<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
SRS Labs, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
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Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
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(1) Amount Previously Paid:
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<PAGE> 3
SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
We cordially invite you to attend our 2000 Annual Meeting of Stockholders.
This Annual Meeting will be held at 10:00 A.M., California time, on Thursday,
June 15, 2000, at the Irvine Marriott Hotel, located at 18000 Von Karman Avenue,
Irvine, California 92612, for the following purposes:
1. To elect three Class I directors to the Board of Directors to hold
office for a term of three years and until their respective successors are
elected and qualified.
2. To act upon a proposal to approve an amendment to the SRS Labs,
Inc. Amended and Restated 1996 Long-Term Incentive Plan to increase the
number of shares of common stock available for issuance thereunder by
2,500,000.
3. To transact such other business as may properly come before this
Annual Meeting or any adjournment thereof.
The Board of Directors has nominated Robert B. Pfannkuch, Jeffrey I.
Scheinrock and Thomas W.T. Wan as the nominees for election to the Board of
Directors as Class I directors.
The Board of Directors has fixed the close of business on April 21, 2000,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, this Annual Meeting.
YOU ARE CORDIALLY INVITED TO BE PRESENT AND TO VOTE AT THIS ANNUAL MEETING
IN PERSON. HOWEVER, YOU ARE ALSO REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE-PAID AND ADDRESSED ENVELOPE, WHETHER OR NOT YOU
EXPECT TO ATTEND. IN THE EVENT YOU HAVE RETURNED A SIGNED PROXY, BUT ELECT TO
ATTEND THIS ANNUAL MEETING AND VOTE IN PERSON, YOU WILL BE ENTITLED TO VOTE.
By Order of the Board of Directors,
/s/ JOHN AUYEUNG
John AuYeung
Executive Vice President,
Chief Operating Officer, Chief
Financial Officer,
Secretary and Treasurer
Santa Ana, California
April 26, 2000
<PAGE> 4
SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705
------------------------
PROXY STATEMENT
------------------------
The Board of Directors of SRS Labs, Inc. (the "Company") is soliciting
proxies to be voted at the Annual Meeting of Stockholders of the Company to be
held on Thursday, June 15, 2000, at the Irvine Marriott Hotel, located at 18000
Von Karman Avenue, Irvine, California 92612, at 10:00 A.M., California time, and
at any adjournments thereof (the "Annual Meeting" or the "Meeting"), for the
purposes set forth in the accompanying Notice of Annual Meeting of Stockholders
and described herein. This Proxy Statement describes issues on which we would
like you, as a stockholder, to vote. It also gives you information on these
issues so that you can make an informed decision. The approximate date on which
this Proxy Statement and the enclosed form of proxy are first being sent or
given to stockholders is May 8, 2000.
VOTING RIGHTS AND SOLICITATION OF PROXIES
WHO MAY VOTE. The Board of Directors of the Company (the "Board of
Directors" or the "Board") has fixed the close of business on April 21, 2000, as
the record date for the determination of stockholders entitled to receive notice
of, and to vote at, the Annual Meeting (the "Record Date"). The only outstanding
class of stock of the Company is its common stock, par value $.001 per share
("Common Stock"). At the Record Date, 12,564,273 shares of Common Stock were
outstanding. Of that amount, 71,100 shares were held as treasury shares. Each
share of Common Stock, excluding treasury shares, entitles its record holder on
the Record Date to one vote on all matters. With respect to the election of
directors only (Proposal 1), stockholders may vote in favor of all nominees or
withhold their votes as to all nominees or withhold their votes as to specific
nominees.
NOMINATIONS FOR DIRECTORS. The Bylaws of the Company (the "Bylaws") set
forth certain procedures relating to the nomination of directors (the
"Nomination Bylaw") and no person shall be eligible for election as a director
unless nominated in accordance with the provisions of the Nomination Bylaw.
Nominations of persons for election to the Board of Directors may be made by (a)
the Board of Directors or a committee appointed by the Board of Directors or (b)
any stockholder who (i) is a stockholder of record at the time of giving the
notice provided for in the Nomination Bylaw, (ii) shall be entitled to vote for
the election of directors at the Annual Meeting and (iii) complies with the
notice procedures set forth in the Nomination Bylaw.
Nominations by stockholders shall be made in written form to the Secretary
of the Company. To be timely for the Annual Meeting, a stockholder's notice must
have been delivered to or mailed and received at the principal executive offices
of the Company not more than 90 days (March 12, 2000) nor less than 60 days
(April 11, 2000) prior to the first anniversary of the preceding year's annual
meeting (June 10, 2000); provided, however, that in the event that the date of
the Annual Meeting is changed by more than 30 days from such anniversary date,
notice by the stockholder to be timely must be received by the Company not later
than the close of business on the 10th day following the day on which public
announcement of the date of the Meeting is first made. For the annual meeting to
be held in the year 2001, a stockholder's notice shall be delivered to or mailed
and received at the principal executive offices of the Company not earlier than
March 17, 2001 and not later than April 16, 2001.
To be effective, the written notice must include (a) the name and address,
as they appear on the Company's books, of the stockholder giving the notice and
of the beneficial owner, if any, on whose behalf the nomination is made; (b) a
representation that the stockholder giving the notice is a holder of record of
stock of the Company entitled to vote at the Annual Meeting and intends to
appear in person or by proxy at the Annual Meeting to nominate the person or
persons specified in the notice; (c) the number of shares of Common Stock
<PAGE> 5
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; (d) a
description of all arrangements or understandings between or among any of (i)
the stockholder giving the notice, (ii) the beneficial owner on whose behalf the
notice is given, (iii) each nominee, and (iv) any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder giving the notice; (e) such other information
regarding each nominee proposed by the stockholder giving the notice as would
have been required to be included in a proxy statement filed pursuant to the
proxy rules of the U.S. Securities and Exchange Commission (the "SEC") had the
nominee been nominated, or intended to be nominated, by the Board; and (f) the
signed consent of each nominee to serve as a director of the Company if so
elected. At the request of the Board of Directors, any person nominated by the
Board for election as a director shall furnish to the Secretary of the Company
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee.
The presiding officer of the Annual Meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the procedures
prescribed by the Nomination Bylaw, and if he should so determine, he shall so
declare to the Meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of the Nomination Bylaw, a stockholder
also must comply with all applicable requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in the Nomination Bylaw.
REVOCABILITY OF PROXY. You may revoke your proxy prior to its exercise. You
may do this by (a) delivering to the Secretary of the Company, John AuYeung, at
or prior to the Annual Meeting, an instrument of revocation or another proxy
bearing a date or time later than the date or time of the proxy being revoked or
(b) voting in person at the Annual Meeting. Mere attendance at the Annual
Meeting will not serve to revoke your proxy.
HOW YOUR SHARES WILL BE VOTED. All proxies received and not revoked will be
voted as directed. If no directions are specified, such proxies will be voted
"FOR" (a) election of the Board's nominees for Class I directors and (b)
approval of the amendment to the SRS Labs, Inc. Amended and Restated 1996
Long-Term Incentive Plan (the "Incentive Plan") increasing the number of shares
of common stock available for issuance thereunder by 2,500,000. As to any other
business which may properly come before the Annual Meeting, the persons named in
such proxies will vote in accordance with their best judgment, although the
Company does not presently know of any other such business.
VOTING; QUORUM; AND BROKER NON-VOTES. Shares of Common Stock will be
counted as present at the Annual Meeting if the stockholder is present and votes
in person at the Meeting or has properly submitted a proxy card. A majority of
the Company's outstanding shares entitled to vote as of the Record Date must be
present at the Annual Meeting in order to hold the Meeting and conduct business.
This is called a quorum. As noted above, treasury shares are not entitled to
vote and, therefore, are not counted in determining a quorum. Abstentions and
non-votes will be counted for purposes of determining the existence of a quorum
at the Annual Meeting. The three nominees receiving the highest number of votes
"FOR" a director will be elected as directors. This number is called a
plurality. The affirmative vote of a majority of the shares of Common Stock
present in person or by proxy at the Annual Meeting and entitled to vote on each
of the proposals (other than the election of directors) is required for the
adoption of each such proposal. Abstentions will be counted as votes against any
of the proposals as to which a stockholder abstains, but non-votes will have no
effect on the voting with respect to any proposal as to which there is a
non-vote. A non-vote may occur when a nominee holding shares of Common Stock for
a beneficial owner does not vote on a proposal because such nominee does not
have discretionary voting power and has not received instructions from the
beneficial owner.
EXPENSES; METHOD OF SOLICITATION. The expenses of soliciting proxies for
the Annual Meeting are to be paid by the Company. Solicitation of proxies may be
made by means of personal calls upon, or telephonic or telegraphic
communications with, stockholders or their personal representatives by
directors, officers and employees of the Company who will not be specially
compensated for such services. Although there is no formal agreement to do so,
the Company may reimburse banks, brokerage houses and other custodians, nominees
and fiduciaries for their reasonable expenses in forwarding this Proxy Statement
to stockholders
2
<PAGE> 6
whose Common Stock is held of record by such entities. The Board of Directors
has authorized certain officers of the Company to retain the services of a proxy
solicitation firm if, in such officers' view, it is deemed necessary. The
Company has not engaged such a firm at this time; however, to the extent it
decides to do so, the Company will utilize the services of Corporate Investor
Communications, Inc. to assist in the solicitation of proxies in connection with
this Proxy Statement, and such firm will receive a fee estimated to be $4,000
and will be reimbursed for out-of-pocket expenses.
The Company was incorporated in the State of California in June 1993 and
reincorporated in the State of Delaware in June 1996. All references to the
Company reflect this continuation. The Company first became a reporting company,
pursuant to Section 13(a) of the Exchange Act, in August 1996.
3
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table contains certain information as of the Record Date
regarding all persons who were the beneficial owners of more than 5% of the
outstanding shares of Common Stock, each of the directors of the Company, each
nominee for election to become a director, each of the executive officers named
in the Summary Compensation Table set forth herein under the caption
"Compensation of Executive Officers" (we refer to all these officers as the
"Named Executive Officers") and all directors and executive officers as a group.
Each of the Named Executive Officers, Messrs. AuYeung, Wan and Yuen, is a
director of the Company. The persons named hold sole voting and investment power
with respect to the shares shown opposite their respective names, unless
otherwise indicated. The information with respect to each person specified is as
supplied or confirmed by such person, based upon statements filed with the SEC,
or based upon the actual knowledge of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF
SHARES RIGHT TO PERCENT OF
NAME OWNED(2) ACQUIRE(3) CLASS(1)(2)(3)
---- --------- ---------- --------------
<S> <C> <C> <C>
Thomas C.K. Yuen and Misako Yuen(4)(5)................. 3,007,879 235,733 25.34%
Mutual Management Corp.(6)............................. 652,046 -- 5.19%
Packard Bell NEC, Inc.(7).............................. 572,061 382,104 7.37%
Thomrose Holdings (BVI) Limited(8)(9).................. 778,179 -- 6.19%
Rayfa (BVI) Limited(9)(10)............................. 709,760 -- 5.65%
Raymond Choi(9)(10).................................... 709,760 62,500 6.12%
Class I Directors/Nominees:
Robert B. Pfannkuch.................................. -- 25,000 *
Jeffrey I. Scheinrock................................ -- 34,741 *
Thomas W.T. Wan(8)(9)................................ 778,179 80,000 6.79%
Class II Directors:
John AuYeung......................................... -- 98,750 *
John Tu.............................................. 211,152 35,000 1.95%
Class III Directors:
Stephen V. Sedmak(5)(11)............................. 697,401 291,268 7.69%
Thomas C.K. Yuen(4)(5)............................... 3,007,878 235,733 25.34%
All directors and executive officers as a group (10
persons)............................................. 4,696,946 887,393 41.51%
</TABLE>
- ---------------
* Less than one percent.
(1) Subject to applicable community property and similar statutes.
(2) Includes shares beneficially owned, whether directly or indirectly,
individually or together with associates.
(3) Shares that can be acquired through stock option exercises through June 20,
2000 (within 60 days of the Record Date). These shares are referred to
herein as "Stock Option Shares."
(4) Includes 2,788,696 shares of Common Stock held by Mr. and Mrs. Yuen as
co-trustees of the Thomas Yuen Family Trust and 235,733 Stock Option Shares
granted to Mr. Yuen as an executive officer and a director of the Company.
Also includes 213,469 shares of Common Stock held by Atsuko Hamasaki as
trustee of the Yuen 1993 Irrevocable Trust (144,825 shares) and as
custodian for Mr. and Mrs. Yuen's children, Jennifer Wen Lee Yuen (31,465
shares) and Constance Kahlee Yuen (37,179 shares). Also includes 5,714
shares held by Jennifer Wen Lee Yuen. Mr. and Mrs. Yuen disclaim beneficial
ownership of the 213,469 shares held by Atsuko Hamasaki in the capacities
referenced above and the 5,714 shares held by Jennifer Wen Lee Yuen, the
adult daughter of Mr. and Mrs. Yuen. Not included are 9,000 shares of
Common Stock held by: Atsuko Hamasaki in her individual capacity (3,000
shares);
(Footnotes continued on the next page.)
4
<PAGE> 8
(Footnotes continued from the preceding page.)
Noriaki Hamasaki (3,000 shares); and Yuzuru Hamasaki (3,000 shares). Atsuko
Hamasaki, Noriaki Hamasaki and Yuzuru Hamasaki are the sister-in-law,
brother-in-law and father-in-law of Mr. Yuen; none of whom resides in the
same household as Mr. and Mrs. Yuen. Mr. and Mrs. Yuen disclaim beneficial
ownership of the above-referenced 9,000 shares.
(5) The mailing address of such stockholder is c/o SRS Labs, Inc., 2909 Daimler
Street, Santa Ana, California 92705.
(6) Mutual Management Corp. ("MMC"), Salomon Smith Barney Holdings Inc. ("SSB
Holdings") and Travelers Group Inc. ("TRV"), 388 Greenwich Street, New
York, New York 10013, filed a joint Schedule 13G on or about September 9,
1998. SSB Holdings is the sole stockholder of MMC, and TRV is the sole
stockholder of SSB Holdings. MMC has shared voting and dispositive power
over 600,000 shares, and SSB Holdings and TRV each have shared voting and
dispositive power over 652,046 shares. SSB Holdings and TRV disclaim
beneficial ownership of the shares referred to in the Schedule 13G.
(7) The mailing address for Packard Bell NEC, Inc. is 1 Packard Bell Way,
Sacramento, California 95828.
(8) All of the 778,179 shares are held by Thomrose Holdings (BVI) Limited
("Thomrose"). Mr. Thomas W.T. Wan, a director and an executive officer of
the Company and a director and executive officer of ValenceTech Limited, a
wholly-owned subsidiary of the Company ("ValenceTech"), is the sole
stockholder of Thomrose. In the case of Mr. Wan, includes 80,000 Stock
Option Shares granted to Mr. Wan as an executive officer and a director of
the Company.
(9) The mailing address of such stockholder is c/o ValenceTech, Unit 413, 4th
Floor, Hong Kong Industrial Technology Centre, 72 Tat Chee Avenue, Kowloon
Tong, Hong Kong.
