from the collection of certain
large balances due from SRS Labs, Inc. and Valence customers that were
outstanding at December 31, 1998.
As described above, the Company acquired Valence and additional
technologies during the first quarter of Fiscal 1998. (See Note 2 to the interim
consolidated financial statements.)
On July 6, 1999, the Company replaced its then existing revolving line of
credit with another revolving line of credit with a bank which expires on April
1, 2001 and is secured by certain of the Company's cash, cash equivalents and
investments. As of September 30, 1999, approximately $3.2 million in cash and
cash equivalents and $10.9 million in investments were pledged as collateral for
the line of credit. The total availability under the line of credit is the
lesser of $10 million or a percentage of the fair market value of the
collateral. The line of credit bears interest at the bank's prime rate or the
LIBOR interest rate as determined by the bank.. The Company had $8.0 million
outstanding under the line of credit as of September 30, 1999. As a result of
the acquisition of Valence, the Company provided Valence $8.0 million to pay off
its short-term debt and other obligations. These funds were provided by
borrowings on the above-referenced line of credit.
The Company anticipates that its primary uses of working capital in future
periods will be to acquire new technologies, to provide Valence with additional
working capital and to fund increased costs for additional sales and engineering
headcount and marketing activities associated with the introduction of new
technologies and products into the market.
Based on current plans and business conditions, the Company believes that
its cash, cash equivalents, investments and/or available borrowings under its
line of credit, together with any amounts generated from
16
<PAGE> 17
operations, will be sufficient to meet the Company's operating and capital
requirements for the foreseeable future. However, there can be no assurance that
the Company will not be required to seek other financing sooner or that such
financing, if required, will be available on terms satisfactory to the Company.
YEAR 2000 READINESS DISCLOSURE
The Company is currently in the process of addressing a problem that is
facing all users of automated information systems. The "Year 2000 issue" arises
out of the fact that many of the world's computer systems currently record years
in a two-digit format. Such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business disruptions
in the U.S. and internationally.
The Company and its subsidiaries have identified the following areas which
could be impacted by the Year 2000 issue: Company products; internally used
systems and software; products or services provided by key third parties; and
the ability of chip partners, licensees or customers to process business
transactions relating to chip design and licensing revenue and product and
component sales.
During Fiscal 1998, the Company and its subsidiaries reviewed its internal
systems including those which support manufacturing process control and
financial and general business operations. The review consisted of an evaluation
of significant internal hardware systems and major software application programs
for their ability to accurately recognize and process dates properly in the Year
2000 and beyond. As a result of this evaluation, the Company identified certain
systems which require upgrades to be Year 2000 ready, including certain business
software applications. The Company is in the process of installing a new
computer system in its overseas operation and has been assured by the software
and hardware providers that these systems will be fully compliant with the Year
2000. The Company believes that installation will be complete by the beginning
of December 1999. The Company's products do not have any material Year 2000
problems.
In addition, the Company and its subsidiaries are in the process of
assessing and documenting the compliance of their major customers, suppliers and
vendors. Management believes that third-party relationships upon which the
Company relies represent the greatest risk with respect to the Year 2000 issue,
because the Company cannot guarantee that third parties will be able to
adequately assess and address their Year 2000 compliance issues in a timely
manner. As a consequence, the Company can give no assurances that issues related
to Year 2000 would not have a material adverse effect on future results of
operations or financial condition.
Total costs relating to the Company's compliance efforts, based on
management's best estimates, are estimated to be approximately $350,000.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to process transactions, manufacture products, send invoices
or engage in similar normal business activities at the Company or its vendors
and suppliers. The Company currently is developing a contingency plan with
respect to potential Year 2000 failures of its suppliers or customers. However,
if such failures would occur, depending upon their duration and severity, there
is no guarantee that the contingency plan would mitigate the effects of these
failures, and they could have a material adverse effect on the Company's
business, results of operations and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations, (b) products and technologies licensed
or sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the Year 2000 Information Readiness Act."
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<PAGE> 18
FORWARD-LOOKING INFORMATION AND CERTAIN FACTORS
Included in this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations are certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
reflecting management's current expectations. Examples of such forward-looking
statements include the expectations of the Company with respect to its strategy
and the shift in revenue mix which is expected to be weighted more toward chip
and electronic component sales and less to licensing an distribution. Although
the Company believes that its expectations are based upon reasonable
assumptions, there can be no assurances that the Company's financial goals will
be realized. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Numerous factors may affect the Company's
actual results and may cause results to differ materially from those expressed
in forward-looking statements made by or on behalf of the Company. Such factors
include, among others, those set forth below. The Company assumes no obligation
to update the forward-looking information to reflect actual results or changes
in the factors affecting such forward-looking information.
