-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F2mjmKOCaGKX7BOtixLxfarA8IQUGnXdeZj5olaMYzENIjcje+RYLDbaEZFVGxMS HipuU2gyWDsdTea9fF4PIg== 0000892569-98-001568.txt : 19980518 0000892569-98-001568.hdr.sgml : 19980518 ACCESSION NUMBER: 0000892569-98-001568 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SRS LABS INC CENTRAL INDEX KEY: 0001016470 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 330714264 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21123 FILM NUMBER: 98626267 BUSINESS ADDRESS: STREET 1: 2909 DAIMIER ST CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 7144421070 MAIL ADDRESS: STREET 1: 2909 DAIMLER ST CITY: SANTA ANA STATE: CA ZIP: 92705 10-Q 1 FORM 10-Q PERIOD ENDED MARCH 31, 1998 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-21123 SRS LABS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 33-0714264 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (949) 442-1070 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of April 30, 1998, 11,507,629 shares of the issuer's common stock, par value $.001 per share, were outstanding. ================================================================================ 2 SRS LABS, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997....................................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (unaudited)................... 4 Consolidated Statements of Cash Flows for the three month periods ended March 31, 1998 and 1997 (unaudited)........... 5 Notes to the Interim Unaudited Consolidated Financial Statements.................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 14 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds........... 15 Item 6. Exhibits and Reports on Form 8-K.................... 17 SIGNATURES............................................................ 19
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. SRS LABS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1998 1997 ------------ ------------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 7,371,702 $ 4,446,753 Investments available for sale............................ -- 2,010,775 Accounts receivable....................................... 5,813,967 3,989,927 Inventories............................................... 4,369,032 -- Prepaid expenses and other current assets................. 633,063 578,957 Deferred income taxes..................................... 505,674 170,674 ------------ ----------- Total current assets.............................. 18,693,438 11,197,086 INVESTMENTS AVAILABLE FOR SALE.............................. 14,091,967 19,556,262 FURNITURE, FIXTURES & EQUIPMENT -- net...................... 1,365,801 245,779 INTANGIBLE ASSETS -- net.................................... 6,054,663 313,673 DEFERRED INCOME TAXES....................................... 229,223 229,223 ------------ ----------- TOTAL ASSETS...................................... $ 40,435,092 $31,542,023 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 6,630,668 $ 202,352 Accrued liabilities....................................... 1,071,245 826,242 Line of Credit............................................ 7,000,000 -- Income taxes payable...................................... 835,101 1,011,426 Current portion of consideration due on asset purchase.... 29,984 81,804 ------------ ----------- Total current liabilities......................... 15,566,998 2,121,824 STOCKHOLDERS' EQUITY Preferred stock -- $.001 par value 2,000,000 shares authorized; no shares issued and outstanding Common stock -- $.001 par value 56,000,000 shares authorized; 11,505,754 (at March 31, 1998) and 9,609,867 (at December 31, 1997) shares issued and outstanding...... 11,506 9,610 Additional paid-in capital.................................. 38,693,116 25,022,437 Deferred stock option compensation.......................... 257,757 231,087 Unrealized gain on investments available for sale........... 123,184 163,600 Retained earnings (deficit)................................. (14,217,469) 3,993,465 ------------ ----------- Total Stockholders' equity........................ 24,868,094 29,420,199 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 40,435,092 $31,542,023 ============ ===========
See accompanying notes to financial statements. 3 4 SRS LABS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 ------------ ---------- REVENUES Chip Design and Licensing Revenue........................... $ 2,881,961 $2,212,100 Product and Component Sales................................. 4,175,435 -- ------------ ---------- Total revenues.................................... 7,057,396 2,212,100 COST OF SALES............................................... 4,398,416 39,194 ------------ ---------- GROSS MARGIN................................................ 2,658,980 2,172,906 SALES AND MARKETING......................................... 1,188,894 428,662 RESEARCH AND DEVELOPMENT.................................... 399,079 183,592 GENERAL AND ADMINISTRATIVE.................................. 1,252,823 715,160 ------------ ---------- OPERATING INCOME/(LOSS) BEFORE WRITE OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT....................... (181,816) 845,492 WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT... 18,510,378 -- ------------ ---------- INCOME/(LOSS) FROM OPERATIONS............................... (18,692,194) 845,492 OTHER INCOME................................................ 77,438 -- INTEREST INCOME, net........................................ 120,054 257,644 ------------ ---------- 197,492 257,644 INCOME/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)........... (18,494,702) 1,103,136 INCOME TAX EXPENSE/(BENEFIT)................................ (283,768) 408,161 ------------ ---------- NET INCOME/(LOSS)........................................... $(18,210,934) $ 694,975 ============ ========== NET INCOME/(LOSS) PER COMMON SHARE: BASIC..................................................... $ (1.68) $ 0.07 ============ ========== WEIGHTED AVERAGE SHARES USED IN THE CALCULATION OF NET INCOME/(LOSS) PER COMMON SHARE: BASIC..................................................... 10,852,052 9,493,876 ============ ==========