(10) The sole stockholder of Rayfa (BVI) Limited is Raymond Choi. Mr. Choi also
is a director of ValenceTech and the President of Valence Semiconductor
Design Limited, a subsidiary of ValenceTech. In the case of Mr. Choi,
includes 62,500 Stock Option Shares granted to Mr. Choi.
(11) Includes 26,000 shares held by Mr. Sedmak's wife, Mary Sedmak, as custodian
for their children, Jeffrey Sedmak (13,000 shares) and Sarah Sedmak (13,000
shares).
5
<PAGE> 9
ELECTION OF DIRECTORS
(PROPOSAL 1)
Under the Company's Certificate of Incorporation and Bylaws, which provide
for a "classified" board of directors, three persons, Robert B. Pfannkuch,
Jeffrey I. Scheinrock and Thomas W.T. Wan, have been nominated by the Board of
Directors for election at the Annual Meeting to serve a three year term expiring
at the annual meeting in 2003 and until their respective successors are elected
and qualified. Directors shall be elected by a plurality of the votes of shares
of Common Stock present in person or represented by proxy at the Annual Meeting
and entitled to vote on such election.
The Bylaws provide for seven directors. Currently, there are three Class I
directors (Messrs. Pfannkuch, Scheinrock and Wan), whose term expires at the
Annual Meeting; two Class II directors (Messrs. AuYeung and Tu), whose term
expires at the 2001 annual meeting of stockholders; and two Class III directors
(Messrs. Sedmak and Yuen), whose term expires at the 2002 annual meeting of
stockholders.
Each of the nominees presently serves as a Class I director and has served
continuously as a director of the Company since the date indicated in his
biography below. In the event any nominee is unable to or declines to serve as a
director at the time of the Annual Meeting (which is not anticipated), the
persons named in the proxy will vote for the election of such person or persons
as may be designated by the present Board of Directors. UNLESS OTHERWISE
DIRECTED IN THE ACCOMPANYING PROXY, THE PERSONS NAMED THEREIN WILL VOTE FOR THE
ELECTION OF THE THREE NOMINEES LISTED BELOW.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
ROBERT B. PFANNKUCH, JEFFREY I. SCHEINROCK AND THOMAS W.T. WAN AS CLASS I
DIRECTORS.
INFORMATION WITH RESPECT TO THE CLASS I DIRECTOR NOMINEES
The following table sets forth information regarding the nominees,
including age on the date of the Annual Meeting and business experience during
the past five years.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
Robert B. Pfannkuch...... 65 1998 Mr. Pfannkuch has served as a director of the Company since
June 1998. Since April 1997, Mr. Pfannkuch has been
President of Panasonic Disc Services Corporation, a DVD
disc replication company (PDSC) headquartered in Torrance,
California. A wholly-owned subsidiary of Matsushita
Electric Industrial Co. Ltd. in Japan, PDSC was founded in
June 1996 to manufacture DVDs for the movie, music and
computer software industries. Mr. Pfannkuch has been in the
field of video communications since 1963 when he founded
Audio Video Industries. In 1974, he organized a
videocassette duplication division for Bell & Howell
Company, which grew into one of the world's largest
duplicators and by 1985 was known as Bell &
Howell/Columbia/Paramount Video Services (BHCP) to reflect
the addition of Columbia Pictures and Paramount Pictures as
joint venture partners. In May 1998, The Rank Organisation
Plc purchased BHCP and renamed the unit "Rank Video
Services America." Mr. Pfannkuch was Chairman and Chief
Executive Officer of Rank Video Services America from May
1988 to January 1990 and served in an executive capacity
with Telefuture Partners, a video communications consultant
from January 1990 to April 1997. Having broad exposure to
all facets of the home video industry since its inception,
Mr. Pfannkuch is widely known and has received numerous
awards and citations for his many contributions to the
growth of home video, including membership in the Video
Hall of Fame. In April 2000, Mr. Pfannkuch received a
Lifetime Achievement
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
Award at the DVD Summit III Conference in Dublin, Ireland.
Jeffrey I. Scheinrock.... 49 1996 Mr. Scheinrock has served as a director of the Company and
a member of the Board's Audit Committee since June 1996.
Since December 1999, Mr. Scheinrock has served as Chief
Executive Officer, President and Chief Financial Officer of
Tornado Development, Inc., an internet centric unified
messaging company. Mr. Scheinrock also serves as Chief
Executive Officer of Scheinrock Advisory Group, an
investment consulting firm. Prior thereto, he served as
Vice Chairman and Chief Financial Officer of Kistler
Aerospace Corporation, a manufacturer of reusable launch
vehicles, from July 1996 to May 1997. Prior thereto, he
served as Vice Chairman -- Finance and Strategic Planning
and Chief Financial Officer of Packard Bell Electronics,
Inc., a manufacturer of personal computers, from March 1989
to June 1996. Mr. Scheinrock also has served as a director
of Brilliant Digital Entertainment, a developer and
distribution of digital equipment, since October 1996.
Thomas W.T. Wan.......... 39 1998 Mr. Wan has served as a Vice President and a director of
the Company since the closing of the acquisition of Valence
Technology, Inc. ("Valence") by the Company in March 1998.
Mr. Wan was appointed as a director and an executive
officer of the Company pursuant to the terms of the Stock
Purchase Agreement dated February 24, 1998, among the
Company, Valence, Mr. Wan and three other management
stockholders of Valence, relating to the acquisition of
Valence by the Company. Mr. Wan also serves as a director,
President and Chief Executive Officer of ValenceTech
Limited, a wholly-owned subsidiary of the Company
("ValenceTech") since March 2000 and a director, President
and Chief Executive Officer of Valence, a wholly-owned
subsidiary of the Company. ValenceTech is the successor
company to Valence and was formed to facilitate listing the
shares of the Company's principal holding company
subsidiary in Asia on the Growth Enterprise Market of the
Stock Exchange of Hong Kong Limited. In addition, Mr. Wan
has served as a director of Valence and each of Valence's
subsidiaries since May 1995. Mr. Wan also served as
President, Chief Executive Officer and Sales and Marketing
Manager of Valence Semiconductor (HK) Limited from April
1990 to May 1995. Prior thereto, Mr. Wan served as
Assistant Executive Engineer and Executive Engineer in the
Full-Custom Chip Design Division of British Telecom
Research Laboratories from 1985 to 1990.
</TABLE>
7
<PAGE> 11
INFORMATION WITH RESPECT TO DIRECTORS WHOSE TERMS CONTINUE
The following table sets forth similar information regarding the members of
the Board of Directors who are designated either Class II or Class III Directors
and are continuing in office as directors of the Company.
Class II Directors -- Term Expiring at the 2001 Annual Meeting
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
John AuYeung, Ph.D....... 48 1996 Dr. AuYeung has served as Executive Vice President since
July 1998, as Chief Operating Officer since April 1999, as
a director of the Company since May 1996 and has served as
a member of the Audit Committee of the Board since June
1996. Dr. AuYeung also served as the Company's Chief
Financial Officer, Secretary and Treasurer from April 1999
to August 1999 and since February 2000 is again serving in
those capacities. Dr. AuYeung served as a member of the
Compensation Committee of the Board, from June 1996 through
June 1998. In addition, Dr. AuYeung has served as a
director of ValenceTech since March 2000, has served as a
director of Valence from March 1998 to April 2000 and has
served as a director of all but one of Valence's
subsidiaries since March 1998. Dr. AuYeung has served as
Chief Financial Officer, Treasurer and Secretary and a
director of SRSWOWcast.com, Inc., a wholly-owned subsidiary
of the Company ("SRSWOWcast") since September 1999, and has
served as Executive Vice President of SRSWOWcast since
February 2000. From November 1996 to February 1999, Dr.
AuYeung served as President, Secretary and Treasurer of ACG
(U.S.), Inc., the U.S. subsidiary of a foreign-based
Internet company. Dr. AuYeung also has served since
November 1996 as President of Communications Management,
Inc., a management consulting firm and since October 1996,
as Assistant Secretary of Asia Communications Global
Limited, a privately-held Internet technology company
focusing on the dissemination of financial, home shopping
and other information to substantially all of the Asian
market ("ACGL"). Prior thereto, Dr. AuYeung served as Vice
President, Technology and Business Development of Atlantis
Computers, Inc. dba NuReality, a privately-held company
that manufactured computer multimedia and consumer
audio/video products and was a licensee of the Company
("NuReality") from May 1995 to October 1996. In addition,
Dr. AuYeung served in a variety of management positions
with Newport Corporation, a scientific research instrument
manufacturer, from March 1982 to April 1995. Prior to
joining Newport Corporation, Dr. AuYeung was a research
scientist at the Jet Propulsion Laboratory. Dr. AuYeung
holds a B.S. from the Massachusetts Institute of Technology
and an M.S. and a Ph.D. in electrical engineering from the
California Institute of Technology.
John Tu.................. 58 1994 Mr. Tu has served as a director of the Company since May
1994. In addition, since June 1996, Mr. Tu has served as a
member of the Audit Committee of the Board. Mr. Tu also
served as a member of the Compensation Committee of the
Board from June 1996 through June 1998 and since April
1999. Mr. Tu has served as a director and President of
Kingston Technology Company (and its predecessor, Kingston
Technology Corporation), a manufacturer of computer
products, since October 1987. Mr. Tu also was a co-founder
of Kingston Technology Corporation. Prior
</TABLE>
8
<PAGE> 12
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
thereto, from 1982 to 1986, Mr. Tu served as President of
Camintonn Corporation, a manufacturer of board level
products for the DEC market-place, and from 1986 to 1987,
he served as Vice President and General Manager of the
Digital Division after the company's sale to AST Research.
Mr. Tu was also a co-founder of Camintonn Corporation. Mr.
Tu earned a degree in electrical engineering from the
Technische Hochschule Darmstadt in Germany.
</TABLE>
Class III Directors -- Term Expiring at the 2002 Annual Meeting
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- -------- ------------------------------------------
<S> <C> <C> <C>
Stephen V. Sedmak........ 51 1993 Mr. Sedmak, currently retired, was one of the founders of
the Company. He served as President of the Company since
its inception in June 1993 until July 1998. In addition,
Mr. Sedmak has served as a director of the Company since
June 1993, served as Chief Operating Officer from June 1996
until July 1998, and has served as a director of
ValenceTech since March 2000. Mr. Sedmak also has served as
a member of the Compensation Committee of the Board since
March 1999. Prior to joining the Company, Mr. Sedmak served
as Vice President of Sales for PTC Corporation, a provider
of telecommunications systems, from January 1973 to March
1982, as Vice President of Sales for The ICT Group, a
provider of database marketing and telemarketing services,
from March 1985 to September 1987, and as Vice President of
Sales for TeleRelation Systems Inc., a software development
company, from January 1991 to June 1992. Mr. Sedmak was
involved as a founder of each of these companies. In
addition, Mr. Sedmak held a variety of executive sales and
marketing positions with IBM/ROLM Corporation, a leading
telecommunications manufacturer, from March 1982 to March
1985.
Thomas C.K. Yuen......... 48 1994 Mr. Yuen has served as Chairman, Chief Executive Officer
and a director of the Company since January 1994, and has
served as President of the Company since April 1999. Mr.
Yuen also has served as a director of ValenceTech since
March 2000 and Valence and all but one of Valence's
subsidiaries since March 1998. Mr. Yuen served as President
of SRSWOWcast from September 1999 to February 2000, and has
served as Chairman of the Board and Chief Executive Officer
of SRSWOWcast since February 2000, and as a director of
SRSWOWcast since September 1999. In addition, Mr. Yuen
served as Chief Financial Officer of the Company from
January 1994 to July 1994. Since May 1995, Mr. Yuen has
also served as Chairman and a director for ACGL. Since June
1993, Mr. Yuen has served as Chairman, Chief Executive
Officer, President and a director of NuReality. Mr. Yuen is
one of the founders of AST Research, Inc., where he served
as a director from such company's inception in 1981 until
June 1992 and the company's co-chairman and chief operating
officer from August 1987 to June 1992.
</TABLE>
9
<PAGE> 13
INFORMATION WITH RESPECT TO EXECUTIVE OFFICERS
The executive officers of the Company are Thomas C.K. Yuen, John AuYeung,
Charles Cortright, James F. Gardner, Alan D. Kraemer and Thomas W.T. Wan.
Messrs. Yuen, AuYeung and Wan are also directors of the Company and their
business biographies are referenced above. The business experience of Messrs.
Cortright, Gardner and Kraemer are described below. Executive officers are
elected by, and serve at the pleasure of, the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND OTHER INFORMATION
---- --- ------------------------------------------
<S> <C> <C>
Charles Cortright............... 51 Mr. Cortright has served as President of SRSWOWcast since
February 2000 and prior thereto, from October 1999 to
February 2000, served as General Manager of SRSWOWcast.
Before joining the Company, Mr. Cortright acted as a
consultant to various companies, including IBM, from April
1997 to September 1999. From January 1996 until October
1996, Mr. Cortright served as President, Chief Executive
Officer and a director of GraphixZone, Inc., an
entertainment software products and content company
("GraphixZone"), from August 1989 to January 1996, he
served as Chairman, President and Chief Executive Officer
of GraphixZone, and from May 1995 to January 1996 served as
interim Chief Financial Officer of a predecessor
corporation to GraphixZone.
James F. Gardner................ 53 Mr. Gardner has served as Vice President, Operations since
February 2000 and has served as Vice President, Chief
Financial Officer, Treasurer and Secretary from August 1999
to February 2000. Prior to joining the Company, from August
1996 through July 1999, Mr. Gardner held the position of
Vice President, Chief Financial Officer of Cherokee
International LLC, a designer, manufacturer and seller of
switch-made power supply units and from December 1995 to
August 1996 he served as a consultant to Ceradyne, Inc., an
advanced technical ceramics manufacturer.
Alan D. Kraemer................. 49 Mr. Kraemer has served as Vice President of Engineering of
the Company since April 2000, and prior thereto, as
Director of Engineering of the Company since February 1994.
In addition, Mr. Kraemer has served as President of Sierra
Digital Productions, Inc., a compact disc production and
recording company, since August 1989. Prior to joining the
Company, Mr. Kraemer also served as President of
Engineering of De LaRue Printrak, a manufacturer of
automatic fingerprint identification systems from January
1989 to December 1989. Prior thereto, Mr. Kraemer served as
Vice President of Engineering for AST Research, a personal
computer manufacturer. Mr. Kraemer also served as Vice
President of Engineering with Point4 Data Corporation from
May 1986 to December 1986, and as Director of Software
Engineering of Northrop Electronics from May 1984 to May
1986.
</TABLE>
10
<PAGE> 14
INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
MEETINGS OF THE BOARD AND ITS COMMITTEES
The Board of Directors manages the business of the Company. It establishes
overall policies and standards for the Company and reviews the performance of
management. In addition, the Board has established an Audit Committee and a
Compensation Committee whose functions are briefly described below. The Board
has not established a Nominating Committee. From July 1998 through April 1999,
the Board decided to assume the responsibilities of the Compensation Committee
for making determinations regarding salaries, bonuses and other compensation for
the Company's officers and making decisions with respect to awards, including
but not limited to stock option grants to the Company's directors, officers, key
employees, consultants and important business associates pursuant to the
Company's discretionary plans. In April 1999, the Board reinstated the
Compensation Committee. The directors are kept informed of the Company's
operations at meetings of the Board and its committees through reports and
analyses from, and discussions with, management.