Quarterly Fluctuations
The Company's operating results may fluctuate from those in prior quarters
and will continue to be subject to quarterly and other fluctuations due to a
variety of factors, including the extent to which the Company's licensees
incorporate the Company's technologies into their products, the timing of orders
from and the shipments to major customers, the timing of new product
introductions by the Company, the gain or loss of significant customers,
competitive pressures on selling prices, the market acceptance of new or
enhanced versions of the Company's technologies, the rate that the Company's
semiconductor licensees manufacture and distribute chips to consumer electronic
manufacturers, and fluctuations in general economic conditions, particularly
those affecting the consumer electronics market. In addition, due to the
Company's dependence on the consumer electronics market, the substantial
seasonality of sales in the market has impacted the Company's revenues and net
income. In particular, the Company believes that there is seasonality relating
to the Christmas season, generally, and the Chinese New Year within the Asia
region, which fall into the fourth and first quarters, respectively. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
Changes to the Business Model/Integration of Valence/Refinement of Asian
Strategy
From the Company's inception in 1993 through 1997, the Company derived
substantially all of its revenues from licensing activities. As a result of the
acquisition of Valence, the Company has added business operations engaged in the
design and sale of ASICs and other semiconductor products; the design,
manufacture and sale of consumer electronics components and products; and the
distribution of components and products within mainland China and throughout
Asia. These operations differ substantially from the Company's previous business
model, and future operating results could be affected by a variety of factors,
including the timing of customer orders, the timing of development revenue,
changes in the mix of products distributed and the mix of distribution channels
employed, the emergence of new industry standards, product obsolescence and
changes in pricing policies by the Company, its competitors or its suppliers.
The integration of certain operations following the Valence acquisition has
required, and will continue to require, the dedication of management and other
personnel resources which may temporarily distract them from the day-to-day
business of the combined company. The geographic separation of these operations
places additional strain on the Company's resources. In addition, the Company's
significant operations in China and Asia have required refinement to adapt to
the changing market conditions in that region. This refinement may impact
certain of the Company's current business directions, including Valence, as the
Company attempts to position itself to maximize penetration of selected growth
segments in that region and to identify and focus on those segments that
contribute the highest margins. The Company's operations in Asia, and
internationally in general, also are subject to risks of unexpected changes in,
or impositions of, legislative or regulatory requirements.
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The acquisition of Valence has added significant diversity to the Company's
overall business structure and the Company's opportunities. The Company
recognizes that in the presence of such corporate diversity, in particular with
regard to the semiconductor industry, there will always exist a potential for a
conflict among sales channels between the Company and certain of the Company's
technology licensees. Although the operations of the Company's licensing
business and those of Valence are generally complementary, there can be no
assurances that sales channel conflicts will not arise. If such potential
conflicts do materialize, the Company may or may not be able to mitigate the
effect of such perceived conflicts, which, if not resolved, may impact the
results of operations.
Currency Risk/Stability of Asian Markets
The Company expects that international sales will continue to represent a
significant portion of total revenues. To date, all of the Company's licensing
revenues have been denominated in U.S. dollars and most costs have been incurred
in U.S. dollars. It is the Company's expectation that licensing revenues will
continue to be denominated in U.S. dollars for the foreseeable future. With its
acquisition of Valence and the Company's anticipated expansion of its business
in China and other parts of Asia, the Company's consolidated operations and
financial results could be significantly affected by risks associated with
international activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes
in the value of the U.S. dollar versus the local currency in which the products
are sold. In addition, the Company's valuation of assets recorded as a result of
the Valence acquisition may also be adversely impacted by the currency
fluctuations relative to the U.S. dollar. The Company continues to actively
monitor its foreign exchange exposure and to evaluate strategies to reduce its
foreign exchange risk. At such time that the Company determines the benefits of
such strategies outweigh the associated costs, the Company intends to implement
appropriate strategies. However, there is no guarantee that the Company will
take steps to insure against such risks, and should such risks occur, there is
no guarantee that the Company will not be significantly impacted. Countries in
the Asia Pacific region continue to experience weakness in their currency,
banking and equity markets. These weaknesses could adversely affect consumer
demand for Valence's products, the U.S. dollar value of the Company's and its
subsidiaries' foreign currency denominated sales, the availability and supply of
product components to Valence and ultimately, the Company's consolidated results
of operations.
Competitive Pressures
The Company's existing and potential competitors include both large and
emerging domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources. The Company's present or future competitors may be able to develop
products and technologies comparable or superior to those offered by the
Company, and to adapt more quickly than the Company to new technologies or
evolving market needs. The Company believes that the competitive factors
affecting the market for the Company's products and technologies include product
performance, price and quality; product functionality and features; and the ease
of integration and implementation of the products and technologies with other
hardware and software components in the manufacturer's products. In addition,
the markets in which the Company competes are intensely competitive and are
characterized by rapid technological changes, declining average sales prices and
rapid product obsolescence. Accordingly, there can be no assurance that the
Company will be able to continue to compete effectively in its respective
markets, that competition will not intensify or that future competition will not
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition.
Importance of Intellectual Property
The Company's ability to compete may be affected by its ability to protect
its proprietary information. The Company has filed several U.S. and foreign
patent applications and to date has a number of issued U.S. and foreign patents
covering various aspects of its technologies. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as do the laws of the U.S. The semiconductor industry is characterized by
frequent claims and litigation regarding patent and other property rights. There
can be no assurances that third parties will not assert additional claims or
initiate litigation against the Company or its
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<PAGE> 20
customers with respect to existing or future products. In addition, the Company
may initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to determine the scope and validity of the
proprietary rights of the Company or others.
Management of Growth; Dependence on Key Personnel
The Company has experienced rapid growth and expansion with the acquisition
of Valence. This acquisition has placed, and will continue to place, a
significant strain on its administrative, operational and financial resources,
and has increased, and will continue to increase, the level of responsibility
for both existing and new management personnel. The Company's future success
depends in part on the continued service of its key engineering, sales,
marketing and executive personnel, including highly skilled semiconductor IC
design personnel. The Company anticipates that any future growth will require it
to recruit and hire a number of new personnel in engineering, operations,
finance, sales and marketing. Competition for such personnel is intense, and
there can be no assurance that the Company can retain and recruit necessary
personnel to operate its business and support future growth. The Company's
ability to manage its growth successfully also will require the Company to
continue to expand and improve its administrative, operational, management and
financial systems and controls.
Volatility of Stock Price
The trading price of the Common Stock has been, and will likely continue to
be, subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the markets in which the Company does
business, or relating to the Company specifically, have in the past resulted in,
and could in the future result in, an immediate effect on the market price of
the Common Stock.
Acquisitions
From time-to-time, the Company expects to make acquisitions of businesses
or technologies that are complementary to its business strategy. Such future
acquisitions would expose the Company to risks commonly encountered in
acquisitions of businesses. Such risks include, among others, difficulty of
assimilating the operations, information systems and personnel of the acquired
businesses; the potential disruption of the Company's ongoing business; and the
inability of management to maximize the financial and strategic position of the
Company through successful incorporation of the acquired technologies, employees
and customers. There can be no assurance that any potential acquisition will be
consummated or, if consummated, that it will not have a material adverse effect
on the Company's business, financial condition and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its debt.
Foreign Currency
The Company has subsidiary operations in Hong Kong and China, and
accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates. The Company uses the
local currency (Hong Kong dollars) as the functional currency for its
subsidiaries. Translation adjustments resulting from the process of translating
foreign currency financial statements into U.S. dollars were nil in Fiscal 1998
and for the nine month period ended September 30, 1999 due to the fact that the
value of the Hong Kong dollar is currently pegged to the U.S. dollar and the
exchange rate remained constant throughout the period. Under the current
circumstances, the Company believes that the foreign currency market risk is not
material to its consolidated results of operations. The Company continues to
actively monitor its foreign exchange exposure and to evaluate possible
strategies to reduce its risk. At such time that the benefits of such strategies
outweigh the associated costs, the Company intends to implement appropriate
strategies. However, there is no guarantee that the Company will take steps to
insure against such risks, and should such risks occur, there is no guarantee
that the Company will not be significantly impacted.
Interest Rates
The Company's line of credit bears interest based on the lending bank's
prime rate or LIBOR base rate as determined by the bank. The interest rate on
the balance of $8 million outstanding at September 30, 1999 was 6.25%. The
Company believes that if interest rates were to increase by as much as 10%, the
short term impact on the Company's consolidated financial statements would not
be material. If circumstances in the market change materially, the Company
intends to evaluate possible strategies to reduce its risk related to changes in
interest rates.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 23, 1999, Dolby Laboratories, Inc. filed a civil lawsuit in the
United States District Court for the Central District of California against the
Company and Smart Devices, Inc. ("Smart Devices"). Smart Devices is a licensee
of the Company under the SRS(R) and CIRCLE SURROUND(R) technologies. The
complaint seeks both preliminary and permanent injunctions, monetary damages in
an unspecified amount and further equitable relief, based upon allegations of
false advertising, unfair competition, trademark infringement and false labeling
relating to the CIRCLE SURROUND EX trademark. On May 17, 1999, the Company filed
an answer to such complaint generally denying the allegations made by the
plaintiff under each claim for relief and denying that the plaintiff is entitled
to any relief under each stated claim for relief. In addition, the Company also
responded by alleging affirmative defenses to each claim for relief. The Company
is not providing a defense for Smart Devices. Although the Company cannot
predict the likely outcome of the lawsuit at this time, it intends to vigorously
defend the case and believes that the final outcome will not have a material
adverse effect on the Company's consolidated financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
The effective date of the Company's initial public offering of its Common
Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). Since August, 1996,
the Company utilized approximately $2,763,001 of the $22,052,955 net offering
proceeds for working capital purposes as follows:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the issuer or their
associates to persons owning ten
percent or more of any class of
equity securities of the issuer, Direct or indirect
and to affiliates of the issuer payments to others
-------------------------------- ------------------
<S> <C> <C>
Construction of plant, building and facilities -- --
Purchase and installation of machinery and
equipment -- --
Purchase of real estate -- --
Acquisition of other business(es)/assets -- $ 8,394,222(1)
Repayment of indebtedness -- --
Working capital -- $ 2,763,001
Temporary investment (cash and municipal
bonds) $10,895,732
</TABLE>
- ---------
(1) During the second quarter of Fiscal 1998, the Company utilized $500,000 of
the net offering proceeds as part of the consideration to acquire assets
related to the Circle Surround technology. During the first quarter of
Fiscal 1998, the Company utilized an aggregate of $7,894,222 in connection
with two other acquisitions (see Note 2 to the Interim Consolidated
Financial Statements).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Report.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<C> <S>
3.1 Bylaws of SRS Labs, Inc., as amended
10.1 Employment Agreement, dated August 27, 1999, by and between the
Company and James F. Gardner
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Commission during the
nine-month period ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SRS LABS, INC.,
a Delaware corporation
Date: November 12, 1999 By: /s/ JAMES F. GARDNER
--------------------
James F. Gardner
Vice President, Chief Financial
Officer, Secretary and
Treasurer (Principal Financial
and Accounting Officer)
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<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<C> <S>
3.1 Bylaws of SRS Labs, Inc., as amended
10.1 Employment Agreement, dated August 27, 1999, by and between the
Company and James F. Gardner
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
SRS LABS, INC.