During the fiscal year ended December 31, 1999 (the "Fiscal Year" or
"Fiscal 1999"), the Board of Directors met on one (1) occasion and took action
by Unanimous Written Consent on six (6) occasions.
Audit Committee. The Audit Committee provides oversight of the (a)
financial reporting process, the system of internal controls and the audit
process of the Company and (b) independent auditors. The Audit Committee also
recommends to the Board of Directors the appointment of the independent
certified public accountants. The members of the Audit Committee are John
AuYeung, John Tu and Jeffrey I. Scheinrock (Chairman). During the Fiscal Year,
the Audit Committee met on three (3) occasions.
Compensation Committee. The Compensation Committee is responsible for
making determinations regarding salaries, bonuses and other compensation for the
Company's officers and making decisions with respect to awards, including but
not limited to stock option grants to the Company's directors, officers, key
employees, consultants and important business associates pursuant to the
Company's discretionary plans and bonus awards under the Company's Annual
Incentive Bonus Plan and the Company's Annual Supplemental Executive Bonus Plan.
The members of the Compensation Committee are Stephen V. Sedmak (Chairman) and
John Tu. The Compensation Committee did not meet during the Fiscal Year;
however, it acted by Unanimous Written Consent on five (5) occasions.
With the exception of Robert B. Pfannkuch, John Tu and Thomas W.T. Wan,
each of the other incumbent directors attended at least 75% of the aggregate of
the total number of meetings of the Board of Directors held during the Fiscal
Year (held during the period for which he has been a director). With the
exception of John Tu, each of the other incumbent directors who were members of
a Board Committee, attended at least 75% of the aggregate of the total number of
meetings held by all committees of the Board on which he served during the
Fiscal Year (held during the period that he served).
COMPENSATION OF DIRECTORS
Directors who also are employees of the Company are not paid any fees or
remuneration, as such, for their service on the Board or on any Board committee.
Cash Compensation. In Fiscal 1999, each nonemployee director was entitled
to receive $500 for each Board meeting that he attended and $250 for each
telephonic Board meeting in which he participated. Each nonemployee director
also was entitled to receive $250 for each committee meeting that he attended in
person or telephonically. In addition, each nonemployee director was entitled to
be reimbursed for reasonable travel and other expenses incurred in connection
with attending Board and committee meetings.
Nonemployee Directors' Plan. Each nonemployee director is eligible to
receive stock options under the SRS Labs, Inc. Amended and Restated 1996
Nonemployee Directors' Stock Option Plan (the "Nonemployee Directors' Plan"), a
nondiscretionary, formula stock option plan pursuant to which 250,000 shares of
Common
11
<PAGE> 15
Stock have been authorized for issuance. As of the Record Date, 150,000 options
remain available for grant under the Nonemployee Directors' Plan.
Each nonemployee director of the Company who was in office prior to the
date of the closing of the Company's Initial Public Offering (the "IPO") and
remained in office as of such date (namely, Messrs. AuYeung, Scheinrock and Tu)
was granted an option to purchase 10,000 shares of Common Stock which vested
upon the date of grant. On an ongoing basis, (a) each nonemployee director who
first becomes a member of the Board after the date of closing of the IPO is
granted an option to purchase 10,000 shares of Common Stock automatically upon
election to the Board of Directors which vests upon the date of grant, and (b)
each nonemployee director is granted an option to purchase 15,000 shares of
Common Stock automatically effective at the close of business on the date of
each of the Company's annual meeting of stockholders at which such nonemployee
director is elected which vests in three equal annual installments commencing on
the first anniversary of the applicable date of grant. Such option awards are in
each case subject to adjustments, as provided in the Nonemployee Directors'
Plan. In the event that Messrs. Pfannkuch and Scheinrock are elected as
directors at the Annual Meeting, each will receive on such date an option to
purchase 15,000 shares of Common Stock which vests in three equal annual
installments.
At the close of the Company's annual meeting of stockholders in Fiscal
1999, one such nonemployee director (namely, Mr. Sedmak) was granted an option
to purchase 15,000 shares of Common Stock at an exercise price of $3.125 per
share. The exercise price for all options granted under the Nonemployee
Directors' Plan has been based upon the fair market value of Common Stock on the
date of grant.
Incentive Plan. Each nonemployee director also is eligible to receive
awards under the Company's Amended and Restated 1996 Long-Term Incentive Plan
(the "Incentive Plan"), a discretionary plan currently administered by the
Compensation Committee. In Fiscal 1999, each of the nonemployee directors of the
Company (namely, Messrs. Pfannkuch, Scheinrock, Sedmak and Tu), received
non-statutory options to purchase 30,000 shares of Common Stock at an exercise
price of $3.4375 per share, the fair market value on the date of such grant.
Such options vest pro rata over a five year period from the date of grant
(December 11, 2000).
APPROVAL OF AN AMENDMENT TO THE SRS LABS, INC.
AMENDED AND RESTATED 1996 LONG-TERM INCENTIVE PLAN
(PROPOSAL 2)
BACKGROUND
The Board of Directors has adopted, and the stockholders have approved, the
SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan (the
"Incentive Plan"), a discretionary incentive plan which affords the Compensation
Committee of the Company's Board of Directors or the Board of Directors the
ability to design compensatory awards to attract and retain officers (including
all directors of the Company), other key employees and consultants of the
Company and its subsidiaries. The Board of Directors has adopted, subject to
stockholder approval, an amendment to the Incentive Plan to increase the number
of shares of Common Stock that may be issued or transferred pursuant to awards
granted thereunder by 2,500,000 (the "Share Amendment"). The Incentive Plan, as
amended by the Share Amendment (the "Amended Incentive Plan"), is set forth in
full as Appendix "A" to this Proxy Statement and is summarized under the caption
"Summary of the Amended Incentive Plan," below.
The Company has registered with the U.S. Securities and Exchange Commission
(the "Commission") on Form S-8 Registration Statements the 4,500,000 shares of
Common Stock currently issuable under the Incentive Plan. If the Share Amendment
is approved by the stockholders, the Board intends to cause the additional
shares of Common Stock that will become available for issuance under the Amended
Incentive Plan to be registered on a Form S-8 Registration Statement to be filed
with the Commission at the Company's expense.
12
<PAGE> 16
The Omnibus Budget Reconciliation Act of 1993 added Section 162 (m) to the
Internal Revenue Code of 1968, as amended. Subject to certain exceptions,
Section 162(m) generally limits the corporate income tax deductions to
$1,000,000 annually for compensation paid to each of the Chief Executive Officer
and the other four highest paid executive officers of the Company. Currently,
the performance-based compensation paid by the Company pursuant to the Incentive
Plan is excluded from this $1,000,000 limitation. If the Share Amendment is
approved by the stockholders, such approval will constitute approval of the
Share Amendment to the Incentive Plan under Section 162(m) and allow the Company
to rely upon the exception under Section 162(m) for performance-based
compensation awarded under the Amended Incentive Plan.
Currently, the number of shares of Common Stock which may be issued or
transferred (a) upon the exercise of Option Rights or Appreciation Rights, (b)
as Restricted Shares and released from all substantial risks of forfeiture, (c)
as Deferred Shares, (d) in payment of Performance Shares or Performance Units
that have been earned, or (v) in payment of dividend equivalents paid with
respect to awards made under the Incentive Plan, shall not exceed 4,500,000
(subject to adjustment as provided in the Incentive Plan). As of the Record
Date, Option Rights to purchase 4,105,759 shares of Common Stock have been
awarded (of which Option Rights to purchase 183,672 shares have been exercised
and Option Rights to purchase 3,922,087 shares remain outstanding), leaving only
394,241 shares of Common Stock remaining to be issued or transferred pursuant to
awards made under the Incentive Plan.
In addition to the Incentive Plan, the Company maintains the SRS Labs, Inc.
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan -- 1993, a discretionary plan authorizing the grant of awards to officers,
directors, key employees and consultants (the "1993 Plan"), a Stock Option
Agreement dated January 19, 1994 between the Company and Stephen V. Sedmak (the
"Individual Plan") and the SRS Labs, Inc. Amended and Restated 1996 Nonemployee
Directors' Stock Option Plan, a non-discretionary, formula stock option plan in
which only non-employee directors are eligible to participate (the "Nonemployee
Directors' Plan"). Under the 1993 Plan, 1,448,256 shares of Common Stock have
been authorized for issuance and options to purchase 535,372 shares of Common
Stock have been granted, of which options to purchase 319,555 shares of Common
Stock have been exercised. Options to purchase 912,884 shares of Common Stock
remain outstanding and reserved for issuance under the 1993 Plan. At this time,
the Board has determined not to grant further awards under the 1993 Plan. Under
the Individual Plan, options to purchase 362,064 shares of Common Stock have
been granted, of which 255,032 shares of Common Stock have been exercised. No
other shares are authorized for issuance under the Individual Plan. The
Incentive Plan, the 1993 Plan and the Individual Plan are collectively referred
to as the "Discretionary Plans". Accordingly, as of the Record Date, 1,307,125
shares of Common Stock remained available for grant under the Discretionary
Plans.
The Board of Directors continues to believe that such a compensatory award
program is an important factor in attracting, retaining and motivating officers,
other key employees, directors and consultants of the Company and its
subsidiaries. In light of the Company's acquisition of Valence, which has
approximately 90 employees (including employees of its subsidiaries) and the
fact that the Company expects in the future to make acquisitions resulting in
the hiring of additional employees, the Board of Directors has recognized the
need for an additional number of shares of Common Stock which may be issued or
transferred in connection with awards made under the Incentive Plan.
In view of the foregoing, the Board of Directors believes that it is
appropriate to increase the number of shares of Common Stock which may be issued
or transferred pursuant to the Incentive Plan in the form of an amendment to the
Incentive Plan to be presented to the stockholders. Accordingly, the Board of
Directors has adopted, subject to stockholder approval, the Share Amendment to
the Incentive Plan, which amends Section 3 (a) of the Incentive Plan to increase
the number of shares of Common Stock that may be issued or transferred pursuant
to awards granted under the Incentive Plan by 2,500,000 shares, from 4,500,000
to 7,000,000 shares of Common Stock. If the Share Amendment is not approved by
the stockholders at the Annual Meeting, the Incentive Plan will remain in
effect; however, as stated above, only 394,241 shares of Common Stock remain
available for grant as of the Record Date. If the Share Amendment is approved by
the
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<PAGE> 17
stockholders at the Annual Meeting, the stockholders will suffer further
dilution upon the exercise of future awards granted under the Incentive Plan. If
approved, up to an additional 2,500,000 shares of Common Stock will be available
for issuance or transfer pursuant to future awards under the Incentive Plan. In
addition, up to 1,252,091 shares of Common Stock will be available for issuance
or transfer pursuant to outstanding awards under the 1993 Plan and the
Individual Plans and up to 150,000 shares of Common Stock will be available for
issuance or transfer pursuant to outstanding awards and future awards under the
Nonemployee Directors' Plan. As of the Record Date, 12,564,273 shares of Common
Stock were issued and outstanding. Each of the Company's executive officers,
directors and nominees for election as a director is eligible to receive awards
pursuant to the Incentive Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR APPROVAL OF THE SHARE AMENDMENT TO THE INCENTIVE PLAN. THE AFFIRMATIVE VOTE
OF THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON OR
BY PROXY AT THE ANNUAL MEETING AND ENTITLED TO VOTE ON THIS PROPOSAL IS REQUIRED
FOR APPROVAL OF THIS PROPOSAL.
SUMMARY OF THE AMENDED INCENTIVE PLAN
The Amended Incentive Plan is set forth in full as Appendix "A" to this
Proxy Statement and is summarized below. The following summary is not intended
to be complete and reference should be made to Appendix "A" for a complete
statement of the terms and provisions of the Amended Incentive Plan. Capitalized
terms used in this Summary and not otherwise defined shall have the meanings
ascribed to such terms in the Amended Incentive Plan.
Plan Limits
The maximum number of shares of Common Stock that may be issued or
transferred (a) upon the exercise of Option Rights or Appreciation Rights, (b)
as Restricted Shares and released from substantial risk of forfeiture, (c) as
Deferred Shares, (d) in payment of Performance Shares or Performance Units that
have been earned, or (vi) in payment of dividend equivalents paid with respect
to awards made under the Amended Incentive Plan, may not in the aggregate exceed
7,000,000 shares of Common Stock, which may be shares of original issuance or
treasury shares or a combination thereof. These limits are subject to
adjustments as provided in the Amended Incentive Plan for stock splits, stock
dividends, recapitalizations and other similar events.
Upon the payment of any option price by the transfer to the Company of
Common Stock or upon related satisfaction of tax withholding obligations or any
other payment made or benefit realized under the Amended Incentive Plan by the
transfer or relinquishment of Common Stock, there shall be deemed to have been
issued or transferred only the net number of shares actually issued or
transferred by the Company. Upon the payment in cash of a benefit provided by
any award under the Amended Incentive Plan, any shares of Common Stock that were
covered by such award shall again be available for issuance or transfer under
the Amended Incentive Plan. If any award terminates, expires or is canceled with
respect to any shares of Common Stock, new awards may thereafter be granted
covering such Common Stock.
No participant may be granted Option Rights for more than 750,000 shares of
Common Stock during any three consecutive calendar years, subject to adjustment
pursuant to the Amended Incentive Plan. No participant may receive in any one
calendar year awards of Performance Shares and Performance Units having an
aggregate value as of their respective dates of grant in excess of $750,000.
As of the Record Date, the fair market value of a share of Common Stock was
$15.00 per share.
Option Rights
Option Rights provide the right to purchase shares of Common Stock at a
price not less than its fair market value on the date of the grant with respect
to Incentive Options and not less than eighty-five percent (85%) of its fair
market value with respect to other options. The option price is payable in cash,
nonforfeitable, unrestricted shares of Common Stock already owned by the
optionee, any other legal consideration that the
14
<PAGE> 18
Committee deems appropriate, including, without limitation, promissory notes, or
any combination of these methods. Any grant of Option Rights may provide for the
deferred payment of the option price on the sale of some or all of the shares
obtained from the exercise. Any grant may provide for the automatic grant of
additional Option Rights to an optionee upon the exercise of Option Rights using
Common Stock as payment.
Option Rights granted under the Amended Incentive Plan may be Option Rights
that are intended to qualify as incentive stock options ("ISO's") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or Option Rights that are not intended to so qualify or combinations
thereof. Except in the case of grants of ISO's, the Committee may provide for
the payment to the optionee of dividend equivalents in the form of cash or
Common Stock paid on a current, deferred or contingent basis or may provide that
the equivalents be credited against the option price. No Option Rights may be
exercised more than ten years from the date of grant. Each grant must specify
the period of continuous employment that is necessary before the Option Rights
become exercisable and may provide for the earlier exercisability of the Option
Rights in the event of retirement, death or disability of the participant or a
change in control of the Company. Any grant of Option Rights may specify
Management Objectives (as described below) that must be achieved as a condition
to exercise such rights.