BYLAWS*
STOCKHOLDERS' MEETINGS
1. Time and Place of Meetings. All meetings of the stockholders for the
election of Directors or for any other purpose shall be held at such time and
place, within or without the State of Delaware, as may be designated by the
Board of Directors, or by the Chairman of the Board of Directors, the President
or the Secretary in the absence of a designation by the Board of Directors, and
stated in the notice of meeting. The Chairman of the Board of Directors may
postpone and reschedule any previously scheduled annual or special meeting of
the stockholders of the Corporation.
2. Annual Meeting. An annual meeting of the stockholders shall be held
at such date and time as shall be designated from time to time by the Board of
Directors, at which meeting the stockholders shall elect by a plurality vote the
Directors to succeed those whose terms expire and shall transact such other
business as may properly be brought before the meeting in accordance with Bylaw
8.
3. Special Meetings. Special meetings of the stockholders may be called
only by the Chairman of the Board of Directors or by the Chairman of the Board
of Directors or the Secretary within 10 days after receipt of the written
request of a majority of the total number of Directors which the Corporation
would have if there were no vacancies (the "Whole Board"). Any such request by a
majority of the Whole Board shall be sent to the Chairman of the Board of
Directors and the Secretary and shall state the purpose or purposes of the
proposed meeting. Special meetings of holders of the outstanding Preferred Stock
may be called in the manner and for the purposes provided in the resolutions of
the Board of Directors providing for the issuance of such stock as filed
pursuant to the applicable law of the State of Delaware (a "Preferred Stock
Designation"). At a special meeting of stockholders, only such business shall be
conducted or considered as shall have been stated in the notice of the meeting
given by or at the direction of the Board of Directors.
4. Notice of Meetings. Written notice of every meeting of the
stockholders, stating the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than 10 nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting, except as
otherwise provided herein or by law. When a meeting is adjourned to another
place, date or time, written notice need not be given of the adjourned meeting
if the place, date and time thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall be given in conformity herewith. At any adjourned meeting, any
business may be transacted which might have been transacted at the original
meeting.
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*As amended.
<PAGE> 2
5. Inspectors. The Board of Directors shall appoint one or more
inspectors of election to act as judges of the voting and to determine those
entitled to vote at any meeting of the stockholders, or any adjournment thereof,
in advance of such meeting, but if the Board of Directors fails to make such
appointment(s) or if an appointee fails to serve, the presiding officer of the
meeting of the stockholders may appoint one or more inspectors (or substitute
inspector(s)) to act at the meeting.
6. Quorum. Except as otherwise provided by law or in a Preferred Stock
Designation, the holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business thereat. If, however, such quorum shall not be present or represented
at any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented.
7. Voting. Except as otherwise provided by law, by the Certificate of
Incorporation or in a Preferred Stock Designation, each stockholder shall be
entitled at every meeting of the stockholders to one vote for each share of
stock having voting power standing in the name of such stockholder on the books
of the Corporation on the record date for the meeting and such votes may be cast
either in person or by written proxy. Every proxy must be duly executed and
filed with the Secretary of the Corporation. A stockholder may revoke any proxy
that is not irrevocable by attending the meeting and voting in person or by
filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary of the Corporation. The vote upon
any question brought before a meeting of the stockholders may be by voice vote,
unless otherwise required by the Certificate of Incorporation or these Bylaws or
unless the presiding officer or the holders of a majority of the outstanding
shares of all classes of stock entitled to vote thereon present in person or by
proxy at such meeting shall so determine. Every vote taken by written ballot
shall be counted by the inspector(s) of election. When a quorum is present at
any meeting, the affirmative vote of the holders of a majority of the stock
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter and which has actually voted shall be the act of the
stockholders, except in the election of Directors or as otherwise provided in
these Bylaws, the Certificate of Incorporation, a Preferred Stock Designation or
by law.
8. Order of Business. (a) The Chairman of the Board of Directors, or
such other officer of the Corporation designated by a majority of the Whole
Board (as defined in Bylaw 3), shall call meetings of the stockholders of the
Corporation to order and shall act as presiding officer thereof. Unless
otherwise determined by the Board of Directors prior to the meeting, the
presiding officer of the meeting of the stockholders shall determine the order
of business and shall have the authority in his discretion to regulate the
conduct of any such meeting, including without limitation by imposing
restrictions on the persons (other than stockholders of the Corporation or their
duly appointed proxies)
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who may attend any such stockholders' meeting, by ascertaining whether any
stockholder or his proxy may be excluded from any such meeting based upon any
determination by the presiding officer, in his sole discretion, that any such
person has unduly disrupted or is likely to disrupt the proceedings thereat, and
by determining the circumstances in which any person may make a statement or ask
questions at any such meeting.
(b) At an annual meeting of the stockholders, only such business shall
be conducted or considered as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of a majority of the Whole Board, or (iii)
otherwise properly requested to be brought before the meeting by a stockholder
of the Corporation.
(c) For business to be properly requested to be brought before an
annual meeting by a stockholder of the Corporation, the stockholder (i) must be
a stockholder of record at the time of the giving of the notice for such annual
meeting provided for in the Bylaws of this Corporation, (ii) must be entitled to
vote at such meeting and (iii) must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; 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 so
received not later than the close of business on the 10th day following the day
on which public announcement is first made of the date of the meeting. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business and the beneficial owner, if any, on whose behalf the proposal is made,
(iii) the class and number of shares of the Corporation that are owned
beneficially and of record by the stockholder proposing such business and by the
beneficial owner, if any, on whose behalf the proposal is made, and (iv) any
material interest of such stockholder proposing such business and the beneficial
owner, if any, on whose behalf the proposal is made, in such business.
Notwithstanding anything in this Bylaw 8 to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Bylaw 8. The presiding officer of the annual meeting shall, if the
facts warrant, determine that business was not properly brought before the
meeting in accordance with the procedures prescribed in this Bylaw 8 and, if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing provisions of this Bylaw 8, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as
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amended, and the rules and regulations thereunder with respect to the matters
set forth in this Bylaw 8. For purposes of this Bylaw and Bylaw 13, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service, in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, or in stockholder correspondence or a stockholder report.
Nothing in this Bylaw shall be deemed to affect any rights (including, but not
limited to, the time periods specified to exercise such rights) of stockholders
to request inclusion of proposals in the Corporation's proxy statement pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, as amended.
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<PAGE> 5
DIRECTORS
9. Powers. The business and affairs of the Corporation shall be managed
under the direction of its Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Certificate of Incorporation directed or required to be exercised
or done by the stockholders.
10. Number, Election and Terms. Subject to the rights, if any, of any
series of Preferred Stock to elect additional Directors under specified
circumstances, the authorized number of Directors may be determined from time to
time only by a vote of a majority of the Whole Board (as defined in Bylaw 3) or
by the affirmative vote of the holders of at least 80% of the voting power of
the then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors (the "Voting Stock"), voting together as
a single class, but in no case shall the number of Directors be less than 5 or
more than 13. The Directors, other than those who may be elected by the holders
of any series of the Preferred Stock, shall be classified with respect to the
time for which they severally hold office into three classes, as nearly equal in
number as possible, designated Class I, Class II and Class III. The Directors
first appointed to Class I shall hold office for a term expiring at the annual
meeting of stockholders to be held in 1997; the Directors first appointed to
Class II shall hold office for a term expiring at the annual meeting of
stockholders to be held in 1998; and the Directors first appointed to Class III
shall hold office for a term expiring at the annual meeting of stockholders to
be held in 1999, with the members of each class to hold office until their
successors are elected and qualified. At each succeeding annual meeting of the
stockholders of the Corporation, the successors of the class of Directors whose
term expires at that meeting shall be elected by plurality vote of all votes
cast at such meeting to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election.
11. Vacancies and Newly Created Directorships. Subject to the rights,
if any, of the holders of any series of Preferred Stock to elect additional
Directors under specified circumstances, newly created directorships resulting
from any increase in the number of Directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled solely by the affirmative vote of a majority of the
remaining Directors then in office, even though less than a quorum of the Board
of Directors, or by a sole remaining Director. Any Director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been elected and qualified. No decrease in the number of Directors constituting
the Board of Directors shall shorten the term of an incumbent Director.
12. Removal. Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect additional Directors under specified
circumstances, any Director may be removed from office by the stockholders only
for cause and only in the manner
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<PAGE> 6
provided in this Bylaw 12. At any annual meeting or special meeting of the
stockholders of the Corporation, the notice of which shall state that the
removal of a Director or Directors is among the purposes of the meeting, the
affirmative vote of the holders of at least 80% of the Voting Stock (as defined
in Bylaw 10), voting together as a single class, may remove such Director or
Directors for cause.
13. Nominations of Directors; Election. Subject to the rights, if any,
of the holders of any series of Preferred Stock to elect additional Directors
under specified circumstances, only persons who are nominated in accordance with
the following procedures shall be eligible for election as Directors of the
Corporation. Nominations of persons for election as Directors of the Corporation
may be made by (i) the Board of Directors or a committee appointed by the Board
of Directors, or (ii) any stockholder who is a stockholder of record at the time
of giving of notice for the meeting provided for in these Bylaws, who shall be
entitled to vote for the election of Directors and who complies with the
procedures set forth in this Bylaw 13. All nominations by stockholders shall be
made pursuant to timely notice in proper written form to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation (i) in
the case of an annual meeting, not less than 60 days nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting; 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 so received not later than the close of business on the 10th day
following the day on which public announcement is first made of the date of the
meeting, and (ii) in the case of a special meeting at which Directors are to be
elected, not later than the close of business on the 10th day following the day
on which public announcement is first made of the date of the meeting. To be in
proper written form, such stockholder's notice shall set forth or include (i)
the name and address, as they appear on the Corporation's books, of the
stockholder giving the notice and of the beneficial owner, if any, on whose
behalf the nomination is made; (ii) a representation that the stockholder giving
the notice is a holder of record of stock of the Corporation entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iii) the class and
number of shares of stock of the Corporation owned beneficially and of record by
the stockholder giving the notice and by the beneficial owner, if any, on whose
behalf the nomination is made; (iv) a description of all arrangements or
understandings between or among any of (A) the stockholder giving the notice,
(B) the beneficial owner on whose behalf the notice is given, (C) each nominee,
and (D) 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; (v) 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 Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (vi) the signed consent of each nominee to serve as a
Director of the Corporation if so elected. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
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Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. The presiding officer of the meeting for election of Directors
shall, if the facts warrant, determine that a nomination was not made in
accordance with the procedures prescribed by this Bylaw 13, 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 this Bylaw 13, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Bylaw.