Appreciation Rights
Appreciation Rights represent the right to receive from the Company an
amount, determined by the Committee and expressed as a percentage not exceeding
100 percent, of the difference between the base price established for such
Rights and the market value of the Common Stock on the date the rights are
exercised. Appreciation Rights can be tandem (granted with Option Rights to
provide an alternative to exercise of the Option Rights) or free-standing.
Tandem Appreciation Rights may only be exercised at a time when the related
Option Right is exercisable and the spread is positive, and requires that the
related Option Right be surrendered for cancellation. Free-standing Appreciation
Rights must have a base price per Right that is not less than the fair market
value of the Common Stock on the date of grant, must specify the period of
continuous employment that is necessary before such Appreciation Rights become
exercisable (except that they may provide for the earlier exercise of the
Appreciation Rights in the event of retirement, death or disability of the
participant or a change in control of the Company) and may not be exercisable
more than ten years from the date of grant. Any grant of Appreciation Rights may
specify that the amount payable by the Company on exercise of an Appreciation
Right may be paid in cash, in Common Stock or in any combination thereof, and
may either grant to the recipient or retain in the Committee the right to elect
among those alternatives. Any grant of Appreciation Rights may provide for the
payment of dividend equivalents in the form of cash or Common Stock paid on a
current, deferred or contingent basis. Any grant of Appreciation Rights may
specify Management Objectives that must be achieved as a condition to exercise
such rights.
Restricted Shares
Restricted Shares constitute an immediate transfer of ownership to the
recipient in consideration of the performance of services. The participant has
dividend and voting rights on such shares. Restricted Shares must be subject to
a "substantial risk of forfeiture", within the meaning of Section 83 of the Code
for a period to be determined by the Committee on the date of the grant. In
order to enforce these forfeiture provisions, the transferability of Restricted
Shares will be prohibited or restricted in the manner prescribed by the
Committee on the date of grant for the period during which such forfeiture
provisions are to continue. The Committee may provide for the earlier
termination of the forfeiture provisions in the event of retirement, death or
disability of the participant or a change in control of the Company.
Any grant of Restricted Shares may specify Management Objectives which, if
achieved, will result in termination or early termination of the restrictions
applicable to such shares. Any such grant must also specify in respect of such
specified Management Objectives, a minimum acceptable level of achievement and
must set forth a formula for determining the number of Restricted Shares on
which restrictions will terminate if performance is at or above the minimum
level, but below full achievement of the specified Management Objectives.
15
<PAGE> 19
Deferred Shares
Deferred Shares constitute an agreement to issue shares to the recipient in
the future in consideration of the performance of services, but subject to the
fulfillment of such conditions as the Committee may specify. The participant has
no right to transfer any rights under his or her award and no right to vote the
Deferred Shares. The Committee may authorize the payment of dividend equivalents
on the Deferred Shares, in cash or Common Stock, on a current, deferred or
contingent basis. The Committee must fix a deferral period at the time of grant,
and may provide for the earlier termination of the deferral period in the event
of retirement, death or disability of the participant or a change in control of
the Company.
Performance Shares and Performance Units
A Performance Share is the equivalent of one share of Common Stock and a
Performance Unit is the equivalent of $100.00. The participant will be given one
or more Management Objectives to meet within a specified period (the
"Performance Period"). The specified Performance Period may be subject to
earlier termination in the event of retirement, death or disability of the
participant or a change in control of the Company. A minimum level of acceptable
achievement will also be established by the Committee. If by the end of the
Performance Period, the participant has achieved the specified Management
Objectives, the participant will be deemed to have fully earned the Performance
Shares or Performance Units. If the participant has not achieved the Management
Objectives, but has attained or exceeded the predetermined minimum level of
acceptable achievement, the participant will be deemed to have partly earned the
Performance Shares or Performance Units in accordance with a predetermined
formula. To the extent earned, the Performance Shares or Performance Units will
be paid to the participant at the time and in the manner determined by the
Committee in cash, Common Stock or any combination thereof. The grant may
provide for the payment of dividend equivalents thereon in cash or in Common
Stock on a current, deferred or contingent basis.
Management Objectives
The Amended Incentive Plan requires that the Committee establish
"Management Objectives" for purposes of Performance Shares and Performance
Units. When so determined by the Committee, Option Rights, Appreciation Rights,
Restricted Shares and dividend equivalents may also specify Management
Objectives. Management Objectives may be described in terms of either
Company-wide objectives or objectives that are related to the performance of the
individual participant or subsidiary, division, department or function within
the Company or a subsidiary in which the participant is employed. Management
Objectives applicable to any award to a participant who is, or is determined by
the Committee likely to become, a covered employee" within the meaning of
Section 162 (in) (3) of the Code shall be limited to specified levels of or
growth in (a) return on invested capital, (b) earnings per share, (c) return on
assets, (d) return on equity, (e) stockholder return, (f) sales growth, (g)
productivity improvement, and/or (h) net income. Except in the case of such a
covered employee, if the Committee determines that a change in the business,
operations, corporate structure or capital structure of the Company, or the
manner in which it conducts its business, or other events or circumstances
render the Management Objectives unsuitable, the Committee may modify such
Management Objectives, in whole or in part, as the Committee deems appropriate
and equitable.
Administration
The Compensation Committee of the Board of Directors will administer and
interpret the Amended Incentive Plan. The Committee is composed of not less than
two directors, each of whom must be a "non-employee director" within the meaning
of Rule 16b-3. In the absence of a Committee or in the event of grants to
non-employee directors, the Board of Directors will administer and interpret the
Amended Incentive Plan.
Eligibility
Officers, key employees, directors and consultants of the Company and its
Subsidiaries, as determined by the Committee, may be selected to receive
benefits under the Amended Incentive Plan. As of the Record
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<PAGE> 20
Date, approximately 6 officers, 76 key employees, 4 non-employee directors and 7
consultants of the Company and its Subsidiaries were eligible to participate in
the Amended Incentive Plan.
Transferability
Option Rights and other derivative securities awarded under the Amended
Incentive Plan will not be transferable by a participant other than by will or
the laws of descent and distribution or, other than an ISO, a qualified domestic
relations order. Any award made under the Amended Incentive Plan may provide
that any Common Stock issued or transferred as a result of the award will be
subject to further restrictions upon transfer.
Adjustments
The Committee may make or provide for adjustment in the number of shares
covered by outstanding Option Rights, Appreciation Rights, Deferred Shares and
Performance Shares, the prices per share applicable thereto and the kind of
shares (including shares of another issuer), as the Committee in its sole
discretion may in good faith determine to be equitably required in order to
prevent dilution or enlargement of the rights of participants that would
otherwise result from (a) any stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of the
Company, (b) any merger, consolidation, spinoff, spin-out, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of assets,
issuance of rights or warrants to purchase securities, or (c) any other
corporate transaction or event having an effect similar to any of the foregoing.
In the event of any such transaction or event, the Committee may provide in
substitution for any or all of the outstanding awards under the Amended
Incentive Plan such alternative consideration as it may in good faith determine
to be equitable in the circumstances and may require in connection therewith the
surrender of all awards so replaced. Moreover, the Committee may on or after the
Date of Grant provide in the agreement evidencing any award under the Amended
Incentive Plan that the holder of the award may elect to receive an equivalent
award in respect of securities of the surviving entity of any merger,
consolidation or other transaction or event having a similar effect, or the
Committee may provide that the holder will automatically be entitled to receive
such an equivalent award. In any case, such substitution of securities shall not
require the consent of any person who is granted awards pursuant to the Amended
Incentive Plan.
Amendments and Miscellaneous
The Amended Incentive Plan may be amended by the Committee or the Board of
Directors, but except as expressly authorized by the Amended Incentive Plan, no
such amendment shall increase the maximum number of shares specified in Section
3(a) of the Amended Incentive Plan (except as expressly authorized by the
Amended Incentive Plan), increase the number of Performance Units specified in
Section 3(e) of the Amended Incentive Plan or cause Rule 16b-3 to become
inapplicable to the Amended Incentive Plan without the further approval of the
stockholders of the Company, unless permitted by Rule 16b-3. However, the
Committee or the Board may amend the Amended Incentive Plan to eliminate
provisions which are no longer necessary as a result of changes in tax or
securities laws and regulations, or in the interpretation of such laws and
regulations.
Where the Committee has established conditions to the exercisability or
retention of certain awards, the Amended Incentive Plan allows the Committee to
take action in its sole discretion subsequently to equitably adjust such
conditions in certain circumstances, including in the case of death, disability
or retirement.
With the concurrence of the affected Optionee, the Committee may cancel any
agreement evidencing Option Rights or any other award granted under the Amended
Incentive Plan. In the event of such cancellation, the Committee may authorize
the granting of new Option Rights or other awards, which may or may not cover
the same number of shares of Common Stock that had been the subject of the prior
award, at such Option Price and subject to such other terms, conditions and
discretions as would have been applicable under the Amended Incentive Plan had
the canceled Option Rights or other awards not been granted.
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<PAGE> 21
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the Federal income tax
consequences of certain transactions under the Amended Incentive Plan. This
summary is not intended to be complete and does not describe state or local tax
consequences.
Tax Consequences to Participants
Nonqualified Stock options. In general, (a) no income will be recognized by
an optionee at the time a nonqualified Option Right is granted; (b) at the time
of exercise of a nonqualified Option Right ordinary income will be recognized by
the optionee in an amount equal to the difference between the option price paid
for the shares and the fair market value of the shares, if unrestricted, on the
date of exercise; and (c) at the time of sale of shares acquired pursuant to the
exercise of a nonqualified Option Right appreciation (or depreciation) in value
of the shares after the date of exercise will be treated as either short-term or
long-term capital gain (or loss) depending on how long the shares have been
held.
Incentive Stock Options. No income generally will be recognized by an
optionee upon the grant or exercise of an ISO. If shares of Common Stock are
issued to the optionee pursuant to the exercise of an ISO, and if the optionee
satisfies certain employment and holding period requirements, then upon sale of
such shares, any amount realized in excess of the option price will be taxed to
the optionee as a long-term capital gain and any loss sustained will be a
long-term capital loss. To satisfy the employment requirement, the optionee must
exercise the ISO not later than three months after he or she ceases to be an
employee of the Company (or one year if he or she is disabled). To satisfy the
holding period requirement, the optionee must not dispose of the shares issued
pursuant to the exercise of the ISO within two years after the date of grant of
the ISO and within one year after the transfer of such shares to the optionee.
If shares of Common Stock acquired upon the timely exercise of an ISO are
disposed of prior to the expiration of either holding period described above,
the optionee generally will recognize ordinary income in the year of disposition
in an amount equal to the excess (if any) of the fair market value of such
shares at the time of exercise (or, if less, the amount realized on the
disposition of such shares if a sale or exchange) over the option price paid for
such shares. Any further gain (or loss) realized by the participant generally
will be taxed as short-term or long-term capital gain (or loss) depending on the
holding period.
Appreciation Rights. No income will be recognized by a participant in
connection with the grant of a Tandem Appreciation Right or a Free-standing
Appreciation Right. When the Appreciation Right is exercised, the participant
normally will be required to include as taxable ordinary income in the year of
exercise an amount equal to the amount of cash received and the fair market
value of any unrestricted shares of Common Stock received on the exercise.
Restricted Shares. The recipient of Restricted Shares generally will be
subject to tax at ordinary income rates on the fair market value of the
Restricted Shares (reduced by any amount paid by the participant for such
Restricted Shares) at such time as the shares are no longer subject to
forfeiture or restrictions on transfer for purposes of Section 83 of the Code
("Restrictions"). However, a recipient who so elects under Section 83(b) of the
Code within 30 days of the date of transfer of the shares will have taxable
ordinary income on the date of transfer of the shares equal to the excess of the
fair market value of such shares (determined without regard to the Restrictions)
over the purchase price, if any, of such Restricted Shares. If a Section 83 (b)
election has not been made, any dividends received with respect to Restricted
Shares that are subject to the Restrictions generally will be treated as
compensation that is taxable as ordinary income to the participant.
Deferred Shares. No income generally will be recognized upon the award of
Deferred Shares. The recipient of a Deferred Share award generally will be
subject to tax at ordinary income rates on the fair market value of unrestricted
shares of Common Stock on the date that such shares are transferred to the
participant under the award (reduced by any amount paid by the participant for
such Deferred Shares), and the capital gains/loss holding period for such shares
also will commence on such date.
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<PAGE> 22
Performance Shares and Performance Units. No income generally will be
recognized upon the grant of Performance Shares or Performance Units. Upon
payment in respect of the earn-out of Performance Shares or Performance Units,
the recipient generally will be required to include as taxable ordinary income
in the year of receipt an amount equal to the amount of cash received and the
fair market value of any nonrestricted shares of Common Stock received.
Special Rules Applicable to Officers and Directors. In limited
circumstances where the sale of stock received as a result of a grant or award
could subject an officer or director to suit under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the tax
consequences to the officer or director may differ from the tax consequences
described above. In these circumstances, unless a special election under Section
83 (b) of the Code has been made, the principal difference (in cases where the
officer or director would otherwise be currently taxed upon his receipt of the
stock) usually will be to postpone valuation and taxation of the stock received
so long as the sale of the stock received could subject the officer or director
to suit under Section 16(b) of the Exchange Act, but no longer than six months.
Tax Consequences to the Company or Subsidiary
To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company or Subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, the income meets the test of reasonableness,
is an ordinary and necessary business expense, is not an "excess parachute
payment" within the meaning of Section 28OG of the Code and is not disallowed by
the $1 million limitation on certain executive compensation.
NEW PLAN BENEFITS
The benefits or amounts to be awarded in the future under the Amended
Incentive Plan are not determinable at this time and it is not possible to
determine the benefits or amounts which would have been received or allocated to
eligible participants under the Amended Incentive Plan.
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<PAGE> 23
COMPENSATION OF EXECUTIVE OFFICERS
We are required by the SEC to disclose compensation paid by the Company
during the last three fiscal years to (a) the Company's Chief Executive Officer;
(b) the Company's four most highly compensated executive officers, other than
the Chief Executive Officer, who were serving as executive officers at the end
of Fiscal 1999; and (c) up to two additional individuals for whom such
disclosure would have been provided under clause (a) and (b) above but for the
fact that the individual was not serving as an executive officer of the Company
at the end of Fiscal 1999; provided, however, that no disclosure need be
provided for any executive officer, other than the CEO, whose total annual
salary and bonus does not exceed $100,000.