14. Resignation. Any Director may resign at any time by giving written
notice of his resignation to the Chairman of the Board of Directors or the
Secretary.
15. Regular Meetings. Regular meetings of the Board of Directors may be
held without notice immediately after the annual meeting of the stockholders and
at such other time and place either within or without the State of Delaware as
shall from time to time be determined by the Board of Directors.
16. Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors or the President on one day's
written notice to each Director by whom such notice is not waived, given either
personally or by mail, telegram, telex, facsimile or similar medium of
communication, and shall be called by the Chairman of the Board of Directors or
the President in like manner and on like notice on the written request of two
Directors. Special meetings of the Board of Directors may be held at such time
and place either within or without the State of Delaware as is determined by the
Board of Directors or specified in the notice of any such meeting.
17. Quorum. At all meetings of the Board of Directors, a majority of
the total number of Directors then in office shall constitute a quorum for the
transaction of business and, except for the designation of committees (as
provided in Bylaw 18) or as otherwise required by the Certificate of
Incorporation, the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the Directors
present thereat may adjourn the meeting from time to time to another place, time
or date, without notice other than announcement at the meeting, until a quorum
shall be present.
18. Committees of the Board of Directors. The Board of Directors, by
resolution passed by a majority of the Whole Board (as defined in Bylaw 3), may
designate one or more committees, each committee to consist of one or more
Directors and each to have such lawfully delegable powers and duties as the
Board may confer. Each such committee shall serve at the pleasure of the Board
of Directors. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In lieu of such action by the Board of
Directors, in the absence or
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disqualification of any member of a committee, the members thereof present at
any such meeting of the committee and not disqualified from voting, whether or
not they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Except as otherwise provided by law, any such committee, to
the extent provided in the resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
direction of the management of the business and affairs of the Corporation. Any
committee or committees so designated by the Board of Directors shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors. Unless otherwise prescribed by the Board of Directors, a
majority of the members of the committee shall constitute a quorum for the
transaction of business, and the act of a majority of the members present at a
meeting at which there is a quorum shall be the act of such committee. Each
committee shall prescribe its own rules for calling and holding meetings and its
method of procedure, subject to any rules prescribed by the Board of Directors,
and shall keep a written record of all actions taken by it.
19. Compensation. The Board of Directors may establish the compensation
for, and reimbursement of the expenses of, Directors for membership on the Board
of Directors and on committees of the Board of Directors, attendance at meetings
of the Board of Directors or committees of the Board of Directors, and for other
services by Directors to the Corporation.
20. Rules. The Board of Directors may adopt rules and regulations that
are not inconsistent with law or these Bylaws for the conduct of their meetings
and the management of the affairs of the Corporation.
NOTICES
21. Generally. Except as otherwise provided by law, these Bylaws or the
Corporation's Certificate of Incorporation, whenever by law or under the
provisions of the Certificate of Incorporation or these Bylaws, notice is
required to be given to any Director or stockholder, it shall not be construed
to mean personal notice, but such notice may be given in writing, by mail,
addressed to such Director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to Directors may also be given by telephone, telegram,
telex, facsimile or similar medium of communication.
22. Waivers. Whenever any notice is required to be given by law or
under the provisions of the Certificate of Incorporation or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time of the event for which notice is to be
given, shall be deemed equivalent to such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the
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beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
OFFICERS
23. Generally. The officers of the Corporation shall be elected by the
Board of Directors and shall consist of a Chairman of the Board of Directors, a
Chief Executive Officer, a President, one or more Vice Presidents, a Secretary,
and a Treasurer. The Board of Directors may also choose any or all of the
following: one or more Vice Chairmen of the Board of Directors, one or more
Executive Vice Presidents, one or more Senior Vice Presidents, and one or more
Assistant Secretaries, Assistant Treasurers, and such other officers as may be
appointed in accordance with Bylaw 24. Any number of offices may be held by the
same person. Any of the offices may be left vacant from time to time as the
Board of Directors may determine. In the case of the absence or disability of
any officer of the Corporation or for any other reason deemed sufficient by a
majority of the Board of Directors, the Board of Directors may delegate his
powers or duties to any other officer or to any Director.
24. Subordinate Officers. The Board of Directors may appoint, and may
empower the Chief Executive Officer or President to appoint, such other officers
as the business of the Corporation may require.
25. Compensation. The compensation of all officers and agents of the
Corporation who are also Directors of the Corporation shall be fixed by the
Board of Directors or by a committee of the Board of Directors established
pursuant to Bylaw 18. The Board of Directors may delegate the power to fix the
compensation of other officers and agents of the Corporation to an officer of
the Corporation.
26. Succession. The officers of the Corporation shall hold office until
their successors are elected and qualified. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Whole Board. Any vacancy occurring in any office of the
Corporation may be filled by the Board of Directors.
27. Authority and Duties. Each of the officers of the Corporation shall
have such authority and shall perform such duties as are customarily incident to
their respective offices, or as may be specified from time to time by the Board
of Directors in a resolution which is not inconsistent with these Bylaws.
28. Chairman of the Board of Directors. The Chairman of the Board of
Directors shall preside at all meetings of the stockholders and of the Board of
Directors and he shall have such other duties and responsibilities as may be
assigned to him by the Board of Directors. The Chairman of the Board of
Directors may delegate to any qualified person authority to chair any meeting of
the stockholders, either on a temporary or a permanent basis.
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29. Chief Executive Officer. The Chief Executive Officer shall have
such supervisory powers and such other duties and responsibilities as may be
assigned to him by the Board of Directors.
30. President. The President shall be responsible for the active
management and direction of the business and affairs of the Corporation. In case
of the inability or failure of the Chairman of the Board of Directors to perform
the duties of that office, the President shall perform the duties of the
Chairman of the Board of Directors, unless otherwise determined by the Board of
Directors.
31. Execution of Documents and Action With Respect to Securities of
Other Corporations. The President, the Chairman of the Board of Directors and
the Chief Executive Officer, if such an officer be elected (for purposes of this
Bylaw 31, each an "Executive Officer"), each shall have and is hereby given,
full power and authority, except as otherwise required by law or directed by the
Board of Directors, (a) to execute, on behalf of the Corporation, all duly
authorized contracts, agreements, deeds, conveyances or other obligations of the
Corporation, applications, consents, proxies and other powers of attorney, and
other documents and instruments, and (b) to vote and otherwise act on behalf of
the Corporation, in person or by proxy, at any meeting of stockholders (or with
respect to any action of such stockholders) of any other corporation in which
the Corporation may hold securities and otherwise to exercise any and all rights
and powers which the Corporation may possess by reason of its ownership of
securities of such other corporation. In addition, the Executive Officer may
delegate to other officers, employees and agents of the Corporation the power
and authority to take any action which the Executive Officer is authorized to
take under this Bylaw 31, with such limitations as the Executive Officer may
specify; such authority so delegated by the Executive Officer shall not be
re-delegated by the person to whom such execution authority has been delegated.
32. Vice President. Each Vice President, however titled, shall perform
such duties and services and shall have such authority and responsibilities as
shall be assigned to or required from time to time by the Board of Directors or
the President.
33. Secretary. The Secretary shall attend all meetings of the
stockholders and all meetings of the Board of Directors and record all
proceedings of the meetings of the stockholders and of the Board of Directors
and shall perform like duties for the standing committees when requested by the
Board of Directors or the President. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and meetings of the Board of
Directors. The Secretary shall perform such duties as may be prescribed by the
Board of Directors or the President. The Secretary shall have charge of the seal
of the Corporation and authority to affix the seal to any instrument. The
Secretary or any Assistant Secretary may attest to the corporate seal by
handwritten or facsimile signature. The Secretary shall keep and account for all
books, documents, papers and records of the Corporation except those for which
some other officer or
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agent has been designated or is otherwise properly accountable. The Secretary
shall have authority to sign stock certificates.
34. Treasurer. The Treasurer shall be the chief financial officer of
the Corporation. The Treasurer shall have the custody of the funds and
securities belonging to the Corporation and shall deposit all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Treasurer with the prior approval of
the Board of Directors or the President. The Treasurer shall disburse the funds
and pledge the credit of the Corporation as may be directed by the Board of
Directors and shall render to the Board of Directors and the President, as and
when required by them, or any of them, an account of all transactions by the
Treasurer.
STOCK
35. Certificates. The shares of the Corporation shall be represented by
certificates, in such form as shall be determined by the Board of Directors,
subject to applicable legal requirements, provided that the Board of Directors
may provide by resolution or resolutions that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution(s) by the Board of Directors, every holder of stock represented by
certificates, and upon request every holder of uncertificated shares, shall be
entitled to have a certificate signed by, or in the name of the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the President or
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation representing the number of shares
registered in certificate form. Such certificate also shall be signed by a duly
authorized officer or agent of any properly designated transfer agent of the
Corporation. Any or all of the signatures on the certificate may be a facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to the Delaware General Corporation Law, including
information regarding partly paid shares, restrictions on transfer or voting
trusts, or, with respect to the information required by Section 151(f) of the
Delaware General Corporation Law, a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Except as otherwise expressly
provided by law, the rights and obligations of the holders of uncertificated
stock and the rights and obligations of the holders of certificates representing
stock of the same class and series shall be identical.
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36. Classes of Stock. The designations, preferences and relative
participating, optional or other special rights of the various classes of stock
or series thereof, and the qualifications, limitations or restrictions thereof,
shall be set forth in full or summarized on the face or back of the certificates
which the Corporation issues to represent its stock, or in lieu thereof, such
certificates shall set forth the office of the Corporation from which the
holders of certificates may obtain a copy of such information.