Accordingly, the following table discloses compensation paid by the Company
during the last three fiscal years to (a) Mr. Yuen, the Company's Chief
Executive Officer; and (b) Messrs. Wan and AuYeung, the two most
highly-compensated executive officers, other than the Chief Executive Officer,
who were serving as executive officers at the end of Fiscal 1999 and whose
salary and bonus exceeded $100,000. We refer to all of these officers as the
"Named Executive Officers." The Company first became a reporting Company,
pursuant to Section 13(a) of the Exchange Act, during Fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) SECURITIES
-------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C.K. Yuen............ 1999 $225,000 $ -- -- 70,000 --
Chairman of the Board 1998 281,250 1,000 -- 110,000 --
and Chief Executive 1997 225,000 1,147 -- 167,762 --
Officer
Thomas W.T. Wan(2).......... 1999 257,881 -- 41,743(3) 80,000 --
Vice President of SRS 1998 144,228 -- 43,787(3) 285,000 --
Labs, Inc., Chief 1997 -- -- -- -- --
Executive Officer of
Valence Technology Inc.
John AuYeung, Ph.D.(4)...... 1999 182,500 10,000 -- 115,000 --
Executive Vice President, 1998 75,000 95,500 -- 225,000(5) --
Chief Operating Officer, 1997 -- -- -- -- --
Chief Financial Officer,
Secretary and Treasurer
</TABLE>
- ---------------
(1) Portions of Mr. Yuen's and Mr. AuYeung's salary in Fiscal 1999 were
deferred under the Company's 401(k) Plan.
(2) Mr. Wan became an executive officer of the Company on March 2, 1998 in
connection with the Company's acquisition of Valence Technology Inc. All
compensation amounts payable to Mr. Wan pursuant to his employment
agreement are in Hong Kong dollars; however, for purposes of disclosure in
this table, all compensation amounts are expressed in U.S. dollars at a
conversion rate of 7.75 Hong Kong dollars to 1 U.S. dollar.
(3) For Mr. Wan, the amount attributable to perquisites in Fiscal 1999 was
attributable solely to a housing allowance. The amount attributable to
perquisites in Fiscal 1998 includes a $41,743 housing allowance; the
remaining perquisites and the related amounts did not meet the disclosure
threshold established by the SEC.
(4) Dr. AuYeung became an executive officer and an employee of the Company on
July 1, 1998. Dr. AuYeung has been a director of the Company since May 1996
and as such was, prior to July 1, 1998, compensated as a nonemployee
director of the Company. In Fiscal 1998, Dr. AuYeung earned $250 as a
nonemployee director which is not included in the amount set forth in the
Summary Compensation Table. See "Information About the Board of Directors
and Committees of the Board -- Compensation of Directors."
(Footnotes continued on the next page.)
20
<PAGE> 24
(Footnotes continued from the preceding page.)
- ---------------
(5) Of the aggregate amount of securities underlying options granted to Dr.
AuYeung, 15,000 represent shares of Common Stock underlying an option grant
awarded to Dr. AuYeung as a nonemployee director of the Company.
STOCK OPTIONS
Stock Option Grants. The following table shows stock option grants to the
Named Executive Officers during Fiscal 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
------------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. K. Yuen....... 70,000(4) 5.54% $3.4375 11/9/09 $151,328 $383,494
Thomas W.T. Wan......... 80,000(4) 6.33% 3.4375 11/9/09 172,946 438,279
John AuYeung............ 50,000(4) 3.95% 2.75 6/7/09 86,473 219,140
65,000(4) 5.14% 3.4375 11/9/09 140,519 356,102
</TABLE>
- ---------------
(1) Upon a change in control of the Company (as defined in the stock option
agreements relating to the respective plans), the options shall,
notwithstanding the installment vesting provisions, become immediately
exercisable in full.
(2) All options were granted at the fair market value on the date of grant.
(3) We are required by the SEC to use 5% and 10% assumed rate of appreciation
over the ten year option term. This does not represent the Company's
estimate or projection of the future Common Stock price. If the Common Stock
does not appreciate, the Named Executive Officers will receive no benefit
from the options.
(4) Nonqualified stock options which vest pro rata over a five year period from
the date of grant.
Option Exercises/Fiscal Year End Value. The following table shows stock
option exercises and the value of unexercised stock options held by the Named
Executive Officers during Fiscal 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES VALUE FY-END(#) FY-END($)(1)
ACQUIRED ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C.K. Yuen..... -- $-- 358,059 191,941 $747,449 $277,948
Thomas W.T. Wan...... -- -- 80,000 285,000 79,219 321,094
John AuYeung......... -- -- 81,250 268,750 72,187 419,687
</TABLE>
- ---------------
(1) Represents the positive difference between the closing price of the Common
Stock on Thursday, December 31, 1999 (the last stock trading day of the
Fiscal Year) and the exercise price of the options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Mr. Yuen entered into an employment agreement with the Company effective as
of July 1, 1996. Such agreement provided for a fixed base salary, with annual
increases and performance bonuses at the discretion of the Board of Directors.
The agreement provided for a base salary for Mr. Yuen of $175,000 per year
commencing July 1, 1996 and $225,000 per year for the 12-month period commencing
January 1, 1997; such base salary to be adjusted, thereafter, by the Board of
Directors, but not to be reduced below the initial base
21
<PAGE> 25
salary provided in the agreement. Mr. Yuen's employment agreement provided that
he should devote at least 40% of his time (based on an average eight hour work
day) to the business of the Company. Mr. Yuen is permitted to directly engage in
other business activities provided such activities are not competitive with the
Company. The employment agreement with Mr. Yuen could be terminated by the
Company for cause which is defined as (a) the failure to follow the reasonable
instructions of the Board of Directors, (b) the material breach of any term of
the employment agreement and failure to cure such breach within 10 days after
written notice thereof from the Company, or (c) the misappropriation of assets
of the Company or any subsidiary by the employee resulting in a material loss to
such entity. The employment agreements could be terminated by the employee upon
60 days prior written notice.
The initial term of the employment agreement was two years. The agreement
automatically renews for additional one year periods unless prior notice of
termination is given by either the Company or the employee. Mr. Yuen's
employment agreement has been automatically renewed for each successive one year
period. During Fiscal 1998, the Compensation Committee of the Board of Directors
increased Mr. Yuen's base salary to $300,000 per year commencing April 1, 1998,
in light of Mr. Yuen's commitment to devote a significantly greater amount of
time to the business of the Company during such year than required under his
employment agreement. Effective April 1, 1999, Mr. Yuen voluntarily reduced his
base salary to $200,000, without the reduction in his time commitment to the
business of the Company.
In the event the Company either terminates Mr. Yuen's employment agreement
at the end of the current term, or terminates such employment agreement during
the current term without cause, Mr. Yuen is entitled to receive his salary and
benefits for the remainder of the current term of his employment agreement plus
an additional period of 12 months. During such period, Mr. Yuen is obligated to
provide advisory services and may not compete with the Company. Mr. Yuen's
employment agreement also generally provides Mr. Yuen with compensation for the
remainder of the current term plus an additional period of 12 months and certain
other benefits and for the acceleration of the date of vesting for outstanding
stock options if Mr. Yuen is terminated or terminates his employment for certain
enumerated reasons within 90 days before or one year after a change in control
in the Company, as defined in the employment agreement.
Mr. Wan entered into an employment agreement with the Company and Valence
Technology Inc. ("Valence") effective March 2, 1998 with an initial term ending
December 31, 2000 and Dr. AuYeung entered into an employment agreement with the
Company effective July 1, 1998 and ending June 30, 1999. The respective
agreements provided for initial base salaries for (a) Mr. Wan of $239,871 per
year commencing March 3, 1998; and (b) Dr. AuYeung of $150,000 per year
commencing July 1, 1998. In each case, such base salary may be adjusted by the
Board of Directors, but the base salary for any fiscal year may not be reduced
below the initial base salary provided in the agreement. Effective April 1,
1999, the Board increased Mr. Wan's base salary to $299,160 and increased Dr.
AuYeung's base salary to $180,000. Each agreement may be terminated by the
Company (or, in the case of Mr. Wan, also by Valence) for cause which is defined
as (a) the failure to follow the reasonable instructions of the Board of
Directors of the Company (or, in the case of Mr. Wan, also of Valence), (b) the
material breach of any term of the agreement and failure to cure such breach
within 10 days after written notice thereof from the Company (or, in the case of
Mr. Wan, also Valence), or (c) the misappropriation of the assets of the Company
or any subsidiary resulting in a material loss to such entity. Each agreement
may be terminated by the employee upon 60 days prior written notice. In the case
of Mr. Wan, the agreement automatically renews for additional one year periods
unless prior notice of termination is given by either the Company or the
employee, and in the case of Mr. AuYeung, the agreement was extended for an
additional one year term. In the event that the Company (or, in the case of Mr.
Wan, also Valence) terminates the agreement either at the end of the current
term or during the current term without cause, the employee is entitled to
receive his salary and benefits for the remainder of the current term of the
agreement plus an additional period of 12 months in the case of Mr. Wan, and 6
months in the case of Dr. AuYeung. During such respective periods, the employee
is obligated to provide advisory services to the Company. In the case of Mr.
Wan, during such period, he also may not compete with the Company or its
subsidiaries. The agreement also provides the employee with compensation for the
remainder of the current term plus an additional 12 months in the case of Mr.
Wan and 6 months in the case of Dr. AuYeung and certain other benefits and for
the acceleration of the date of vesting for outstanding stock options if the
22
<PAGE> 26
employee is terminated or terminates his employment for certain enumerated
reasons within 90 days before or one year after a change in control in the
Company, as defined therein.
In addition to the agreements with Messrs. Yuen, Wan and AuYeung, certain
of the Company's plans contain termination or change of control provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From July 1, 1998 through April 14, 1999, the Company did not have a
Compensation Committee and the Board of Directors performed the functions of
such Committee. As directors of the Company, the following officers/directors
participated in deliberations concerning compensation of executive officers:
John AuYeung, Thomas W.T. Wan and Thomas C.K. Yuen. Stephen V. Sedmak, one of
the directors and a founder of the Company, served as President from the
Company's inception in June 1993 through July 1998, and as Chief Operating
Officer from June 1996 until July 1998. On April 14, 1999, the Board of
Directors reconstituted the Compensation Committee naming Stephen V. Sedmak and
John Tu as its members.
REPORT ON EXECUTIVE COMPENSATION
This Report on Executive Compensation shall not be deemed incorporated by
any general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
From the beginning of Fiscal 1999 to April 15, 1999, the Board of Directors
assumed the duties of the Compensation Committee. On April 14, 1999, the Board
of Directors reconstituted the Compensation Committee and appointed as members
Stephen V. Sedmak (a former executive officer of the Company) and John Tu.
Messrs. Sedmak and Tu have been nonemployee directors of the Company at all
times during their service on the Compensation Committee.
The Compensation Committee and the Board each viewed the compensation
process to be evolutionary. Recognizing that this is a complex area and that
there is no perfect program that meets the needs of every company, change should
be expected from time to time. The Board and the Compensation Committee
evaluates performance in a changing economic and regulatory environment against
the backdrop of the Company's evolution as a leading provider of audio and voice
enhancement technology solutions.
During Fiscal 1999, the Company's compensation philosophy for all of its
executive officers was based upon three primary themes: (a) offer base
compensation sufficient to attract and retain high quality management talent;
(b) provide variable compensation components (including short and long-term
incentive awards) which are linked with the performance of the Company and that
align executive remuneration with the interests of the stockholders; and (c)
provide a benefits package which is competitive with similarly situated
companies.
TAX LAW LIMITS ON EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section
162(m)") limits deductions for certain executive compensation in excess of $1
million. Certain types of compensation in excess of $1 million are deductible
only if performance criteria related to such compensation are specified in
detail and stockholders have approved the compensation arrangements. The Company
believes that it is in the best interests of its stockholders to structure
compensation plans to achieve deductibility under Section 162(m), except where
the benefit of such deductibility is outweighed by the need for flexibility or
the attainment of other corporate objectives.
The Board will continue to monitor issues concerning the deductibility of
executive compensation and will take appropriate action if and when it is
warranted. Since corporate objectives may not always be consistent with the
requirements for full deductibility, the Board is prepared, if it deems
appropriate, to enter into compensation arrangements or pay compensation under
which payments may not be deductible under
23
<PAGE> 27
Section 162(m); such deductibility will not be the sole factor used by the Board
in ascertaining appropriate levels or modes of compensation.
In Fiscal 1999, since no executive officer of the Company was expected to
earn compensation of $1,000,000 or more (as calculated under Section 162(m)),
the Company did not take steps to avail itself of potential deductions for
executive officer compensation in excess of $1,000,000.
COMPENSATION PROGRAM COMPONENTS
In Fiscal 1999, the components of the Company's executive compensation
program consisted of (a) base salary, (b) the opportunity to earn a year-end
bonus determined under an incentive bonus program, (c) awards under the
Company's discretionary stock option plans, (d) individual merit bonuses, viewed
on a case-by-case basis, and (e) discretionary Company contributions under the
Company's SRS Labs, Inc. 401(k) Plan (the "401(k) Plan").
The only award of compensation to the Chief Executive Officer and the other
executive officers of the Company which was directly related to the Company's
performance was compensation to be earned under the Company's Annual
Supplemental Executive Bonus Plan. However, the Compensation Committee and the
Board, as applicable, also consider the Company's performance as a factor in
granting the number of stock options, annual base salary increases and
discretionary bonuses. Of course, the compensation benefits related to stock
option grants are related to the Company's performance as reflected in the price
of the Common Stock underlying the option.
Base Salary. In Fiscal 1999, on the basis of Thomas C.K. Yuen's offer, the
Board of Directors, effective April 1, 1999, reduced the Chief Executive
Officer's base salary from $300,000 to $200,000 per year. Recognizing the fact
John AuYeung's responsibilities as an executive officer had significantly
increased, the Board increased Dr. AuYeung's base salary from $150,000 to
$180,000 per year, effective April 1, 1999, to be more in accord with the
competitive salaries for similar positions. In September 1999, the Compensation
Committee reviewed the base compensation of several officers of Valence and its
subsidiaries, including Thomas W. T. Wan, an executive officer of the Company,
and determined that, based upon his performance and competitive market
conditions, his base salary be increased, effective April 1, 1999, by 8% or
$22,160.
Incentive Bonus Plan. In Fiscal 1999, executive officers of the Company
were eligible to receive an incentive bonus under the Annual Supplemental
Executive Bonus Plan (the "Supplemental Plan"). The Supplemental Plan (a)
recognizes that management's contribution to stockholders returns comes from
maximizing earnings and the quality of those earnings, and (b) is designed to
provide a performance-based incentive for the Company's executive officers and
to attract and retain qualified personnel.
Under the Supplemental Plan, bonuses are paid based on a percentage of the
excess of the Company's actual operating profit for the applicable fiscal year
over targeted operating profit goals for that year. Bonus amounts under the
Supplemental Plan are divided equally among the Company's executive officers.
Executive officers who are employed for a portion of the applicable fiscal year
are entitled to a pro-rated bonus share, with the remaining bonus share being
returned to the pool to be divided equally among the other executive officers
who held their positions for the entire fiscal year.
The targets for the Supplemental Plan were established in Fiscal 1999 by
the Board of Directors. The Supplemental Plan was administered by the Board of
Directors through April 14, 1999 and thereafter by the Compensation Committee
for the remainder of Fiscal 1999 and is subject to change or termination by the
Company at any time. In Fiscal 1999, no bonus amounts were earned by any
participant in the Supplemental Plan.
Stock Options. In Fiscal 1999, the Board and the Compensation Committee
awarded in the aggregate options to purchase 70,000 shares of Common Stock to
the Chief Executive Officer and options to purchase an aggregate of 305,000
shares of Common Stock to the Company's other executive officers. To date, the
Board and the Compensation Committee have viewed the options program as a
necessary supplement to the base salary to provide a competitive compensation
package as well as a reward and an incentive for superior on-the-
24
<PAGE> 28
job performance. See the table under this caption "Compensation of Executive
Officers -- Stock Options -- Option/SAR Grants in Last Fiscal Year" herein.
Discretionary Bonus. In Fiscal 1999, the Board of Directors awarded one
discretionary bonus of $10,000 to John AuYeung, the Company's Executive Vice
President, in recognition of his efforts in assuming the responsibilities of
Chief Financial Officer on an interim basis. See "Compensation of Executive
Officers -- Summary Compensation Table."
401(k) Plan. In addition to the executive officers, all employees of the
Company who are at least 21 years of age and who have completed six months of
service are eligible to participate in the SRS Labs, Inc. 401(k) Plan (the
"401(k) Plan"), a plan which is intended to qualify under Sections 401(a) and
401(k) of the Code. Participants in the 401(k) Plan may make effective salary
reduction contributions to the 401(k) Plan of up to 15% of their annual
compensation, not to exceed $9,500 in Fiscal 1999, as adjusted for inflation. In
addition, the Company also may contribute additional amounts determined in its
sole discretion. The level of the Company's contributions is related to the
Company's financial ability to make a contribution and the competitive
compensation packages offered to employees at comparable companies. Employee
contributions and the Company contributions, if any, are fully vested and
nonforfeitable at all times. Benefits under the 401(k) Plan generally become
payable upon separation from service, retirement, death or disability. In Fiscal
1999, Thomas C.K. Yuen and Dr. AuYeung participated in the 401(k) Plan. The
Company did not make a contribution to the 401(k) Plan in Fiscal 1999.
SRS LABS, INC.
COMPENSATION COMMITTEE
Stephen V. Sedmak (Chairman) and
John Tu
SRS LABS, INC.
BOARD OF DIRECTORS
John AuYeung,
Robert B. Pfannkuch,
Jeffrey I. Scheinrock,
Stephen V. Sedmak,
John Tu,
Thomas C.K. Yuen and
Thomas W.T. Wan
25
<PAGE> 29
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Common Stock for the last three fiscal years with the cumulative total return on
(a) the S&P Smallcap 600 Index and (b) an index of six (6) peer companies
selected by the Company. The search was limited to publicly-traded companies in
the audio enhancements and technology business with market capitalizations of
under $100 million. This peer group is the same as the one selected by the
Company for Fiscal 1998, with the exception of two companies, QSound Labs, Inc.
and Polk Audio, Inc. QSound spun-off its audio technology business and Polk
Audio became a private, non-reporting company. This peer group index is subject
to occasional change as the Company or its competitors change their focus, merge
or are acquired, undergo significant changes, or as new competitors emerge.
The comparisons in this table are required by the SEC and, therefore, are
not intended to forecast or be indicative of possible future performance of the
Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN(1)
<TABLE>
<CAPTION>
SRS S&P SMALLCAP 600 INDEX PEER COMPANY INDEX(2)
--- ---------------------- ---------------------
<S> <C> <C> <C>
8/9/96(3) 100.00 100.00 100.00
12/31/96 107.81 112.16 86.64
12/31/97 94.36 139.67 161.50
12/31/98 55.94 136.74 85.49
12/31/99 91.67 152.74 91.79
</TABLE>
(1) The graph assumes that the value of the investment in the Common Stock and
in each index was $100 at August 9, 1996. The returns of each component
issuer in the peer group have been weighted according to the respective
issuer's stock market capitalization at the beginning of each period for
which a return is indicated.
(2) ACT Teleconferencing, Andrea Electronics Corp., Aureal Semiconductor Inc.,
NCT Group, Inc., Sensory Science Corp., and Spatializer Audio Laboratories,
Inc.
(3) SRS Labs, Inc. first became a reporting company, pursuant to Section 13(a)
of the Exchange Act, in August 1996. Its stock began to trade on August 9,
1996.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Company's corporate headquarters are located in Santa Ana, California,
in a 23,400 square foot facility consisting of office and warehouse space. The
Company leases the facility from Daimler Commerce Partners, L.P. (the
"Partnership"), an affiliated partnership. The general partner of the
Partnership is Conifer
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<PAGE> 30
Investments, Inc. ("Conifer"). The sole shareholders of Conifer are Thomas C.K.
Yuen and Misako Yuen, as co-trustees of the Thomas Yuen Family Trust (the
"Trust"), and the executive officers of Conifer include Mr. and Mrs. Yuen. Mr.
and Mrs. Yuen, as co-trustees of the Trust, also beneficially own a significant
amount of the Company's outstanding shares of Common Stock. Mr. Yuen is the
Chairman of the Board and Chief Executive Officer of the Company. Pursuant to
the Company's lease agreement with the Partnership, the Company leases all
23,400 square feet of space at the above-referenced facility. The lease is for a
term of three years which commenced June 1, 1997 and is scheduled to expire on
May 31, 2000. At the time of expiration, the Company will have an option to
renew the lease, under similar terms and conditions, for two additional years
commencing on June 1, 2000 and terminating on May 31, 2002. The Company intends
to exercise such renewal rights. The Company paid the Partnership rent of
$165,672 during Fiscal 1999.
The Company entered into a license agreement (the "NuReality License") with
NuReality (dba for Atlantis Computers, Inc.), whereby the Company licenses
certain of its technologies to NuReality for use with multimedia products and
cartridge-based game accessories. The sole stockholder of NuReality is the
Thomas Yuen Family Trust, and the executive officers of NuReality include Mr.
and Mrs. Yuen. Pursuant to the NuReality License, NuReality paid the Company
royalties of $1,326 during Fiscal 1999.
The Company and Sierra Digital Productions, Inc. ("Sierra Digital") entered
into a Consulting Agreement dated August 23, 1994, pursuant to which Sierra
Digital provides product definition, development and design services on a 100%
time commitment basis to the Company in connection with the Company's research
and development of its sound technologies. The president and sole shareholder of
Sierra Digital is Alan D. Kraemer, the Company's Vice President of Engineering.
Pursuant to the Consulting Agreement, the Company pays to Sierra Digital a
monthly retainer of $9,166.66 per month plus expenses. For the 1999 Fiscal Year,
the Company paid Sierra Digital $90,000.
In addition to the Consulting Agreement, Mr. Kraemer entered into an
employment agreement with the Company effective as of July 1, 1996. Such
agreement provides for a fixed base salary, with annual increases and
performance bonuses at the discretion of the Board of Directors. The agreement
provides for base salary of $65,000 per year commencing July 1, 1996.
Thereafter, such base salary may be adjusted by the Board of Directors, but it
may not be reduced below the initial base salary provided in the agreement. Mr.
Kraemer's employment agreement acknowledges that he serves as President of
Sierra Digital and that he may continue to do so while employed by the Company.
The employment agreement may be terminated by the Company for cause which is
defined as (a) the failure to follow the reasonable instructions of the Board of
Directors, (b) the material breach of any term of the employment agreement and
failure to cure such breach within ten (10) days after written notice thereof
from the Company, or (c) the misappropriation of assets of the Company or any
subsidiary by the employee resulting in a material loss to such entity. The
employment agreement may be terminated by Mr. Kraemer upon sixty (60) days prior
written notice. The initial term of the employment agreement was from May 1,
1996 to April 30, 1999. The employment agreement automatically renews for
additional one (1) year periods unless prior notice of termination is given by
either the Company or the employee. The employment agreement has been
automatically renewed for each successive renewal period. In the event that the
Company either terminates the employment agreement at the end of the current
term, or terminates the employment agreement during the current term without
cause, the employee is entitled to receive his salary and benefits for the
remainder of the current term of the employment agreement plus an additional
period of twelve months. During such period, the employee is obligated to
provide advisory services and may not compete with the Company. The employment
agreement also generally provides the employee with compensation for the
remainder of the current term plus an additional 12 months and certain other
benefits and for the acceleration of the date of vesting for outstanding stock
options if the employee is terminated or terminates his employment for certain
enumerated reasons within 90 days before or one year after a change in control
in the Company, as defined in the employment agreement. For Fiscal 1999, Mr.
Kraemer was paid $65,000 pursuant to the employment agreement.
Mr. Raymond Choi, a beneficial owner of more than 5% of the shares of
Common Stock, an executive director of ValenceTech and the President of Valence
Semiconductor Design Limited ("VSD"), an indirect subsidiary of the Company and
ValenceTech, entered into an employment agreement with the Company and VSD,
effective March 2, 1998, in connection with the Company's acquisition of
Valence. The agreement provided for an initial base salary of $184,516 per year
commencing March 3, 1998, which may be adjusted by
27
<PAGE> 31
the Board of Directors, but not below the initial base salary. Currently, Mr.
Choi's base salary is $244,950 per year. The agreement may be terminated for
cause (defined in a similar manner as Mr. Kraemer's employment agreement
referenced above) and may be terminated by Mr. Choi upon 60 days prior written
notice. The initial term of the agreement extends through December 31, 2000 and
such agreement automatically renews for additional one year periods unless prior
written notice of termination is given by the Company or the employee. In the
event of that the Company or VSD terminates the agreement without cause (or
decides not to renew such contract), Mr. Choi would be entitled to receive his
salary and benefits for the remainder of the current term of the agreement plus
an additional period of 12 months. During such period, Mr. Choi would be
obligated to provide advisory services to the Company and may not compete with
the Company or its subsidiaries. In addition, the employment agreement of Mr.
Choi provides for similar benefits as provided under Mr. Kraemer's employment
contract in the context of a change of control. The Company, Valence and Mr.
Choi are in the process of canceling the existing employment agreement and
entering, in lieu thereof, into a new employment agreement to which the only
parties will be ValenceTech, the successor to Valence, and Mr. Choi and the
effective date of which will be April 1, 2000. The new agreement will provide
for a new initial base salary of $281,692, and will contain provisions similar
to Mr. Choi's existing employment agreement.
In the opinion of management, the terms of the above-described agreements
are fair and reasonable and as favorable to the Company as those which could
have been obtained from unrelated third parties at the time of their execution.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater-than-ten-percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during Fiscal 1999, the Company's officers, directors and
greater-than-ten-percent beneficial owners complied with all Section 16(a)
filing requirements.
RELATIONSHIP OF THE COMPANY WITH
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors selected the firm of Deloitte & Touche LLP
("Deloitte & Touche"), independent certified public accountants, as auditors for
Fiscal 1999 and has selected such firm to act as auditors for the fiscal year
ending December 31, 2000. During Fiscal 1999, Deloitte & Touche also was engaged
by the Company to provide certain consulting services. Representatives of
Deloitte & Touche are expected to be present at the Annual Meeting, will have
the opportunity to make a statement if they desire to do so, and are expected to
be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If you want us to consider including a proposal in the Company's proxy
materials relating to the annual meeting of stockholders to be held in the year
2001, you must submit such proposal to the Company no later than December 27,
2000. If such proposal is in compliance with all of the requirements of Rule
14a-8 under the Exchange Act, we will include it in the proxy statement and set
it forth on the form of proxy issued for such annual meeting of stockholders.
You should direct any such stockholder proposals to the attention of the
Secretary of the Company at the address of the Company set forth on the first
page of this Proxy Statement. Also see "Voting Rights and Solicitation of
Proxies -- Nominations for Directors" for a discussion relating to the Company's
advance notice Bylaw concerning nominations of directors.
With respect to any proposal that a stockholder of the Company presents at
the annual meeting of stockholders to be held in the year 2001 that is not
submitted for inclusion in the Company's proxy materials pursuant to Rule 14a-8
under the Exchange Act, the proxy for such annual meeting of stockholders will
confer
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<PAGE> 32
discretionary voting authority to vote on such stockholder proposal unless (a)
the Company is notified of such proposal no later than March 24, 2001, and (b)
the proponent complies with the other requirements set forth in Rule 14a-4 under
the Exchange Act.
ANNUAL REPORT
YOU MAY OBTAIN, WITHOUT CHARGE, A COPY OF THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR, INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENT SCHEDULES REQUIRED TO BE FILED WITH THE SEC PURSUANT TO RULE 13A-1 OF
THE EXCHANGE ACT. YOU MAY ALSO OBTAIN COPIES OF EXHIBITS TO THE FORM 10-K, BUT
WE WILL CHARGE A REASONABLE FEE TO STOCKHOLDERS REQUESTING SUCH EXHIBITS. YOU
SHOULD DIRECT YOUR REQUEST IN WRITING TO THE COMPANY AT THE ADDRESS OF THE
COMPANY SET FORTH ON THE FIRST PAGE OF THIS PROXY STATEMENT, ATTENTION: MR. JOHN
AUYEUNG, EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER, CHIEF FINANCIAL
OFFICER, TREASURER AND SECRETARY.
By Order of the Board of Directors,
/s/ JOHN AUYEUNG
John AuYeung
Executive Vice President,
Chief Operating Officer, Chief
Financial Officer,
Treasurer and Secretary
Santa Ana, California
April 26, 2000
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<PAGE> 33
APPENDIX A
SRS LABS, INC. AMENDED AND RESTATED
1996 LONG-TERM INCENTIVE PLAN, AS AMENDED
1. PURPOSE. The purpose of this Plan is to attract and retain directors,
officers, key employees and consultants for SRS Labs, Inc., a Delaware
corporation (the "Corporation"), and its Subsidiaries and to provide such
persons with incentives and rewards for superior performance.
2. DEFINITIONS. As used in this Plan,
"Appreciation Right" means a right granted pursuant to Section 5 of this
Plan, including a Free-standing Appreciation Right and a Tandem Appreciation
Right.
"Base Price" means the price to be used as the basis for determining the
Spread upon the exercise of a Free-standing Appreciation Right.
"Board" means the Board of Directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the committee described in Section 16(a) of this Plan.
"Common Shares" means (i) shares of the common stock of the Corporation,
par value $.001 per share, and (ii) any security into which Common Shares may be
converted by reason of any transaction or event of the type referred to in
Section 10 of this Plan.
"Date of Grant" means the date specified by the Committee on which a grant
of Option Rights or Appreciation Rights or Performance Shares or Performance
Units or a grant or sale of Restricted Shares or Deferred Shares shall become
effective, which shall not be earlier than the date on which the Committee takes
action with respect thereto.
"Deferral Period" means the period of time during which Deferred Shares are
subject to deferral limitations under Section 7 of this Plan.
"Deferred Shares" means an award pursuant to Section 7 of this Plan of the
right to receive Common Shares at the end of a specified Deferral Period.
"Free-standing Appreciation Right" means an Appreciation Right granted
pursuant to Section 5 of this Plan that is not granted in tandem with an Option
Right or similar right.
"Incentive Stock Options" means Option Rights that are intended to qualify
as "incentive stock options" under Section 422 of the Code or any successor
provision.