37. Transfers. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, or when
proper instructions with respect to the transfer of uncertificated shares are
received by the Corporation or the transfer agent, it shall be the duty of the
Corporation to transfer such shares upon its records and, in connection with the
transfer of shares that will be certificated, issue, or to cause its transfer
agent to issue, a new certificate to the person entitled thereto and cancel the
old certificate.
38. Lost, Stolen or Destroyed Certificates. The Secretary may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact, satisfactory
to the Secretary, by the person claiming the certificate of stock to be lost,
stolen or destroyed. As a condition precedent to the issuance of a new
certificate or certificates, the Secretary may require the owners of such lost,
stolen or destroyed certificate or certificates to give the Corporation a bond
in such sum and with such surety or sureties as the Secretary may direct as
indemnity against any claims that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of the new certificate.
39. Record Dates. (a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than 60 nor less than 10 days before the date of such meeting. If no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of the stockholders
shall apply to any adjournment of the meeting; provided, however, that the Board
of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the
12
<PAGE> 13
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(c) The Corporation shall be entitled to treat the person in whose name
any share of its stock is registered as the owner thereof for all purposes, and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the Corporation shall
have notice thereof, except as expressly provided by applicable law.
GENERAL
40. Fiscal Year. The fiscal year of the Corporation shall be fixed from
time to time by the Board of Directors.
41. Seal. The Board of Directors may adopt a corporate seal and use the
same by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
42. Reliance upon Books, Reports and Records. Each Director, each
member of a committee designated by the Board of Directors, and each officer of
the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the records of the Corporation and upon
such information, opinions, reports or statements presented to the Corporation
by any of the Corporation's officers or employees, or committees of the Board of
Directors, or by any other person as to matters the Director, committee member
or officer believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation.
43. Time Periods. In applying any provision of these Bylaws that
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded and the day of the event shall be included.
44. Application of California Corporations Code. In the event that the
Board of Directors determines that the Corporation has become subject to and is
not exempt from the application of Section 2115 of the California Corporations
Code ("Section 2115"), the Board of Directors shall amend these Bylaws from time
to time as necessary to comply with the requirements of Section 2115, such
amendments to be effected without a vote of the stockholders notwithstanding
anything herein to the contrary.
13
<PAGE> 1
EXHIBIT 10.1
August 27, 1999
Mr. James Gardner
4 Christamon East
Irvine, CA 92620
Dear Jim:
It is with great pleasure that I invite you to join SRS (o) Labs, Inc. as Vice
President and Chief Financial Officer. This is an extremely important position
as you will be responsible for managing and controlling all aspects of the
company's financial and corporate administrative activities.
Your position will have a monthly salary of $9,583.33. You will also be eligible
to participate in the executive bonus plan. A copy of the plan will be provided
to you.
You will be eligible on your first day to enroll in our benefits plan, which
includes medical, dental and vision insurance, for you and your family, as well
as life insurance for yourself in the amount of $50,000. Coverage will begin on
the first day of the month following your employment. A copy of the plan will be
provided to you during your first week of employment.
As an added incentive, we are pleased to grant you 75,000 stock options for SRS
Labs, Inc. The Compensation Committee of the Board of Directors will set the
grant date. The Company Stock Option program will govern these stock options and
a copy of the plan will be provided to you.
You will be eligible to take two weeks vacation each year. Your vacation
eligibility will begin after the completion of your introductory period, at
which time, you may take what you have earned.
SRS also offers employees the option to participate in an Employee-only
Contributory 401(k) plan. You are eligible to participate in this Plan after
completing a 90-day introductory period. The entry dates of the plan fall on the
first day of the each month. A copy of the plan will be provided to you during
your first week of employment.
Your official starting date will be August 31, 1999, and you will be reporting
to Tom Yuen, Chief Executive Officer.
Any offer of employment will be contingent on the submission of proof of your
eligibility to work in the United States and the signing of the SRS Labs, Inc.
At-Will Employment Agreement and the
<PAGE> 2
Mr. James Gardner Page 2
August 27, 1999
Confidentiality, Non-Competition, and Compliance Agreement, copies of which are
attached for your reference.
Jim, if this offer meets with your approval, please indicate your acceptance in
the space provided below. We look forward to having you as part of our team as
we establish SRS (o) as the industry standard in contemporary audio and voice
processing.
Sincerely,
SRS Labs, Inc.
Thomas C.K, Yuen
Chairman and Chief Executive Officer
Enc.
I Accept:
---------------------------------------- -------------------------
Name Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,565,940
<SECURITIES> 10,895,732
<RECEIVABLES> 4,732,727
<ALLOWANCES> 0
<INVENTORY> 4,367,025
<CURRENT-ASSETS> 22,720,417
<PP&E> 1,175,949
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,605,352
<CURRENT-LIABILITIES> 12,695,580
<BONDS> 0
0
0
<COMMON> 11,715
<OTHER-SE> 24,866,817
<TOTAL-LIABILITY-AND-EQUITY> 37,605,352
<SALES> 13,001,555
<TOTAL-REVENUES> 25,925,406
<CGS> 16,242,610
<TOTAL-COSTS> 11,365,583
<OTHER-EXPENSES> (106,012)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (290,119)
<INCOME-PRETAX> (1,286,656)
<INCOME-TAX> (105,843)
<INCOME-CONTINUING> (1,180,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,180,813)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
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