"Less-Than-80-Percent Subsidiary" means a Subsidiary with respect to which
the Corporation directly or indirectly owns or controls less than 80 percent of
the total combined voting or other decision-making power.
"Management Objectives" means the achievement of a performance objective or
objectives established pursuant to this Plan for Participants who have received
grants of Performance Shares or Performance Units or, when so determined by the
Committee, Option Rights, Appreciation Rights, Restricted Shares and dividend
credits. Management Objectives may be described in terms of Corporation-wide
objectives or objectives that are related to the performance of the individual
Participant or of the Subsidiary, division, department or function within the
Corporation or Subsidiary in which the Participant is employed. The Management
Objectives applicable to any award to a Participant who is, or is determined by
the Committee to be likely to become, a "covered employee" within the meaning of
Section 162(m) of the Code (or any successor provision) shall be limited to
specified levels of or growth in:
(i) return on invested capital;
(ii) earnings per share;
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(iii) return on assets;
(iv) return on equity;
(v) shareholder return;
(vi) sales growth;
(vii) productivity improvement; and/or
(viii) net income.
Except in the case of such a covered employee, if the Committee determines that
a change in the business, operations, corporate structure or capital structure
of the Corporation, or the manner in which it conducts its business, or other
events or circumstances render the Management Objectives unsuitable, the
Committee may modify such Management Objectives or the related minimum
acceptable level of achievement, in whole or in part, as the Committee deems
appropriate and equitable.
"Market Value per Share" means, at any date, (i) the closing sales price
for the Common Shares on that date, if available, or, if there are no sales on
that date or if a closing sales price is not available, (ii) the average of the
"bid" and "asked" prices of the Common Shares on that date, in each case as
reported by the National Association of Securities Dealers Automated Quotation
System or any national securities exchange on which the Common Shares are then
traded, or, if (i) or (ii) are not available, the fair market value of the
Common Shares as determined by the Committee from time to time.
"Optionee" means the person so designated in an agreement evidencing an
outstanding Option Right.
"Option Price" means the purchase price payable upon the exercise of an
Option Right.
"Option Right" means the right to purchase Common Shares upon exercise of
an option granted pursuant to Section 4 of this Plan.
"Participant" means a person who is selected by the Committee to receive
benefits under this Plan and who is at that time an officer, any other key
employee, a director or a consultant of the Corporation or any Subsidiary, or
who has agreed to commence serving in any such capacity.
"Performance Period" means, in respect of a Performance Share or
Performance Unit, a period of time established pursuant to Section 8 of this
Plan within which the Management Objectives relating thereto are to be achieved.
"Performance Share" means a bookkeeping entry that records the equivalent
of one Common Share awarded pursuant to Section 8 of this Plan.
"Performance Unit" means a bookkeeping entry that records a unit equivalent
to $100.00 awarded pursuant to Section 8 of this Plan.
"Reload Option Rights" means additional Option Rights granted automatically
to an Optionee upon the exercise of Option Rights pursuant to Section 4(f) of
this Plan.
"Restricted Shares" mean Common Shares granted or sold pursuant to Section
6 of this Plan as to which neither the substantial risk of forfeiture nor the
restrictions on transfer referred to in Section 6 hereof has expired.
"Rule 16b-3" means Rule 16b-3 of the Securities and Exchange Commission (or
any successor rule to the same effect), as in effect from time to time.
"Spread" means, in the case of a Free-standing Appreciation Right, the
amount by which the Market Value per Share on the date when any such right is
exercised exceeds the Base Price specified in such right or, in the case of a
Tandem Appreciation Right, the amount by which the Market Value per Share on the
date when any such right is exercised exceeds the Option Price specified in the
related Option Right.
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<PAGE> 35
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a direct
or indirect ownership or other equity interest; provided, however, for purposes
of determining whether any person may be a Participant for purposes of any grant
of Incentive Stock Options, "Subsidiary" means any corporation in which the
Corporation owns or controls directly or indirectly more than 50 percent of the
total combined voting power represented by all classes of stock issued by such
corporation at the time of such grant.
"Tandem Appreciation Right" means an Appreciation Right granted pursuant to
Section 5 of this Plan that is granted in tandem with an Option Right or any
similar right granted under any other plan of the Corporation.
3. SHARES AVAILABLE UNDER THE PLAN.
(a) Subject to adjustment as provided in Section 10 of this Plan, the
number of Common Shares issued or transferred (i) upon the exercise of
Option Rights or Appreciation Rights, (ii) as Restricted Shares and
released from all substantial risks of forfeiture, (iii) as Deferred
Shares, (iv) in payment of Performance Shares or Performance Units that
have been earned, or (v) in payment of dividend equivalents paid with
respect to awards made under this Plan, shall not in the aggregate exceed
7,000,000 Common Shares, which may be Common Shares of original issuance or
Common Shares held in treasury or a combination thereof. If any award
terminates, expires or is canceled with respect to any Common Shares, new
awards may thereafter be granted covering such Common Shares.
(b) Upon the full or partial payment of any Option Price by the
transfer to the Corporation of Common Shares or upon satisfaction of tax
withholding provisions in connection with any such exercise or any other
payment made or benefit realized under this Plan by the transfer or
relinquishment of Common Shares, there shall be deemed to have been issued
or transferred under this Plan only the net number of Common Shares
actually issued or transferred by the Corporation.
(c) Upon payment in cash of the benefit provided by any award granted
under this Plan, any Common Shares that were covered by that award shall
again be available for issuance or transfer hereunder.
(d) Notwithstanding any other provision of this Plan to the contrary,
no Participant shall be granted Option Rights for more than 750,000 Common
Shares during any period of three consecutive calendar years subject to
adjustment as provided in Section 10 of this Plan.
(e) Notwithstanding any other provision of this Plan to the contrary,
in no event shall any Participant in any period of one calendar year
receive awards of Performance Shares and Performance Units having an
aggregate value as of their respective Dates of Grant in excess of
$750,000.
4. OPTION RIGHTS. The Committee may from time to time authorize grants to
Participants of options to purchase Common Shares upon such terms and conditions
as the Committee may determine in accordance with the following provisions:
(a) Each grant shall specify the number of Common Shares to which it
pertains, subject to the limitations set forth in Section 3 of this Plan.
(b) Each grant shall specify an Option Price per Common Share, which
in the case of Incentive Options, shall be equal to or greater than the
Market Value per Share on the Date of Grant and, in the case of other
options, shall not be less than eighty-five percent (85%) of the Market
Value per Share on the Date of Grant.
(c) Each grant shall specify the form of consideration to be paid in
satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or check
or other cash equivalent acceptable to the Corporation, (ii)
nonforfeitable, unrestricted Common Shares, which are already owned by the
Optionee and have a value at the time of exercise that is equal to the
Option Price, (iii) any other legal consideration, including, without
limitation, promissory notes, that the Committee may deem appropriate,
including without limitation any form of consideration authorized
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<PAGE> 36
under Section 4(d) below, on such basis as the Committee may determine in
accordance with this Plan and (iv) any combination of the foregoing.
(d) Any grant may provide that payment of the Option Price may also be
made in whole or in part in the form of Restricted Shares or other Common
Shares that are subject to risk of forfeiture or restrictions on transfer.
Unless otherwise determined by the Committee, whenever any Option Price is
paid in whole or in part by means of any of the forms of consideration
specified in this Section 4(d), the Common Shares received by the Optionee
upon the exercise of the Option Rights shall be subject to the same risks
of forfeiture or restrictions on transfer as those that applied to the
consideration surrendered by the Optionee; provided, however, that such
risks of forfeiture and restrictions on transfer shall apply only to the
same number of Common Shares received by the Optionee as applied to the
forfeitable or restricted Common Shares surrendered by the Optionee.
(e) Any grant may provide for deferred payment of the Option Price
from the proceeds of sale through a bank or broker on the date of exercise
of some or all of the Common Shares to which the exercise relates.
(f) Any grant may provide for the automatic grant to the Optionee of
Reload Option Rights upon the exercise of Option Rights, including Reload
Option Rights, for Common Shares or any other non-cash consideration
authorized under Sections 4(d) and (e) above.
(g) Successive grants may be made to the same Participant regardless
of whether any Option Rights previously granted to such Participant remain
unexercised.
(h) Each grant shall specify the period or periods of continuous
employment of the Optionee by the Corporation or any Subsidiary that are
necessary before the Option Rights or installments thereof shall become
exercisable, and any grant may provide for the earlier exercisability of
such rights in the event of retirement, death or disability of the
Participant or a change in control of the Corporation or other similar
transaction or event.
(i) Any grant of Option Rights may specify Management Objectives that
must be achieved as a condition to the exercise of such rights.
(j) Option Rights granted under this Plan may be (i) options that are
intended to qualify under particular provisions of the Code, including
without limitation Incentive Stock Options, (ii) options that are not
intended to so qualify or (iii) combinations of the foregoing.
(k) On or after the Date of Grant of any Option Rights other than
Incentive Stock Options, the Committee may provide for the payment to the
Optionee of dividend equivalents thereon in cash or Common Shares on a
current, deferred or contingent basis.
(l) No Option Right granted under this Plan may be exercised more than
10 years from the Date of Grant.
(m) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered
to and accepted by the Optionee and shall contain such terms and provisions
as the Committee may determine consistent with this Plan.
5. APPRECIATION RIGHTS. The Committee may also authorize grants to
Participants of Appreciation Rights. An Appreciation Right shall be a right of
the Participant to receive from the Corporation an amount, which shall be
determined by the Committee and shall be expressed as a percentage (not
exceeding 100 percent) of the Spread at the time of the exercise of such right.
Any grant of Appreciation rights under this Plan shall be upon such terms and
conditions as the Committee may determine in accordance with the following
provisions:
(a) Any grant may specify that the amount payable upon the exercise of
an Appreciation Right may be paid by the Corporation in cash, Common Shares
or any combination thereof and may (i) either grant to the Participant or
reserve to the Committee the right to elect among those alternatives or
(ii) preclude the right of the Participant to receive and the Corporation
to issue Common Shares or other equity
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securities in lieu of cash; provided, however, that no form of
consideration or manner of payment that would cause Rule 16b-3 to cease to
apply to this Plan shall be permitted.
(b) Any grant may specify that the amount payable upon the exercise of
an Appreciation Right shall not exceed a maximum specified by the Committee
on the Date of Grant.
(c) Any grant may specify (i) a waiting period or periods before
Appreciation Rights shall become exercisable and (ii) permissible dates or
periods on or during which Appreciation Rights shall be exercisable.
(d) Any grant may specify that an Appreciation Right may be exercised
only in the event of retirement, death or disability of the Participant or
a change in control of the Corporation or other similar transaction or
event.
(e) Any grant may provide for the payment to the Participant of
dividend equivalents thereon in cash or Common Shares on a current,
deferred or contingent basis.
(f) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered
to and accepted by the Optionee and shall describe the subject Appreciation
Rights, identify any related Option Rights, state that the Appreciation
Rights are subject to all of the terms and conditions of this Plan and
contain such other terms and provisions as the Committee may determine
consistent with this Plan.
(g) Any grant of Appreciation Rights may specify Management Objectives
that must be achieved as a condition of the exercise of such rights.
(h) Regarding Tandem Appreciation Rights only: Each grant shall
provide that a Tandem Appreciation Right may be exercised only (i) at a
time when the related Option Right (or any similar right granted under any
other plan of the Corporation) is also exercisable and the Spread is
positive and (ii) by surrender of the related Option Right (or such other
right) for cancellation.
(i) Regarding Free-standing Appreciation Rights only:
(i) Each grant shall specify in respect of each Free-standing
Appreciation Right a Base Price per Common Share, which shall be equal
to or greater than the Market Value per Share on the Date of Grant;
(ii) Successive grants may be made to the same Participant
regardless of whether any Free-standing Appreciation Rights previously
granted to such Participant remain unexercised;
(iii) Each grant shall specify the period or periods of continuous
employment of the Participant by the Corporation or any Subsidiary that
are necessary before the Free-standing Appreciation Rights or
installments thereof shall become exercisable, and any grant may provide
for the earlier exercise of such rights in the event of retirement,
death or disability of the Participant or a change in control of the
Corporation or other similar transaction or event; and
(iv) No Free-standing Appreciation Right granted under this Plan
may be exercised more than 10 years from the Date of Grant.
6. RESTRICTED SHARES. The Committee may also authorize grants or sales to
Participants of Restricted Shares upon such terms and conditions as the
Committee may determine in accordance with the following provisions:
(a) Each grant or sale shall constitute an immediate transfer of the
ownership of Common Shares to the Participant in consideration of the
performance of services, entitling such Participant to dividend, voting and
other ownership rights, subject to the substantial risk of forfeiture and
restrictions on transfer hereinafter referred to.
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(b) Each grant or sale may be made without additional consideration
from the Participant or in consideration of a payment by the Participant
that is less than the Market Value per Share on the Date of Grant.
(c) Each grant or sale shall provide that the Restricted Shares
covered thereby shall be subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code for a period to be determined
by the Committee on the Date of Grant, and any grant or sale may provide
for the earlier termination of such period in the event of retirement,
death or disability of the Participant or a change in control of the
Corporation or other similar transaction or event.
(d) Each grant or sale shall provide that, during the period for which
such substantial risk of forfeiture is to continue, the transferability of
the Restricted Shares shall be prohibited or restricted in the manner and
to the extent prescribed by the Committee on the Date of Grant. Such
restrictions may include without limitation rights of repurchase or first
refusal in the Corporation or provisions subjecting the Restricted Shares
to a continuing substantial risk of forfeiture in the hands of any
transferee.
(e) Any grant of Restricted Shares may specify Management Objectives
which, if achieved, will result in termination or early termination of the
restrictions applicable to such shares and each such grant shall specify in
respect of such specified Management Objectives, a minimum acceptable level
of achievement and shall set forth a formula for determining the number of
Restricted Shares on which restrictions will terminate if performance is at
or above the minimum level, but falls short of full achievement of the
specified Management Objectives.
(f) Any grant or sale may require that any or all dividends or other
distributions paid on the Restricted Shares during the period of such
restrictions be automatically sequestered. Such distribution may be
reinvested on an immediate or deferred basis in additional Common Shares,
which may be subject to the same restrictions as the underlying award or
such other restrictions as the Committee may determine.
(g) Each grant or sale shall be evidenced by an agreement, which shall
be executed on behalf of the Corporation by any officer thereof and
delivered to and accepted by the Participant and shall contain such terms
and provisions as the Committee may determine consistent with this Plan.
Unless otherwise directed by the Committee, all certificates representing
Restricted Shares, together with a stock power that shall be endorsed in
blank by the Participant with respect to such shares, shall be held in
custody by the Corporation until all restrictions thereon lapse.
7. DEFERRED SHARES. The Committee may also authorize grants or sales of
Deferred Shares to Participants upon such terms and conditions as the Committee
may determine in accordance with the following provisions:
(a) Each grant or sale shall constitute the agreement by the
Corporation to issue or transfer Common Shares to the Participant in the
future in consideration of the performance of services, subject to the
fulfillment during the Deferral Period of such conditions as the Committee
may specify.
(b) Each grant or sale may be made without additional consideration
from the Participant or in consideration of a payment by the Participant
that is less than the Market Value per Share on the Date of Grant.
(c) Each grant or sale shall provide that the Deferred Shares covered
thereby shall be subject to a Deferral Period, which shall be fixed by the
Committee on the Date of Grant, and any grant or sale may provide for the
earlier termination of such period in the event of retirement, death or
disability of the Participant or a change in control of the Corporation or
other similar transaction or event.
(d) During the Deferral Period, the Participant shall not have any
right to transfer any rights under the subject award, shall not have any
rights of ownership in the Deferred Shares and shall not have any right to
vote such shares, but the Committee may on or after the Date of Grant
authorize the payment of dividend equivalents on such shares in cash or
additional Common Shares on a current, deferred or contingent basis.
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(e) Each grant or sale shall be evidenced by an agreement, which shall
be executed on behalf of the Corporation by any officer thereof and
delivered to and accepted by the Participant and shall contain such terms
and provisions as the Committee may determine consistent with this Plan.
8. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee may also
authorize grants to Participants of Performance Shares and Performance Units,
which shall become payable to the Participant upon the achievement of specified
Management Objectives, upon such terms and conditions as the Committee may
determine in accordance with the following provisions:
(a) Each grant shall specify the number of Performance Shares or
Performance Units to which it pertains, subject to the limitations in
Section 3, which may be subject to adjustment to reflect changes in
compensation or other factors.
(b) The Performance Period with respect to each Performance Share or
Performance Unit shall be determined by the Committee on the Date of Grant
and may be subject to earlier termination in the event of retirement, death
or disability of the Participant or a change in control of the Corporation
or other similar transaction or event.
(c) Each grant shall specify the Management Objectives that are to be
achieved by the Participant and each grant shall specify in respect of the
specified Management Objectives a minimum acceptable level of achievement
below which no payment will be made and shall set forth a formula for
determining the amount of any payment to be made if performance is at or
above the minimum acceptable level but falls short of full achievement of
the specified Management Objectives.
(d) Each grant shall specify the time and manner of payment of
Performance Shares or Performance Units that shall have been earned, and
any grant may specify that any such amount may be paid by the Corporation
in cash, Common Shares or any combination thereof and may either grant to
the Participant or reserve to the Committee the right to elect among those
alternatives.
(e) Any grant of Performance Shares may specify that the amount
payable with respect thereto may not exceed a maximum specified by the
Committee on the Date of Grant. Any grant of Performance Units may specify
that the amount payable, or the number of Common Shares issued, with
respect thereto may not exceed maximums specified by the Committee on the
Date of Grant.
(f) Any grant may provide for the payment to the Participant of
dividend equivalents thereon in cash or in additional Common Shares on a
current, deferred or contingent basis.
(g) Each grant of Performance Shares or Performance Units shall be
evidenced by an agreement, which shall be executed on behalf of the
Corporation by any officer thereof and delivered to and accepted by the
Participant and shall contain such terms and provisions as the Committee
may determine consistent with this Plan.
9. TRANSFERABILITY.
(a) No Option Right or other derivative security (as that term is used
in Rule 16b-3) awarded under this Plan shall be transferable by a
Participant other than by will or the laws of descent and distribution or,
other than with respect to an Incentive Stock Option, a qualified domestic
relations order, as defined in the Code. Option Rights and Appreciation
Rights shall be exercisable during a Participant's lifetime only by the
Participant or, in the event of the Participant's legal incapacity, by his
guardian or legal representative acting in a fiduciary capacity on behalf
of the Participant under state law and court supervision. Notwithstanding
the foregoing, the Committee, in its sole discretion, may provide for
transferability of particular awards under this Plan so long as such
provisions will not disqualify the exemption for other awards under Rule
16b-3.
(b) Any award made under this Plan may provide that all or any part of
the Common Shares that are (i) to be issued or transferred by the
Corporation upon the exercise of Option Rights or Appreciation Rights or
upon the termination of the Deferral Period applicable to Deferred Shares,
or in payment of Performance Shares or Performance Units or (ii) no longer
subject to the substantial risk of forfeiture
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and restrictions on transfer referred to in Section 6 of this Plan, shall
be subject to further restrictions upon transfer.
10. ADJUSTMENTS. The Committee may make or provide for such adjustments in
the (a) number of Common Shares covered by outstanding Option Rights,
Appreciation Rights, Deferred Shares and Performance Shares granted hereunder,
(b) prices per share applicable to such Option Rights and Appreciation Rights,
and (c) kind of shares (including shares of another issuer) covered thereby, as
the Committee in its sole discretion may in good faith determine to be equitably
required in order to prevent dilution or enlargement of the rights of
Participants that otherwise would result from (x) any stock dividend, stock
split, combination of shares, recapitalization or other change in the capital
structure of the Corporation, (y) any merger, consolidation, spin-off, spin-out,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of rights or warrants to purchase securities or
(z) any other corporate transaction or event having an effect similar to any of
the foregoing. In the event of any such transaction or event, the Committee may
provide in substitution for any or all outstanding awards under this Plan such
alternative consideration as it may in good faith determine to be equitable
under the circumstances and may require in connection therewith the surrender of
all awards so replaced. Moreover, the Committee may on or after the Date of
Grant provide in the agreement evidencing any award under this Plan that the
holder of the award may elect to receive an equivalent award in respect of
securities of the surviving entity of any merger, consolidation or other
transaction or event having a similar effect, or the Committee may provide that
the holder will automatically be entitled to receive such an equivalent award.
In any case, such substitution of securities shall not require the consent of
any person who is granted awards pursuant to this Plan.
11. FRACTIONAL SHARES. The Corporation shall not be required to issue any
fractional Common Shares pursuant to this Plan. The Committee may provide for
the elimination of fractions or for the settlement thereof in cash.
12. WITHHOLDING TAXES. To the extent that the Corporation is required to
withhold federal, state, local or foreign taxes in connection with any payment
made or benefit realized by a Participant or other person under this Plan, and
the amounts available to the Corporation for such withholding are insufficient,
it shall be a condition to the receipt of such payment or the realization of
such benefit that the Participant or such other person make arrangements
satisfactory to the Corporation for payment of the balance of such taxes
required to be withheld. At the discretion of the Committee, such arrangements
may include relinquishment of a portion of such benefit. The Corporation and any
Participant or such other person may also make similar arrangements with respect
to the payment of any taxes with respect to which withholding is not required.
13. PARTICIPATION BY EMPLOYEES OF A LESS-THAN-80-PERCENT SUBSIDIARY. As a
condition to the effectiveness of any grant or award to be made hereunder to a
Participant who is an employee of a Less-Than-80-Percent Subsidiary, regardless
whether such Participant is also employed by the Corporation or another
Subsidiary, the Committee may require the Less-Than-80-Percent Subsidiary to
agree to transfer to the Participant (as, if and when provided for under this
Plan and any applicable agreement entered into between the Participant and the
Less-Than-80-Percent Subsidiary pursuant to this Plan) the Common Shares that
would otherwise be delivered by the Corporation upon receipt by the
Less-Than-80-Percent Subsidiary of any consideration then otherwise payable by
the Participant to the Corporation. Any such award may be evidenced by an
agreement between the Participant and the Less-Than-80-Percent Subsidiary, in
lieu of the Corporation, on terms consistent with this Plan and approved by the
Committee and the Less-Than-80-Percent Subsidiary. All Common Shares so
delivered by or to a Less-Than-80-Percent Subsidiary will be treated as if they
had been delivered by or to the Corporation for purposes of Section 3 of this
Plan, and all references to the Corporation in this Plan shall be deemed to
refer to the Less-Than-80-Percent Subsidiary except with respect to the
definitions of the Board and the Committee and in other cases where the context
otherwise requires.
14. CERTAIN TERMINATIONS OF EMPLOYMENT, HARDSHIP AND APPROVED LEAVES OF
ABSENCE. Notwithstanding any other provision of this Plan to the contrary, in
the event of termination of employment by reason of death, disability, normal
retirement, early retirement with the consent of the Corporation, termination of
employment to enter public service with the consent of the Corporation or leave
of absence approved by the
A-8
<PAGE> 41
Corporation, or in the event of hardship or other special circumstances, of a
Participant who holds an Option Right or Appreciation Right that is not
immediately and fully exercisable, any Restricted Shares as to which the
substantial risk of forfeiture or the prohibition or restriction on transfer has
not lapsed, any Deferred Shares as to which the Deferral Period is not complete,
any Performance Shares or Performance Units that have not been fully earned, or
any Common Shares that are subject to any transfer restriction pursuant to
Section 6(d) of this Plan, the Committee may in its sole discretion take any
action that it deems to be equitable under the circumstances or in the best
interests of the Corporation, including without limitation waiving or modifying
any limitation or requirement with respect to any award under this Plan.
15. FOREIGN EMPLOYEES. In order to facilitate the making of any grant or
combination of grants under this Plan, the Committee may provide for such
special terms for awards to Participants who are foreign nationals, or who are
employed by the Corporation or any Subsidiary outside of the United States of
America, as the Committee may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, the Committee may
approve such supplements to, or amendments, restatements or alternative versions
of, this Plan as it may consider necessary or appropriate for such purposes
without thereby affecting the terms of this Plan as in effect for any other
purpose, and the Secretary or other appropriate officer of the Corporation may
certify any such document as having been approved and adopted in the same manner
as this Plan. No such special terms, supplements, amendments, or restatements
shall include any provisions that are inconsistent with the terms of this Plan,
as then in effect, unless this Plan could have been amended to eliminate such
inconsistency without further approval by the shareholders of the Corporation.
16. ADMINISTRATION OF THE PLAN.
(a) This Plan shall be administered by the Compensation Committee of
the Board appointed from time to time by the Board of Directors of the
Corporation. The Committee shall be composed of not less than two members
of the Board, each of whom shall be a "non-employee director" within the
meaning of Rule 16b-3. A majority of the Committee shall constitute a
quorum, and the acts of the members of the Committee who are present at any
meeting thereof at which a quorum is present, or acts unanimously approved
by the members of the Committee in writing, shall be the acts of the
Committee. In the absence of a Committee or in the event of grants to
non-employee directors, this Plan shall be administered by the Board, and,
in such case, all references to the "Committee" herein shall be deemed to
be references to the Board.
(b) The interpretation and construction by the Committee of any
provision of this Plan or of any agreement, notification or document
evidencing the grant of Option Rights, Appreciation Rights, Restricted
Shares or Deferred Shares, Performance Shares and Performance Units and any
determination by the Committee pursuant to any provision of this Plan or
any such agreement, notification or document, shall be final and
conclusive. No member of the Committee shall be liable for any such action
taken or determination made in good faith.
17. AMENDMENTS AND OTHER MATTERS.
(a) This Plan may be amended from time to time by the Committee or the
Board, but except as expressly authorized by this Plan no such amendment
shall increase the maximum number of shares specified in Section 3(a) of
this Plan, increase the number of Performance Units specified in Section
3(e) of this Plan, or cause Rule 16b-3 to become inapplicable to this Plan,
without the further approval of the shareholders of the Corporation, unless
permitted by Rule 16b-3. Without limiting the generality of the foregoing,
the Committee or the Board may amend this Plan to eliminate provisions
which are no longer necessary as a result of changes in tax or securities
laws or regulations, or in the interpretation thereof.
(b) With the concurrence of the affected Optionee, the Committee may
cancel any agreement evidencing Option Rights or any other award granted
under this Plan. In the event of such cancellation, the Committee may
authorize the granting of new Option Rights or other awards hereunder,
which may or may not cover the same number of Common Shares that had been
the subject of the prior award, at
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<PAGE> 42
such Option Price and subject to such other terms, conditions and
discretions as would have been applicable under this Plan had the canceled
Option Rights or other awards not been granted.
(c) The Committee also may permit Participants to elect to defer the
issuance of Common Shares or the settlement of awards in cash under the
Plan pursuant to such rules, procedures or programs as it may establish for
purposes of this Plan. The Committee also may provide that deferred
settlements include the payment or crediting of interest on the deferral
amounts, or the payment or crediting of dividend equivalents where the
deferral amounts are denominated in Common Shares.
(d) This Plan shall not confer upon any Participant any right with
respect to continuance of employment or other service with the Corporation
or any Subsidiary and shall not interfere in any way with any right that
the Corporation or any Subsidiary would otherwise have to terminate any
Participant's employment or other service at any time.
(e) (i) To the extent that any provision of this Plan would prevent
any Option Right that was intended to qualify under particular provisions
of the Code from so qualifying, such provision of this Plan shall be null
and void with respect to such Option Right; provided, however, that such
provision shall remain in effect with respect to other Option Rights, and
there shall be no further effect on any provision of this Plan.
(ii) Any award that may be made pursuant to an amendment to this Plan
that shall have been adopted without the approval of the shareholders of
the Corporation shall be null and void if it is subsequently determined
that such approval was required in order for Rule 16b-3 to remain
applicable to this Plan.
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<PAGE> 43
PROXY PROXY
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
SRS LABS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE
The undersigned stockholder(s) of SRS Labs, Inc., a Delaware corporation (the
"Company"), hereby appoints Thomas C.K. Yuen, John AuYeung, or either of them,
proxies, each with full power of substitution, for and in the name of the
undersigned at the Annual Meeting of Stockholders of the Company to be held on
June 15, 2000, and at any and all adjournments thereof, to vote all shares of
the capital stock of said Company held of record by the undersigned on April 21,
2000, as if the undersigned were present and voting the shares.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN
THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR PROPOSAL 2, FOR THE
NOMINEES NAMED IN PROPOSAL 1 ON THE REVERSE SIDE AND IN ACCORDANCE WITH THEIR
DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.
(CONTINUED AND TO BE VOTED, SIGNED AND DATED ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 44
SRS LABS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [ ]
THE LISTED NOMINEES AND THE PROPOSAL HAVE BEEN PROPOSED BY THE COMPANY. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED AND "FOR"
THE LISTED PROPOSAL.
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS: For All Except as
For All Withhold All Indicated to the Contrary
Nominees for election to the Board of [ ] [ ] [ ]
Directors as Class I Directors:
Robert B. Pfannkuch;
Jeffrey I. Scheinrock; and
Thomas W.T. Wan
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, WRITE THE
NOMINEE'S (S') NAMES ON THE SPACE PROVIDED BELOW.)
_________________________________________________________________________________________________________________________
2. Proposal to approve an amendment to the SRS Labs, Inc. Amended and For Against Abstain
Restated 1996 Long-Term Incentive Plan to increase the number of [ ] [ ] [ ]
shares of common stock available for issuance thereunder by 2,500,000.
3. The proxies are authorized to vote in their discretion upon such other business as may properly come before the meeting.
</TABLE>
Yes No
I PLAN TO ATTEND THE MEETING [ ] [ ]
Please date this Proxy and sign exactly as your
name appears hereon. When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title. If there is more than
one trustee, all should sign. All joint owners
should sign.
__________________________________________________
Signature
__________________________________________________
Signature
Dated:______________________________, 2000
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FOLD AND DETACH HERE