See accompanying notes to financial statements. 4 5 SRS LABS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss)........................................... $(18,210,934) $ 694,975 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization............................. 359,399 77,305 Deferred income taxes..................................... (335,000) -- Write-off of acquired in-process research and development............................................ 18,510,378 -- Amortization of premium on investments available for sale................................................... 56,197 27,301 Accretion of consideration due on asset purchase.......... 4,098 5,961 Increase in deferred compensation......................... 26,670 22,941 Changes in operating accounts -- net of effect of acquisitions: Decrease (increase) in accounts receivable............. 1,448,496 (591,606) Decrease in inventories................................ 2,262,754 -- Decrease in prepaid expenses and other current assets................................................ 398,660 43,030 Decrease in accounts payable........................... (2,123,534) (132,810) Increase (decrease) in other accrued liabilities....... 153,648 (13,752) (Decrease) increase in income taxes payable............ (446,163) 318,614 ------------ ---------- Net cash provided by operations...................... 2,104,669 451,959 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture, fixtures and equipment............. (72,640) (10,341) Proceeds from sale of investments available for sale...... 7,467,571 -- Cash paid for acquisitions, less cash acquired............ (6,911,216) -- ------------ ---------- Net cash provided (used) in investing activities....... 483,715 (10,341) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Line of Credit.............................. 7,000,000 -- Payments on Subsidiary debt............................... (6,755,382) -- Payment of consideration due on asset purchase............ (55,918) (76,761) Exercise of stock options................................. 147,865 83,580 ------------ ---------- Net cash provided by financing activities.............. 336,565 6,819 ------------ ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,924,949 448,437 CASH AND CASH EQUIVALENTS, beginning of period.............. 4,446,753 3,455,997 ------------ ---------- CASH AND CASH EQUIVALENTS, end of period.................... $ 7,371,702 $3,904,434 ============ ========== SUPPLEMENTAL DISCLOSURES ON NON CASH TRANSACTIONS Additional consideration accrued for asset purchase....... $ -- $ 41,794 Unrealized gain on investments, net....................... $ 40,414 $ 86,245
See accompanying notes to financial statements. 5 6 SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITY During the period ended March 31, 1998, the Company issued 1,680,611 shares of common stock in payment of $12,105,778 of the acquisition price of Valence Technologies, Inc. (Note 2) During the period ended March 31, 1998, the Company issued 125,000 shares of common stock in consideration for certain noncompetition agreements with the key employees of Valence. The shares have an ascribed fair value of $900,400. (Note 2) During the period ended March 31, 1998, the Company issued 25,000 shares of common stock in conjunction with the acquisition of VIP. The shares have an ascribed fair value of $176,575. (Note 2) During the period ended March 31, 1998, the Company issued warrants to purchase 100,000 shares of common stock in conjunction with the acquisition of VIP. The warrants have an ascribed value of $341,957. (Note 2) The Company acquired the stock of Valence Technologies, Inc. during the period ended March 31, 1998 (Note 2). In conjunction with the acquisition, certain liabilities were assumed as follows: Fair value of assets acquired............................. $ 14,076,279 Acquired in-process research and development costs........ 17,471,668 Acquired intangible assets................................ 5,910,400 Total consideration............................... (21,879,033) ------------ Liabilities assumed....................................... $ 15,579,314 ============
See accompanying notes to financial statements. 6 7 SRS LABS, INC. NOTES TO THE INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL/BASIS OF PRESENTATION SRS Labs, Inc. (the "Company") is known as a leading developer, marketer and licensor of contemporary audio and voice technologies to the various consumer product markets including consumer home audio, computer multimedia, car audio, and professional sound. Through its recent acquisition (see Note 2) of Valence Technology Inc. ("Valence"), the Company now has added business operations engaged in technology licensing and the design and sale of application-specific integrated circuits (ASIC) and other semiconductor products; the design, manufacture and sale of consumer electronics products; and the distribution of components and products within mainland China and throughout Asia. The accompanying interim unaudited financial statements have been prepared by the Company in conformity with generally accepted accounting principles for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. In the opinion of management, the financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997, the Consolidated Statements of Operations for the three month periods ended March 31, 1998 and 1997 and the Consolidated Statements of Cash Flows for the three month periods ended March 31, 1998 and 1997. The Consolidated Statements of Operations for the three month period ended March 31, 1998 are not necessarily indicative of the Statements of Operations for the entire fiscal year ending December 31, 1998. The interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 and the Current Report on Form 8-K/A dated May 18, 1998, scheduled to be filed on May 18, 1998. Current and future financial statements may not be directly comparable to the Company's historical financial statements. 2. ACQUISITIONS On March 2, 1998, the Company acquired (the "Acquisition") all of the outstanding shares of capital stock of Valence Technology Inc., a British Virgin Islands holding company with its principal business operations in Hong Kong and China ("Valence"). Valence, which conducts its business through its subsidiaries based in Hong Kong and China, is engaged in three primary areas of business, namely, the design and sale of application-specific integrated circuits (ASIC) and other semiconductor products; the design, manufacture, and sale of consumer electronics products; and the distribution of components and products within mainland China and throughout Asia. The aggregate purchase price of $19,500,000 consisted of approximately $7,400,000 in cash and 1,680,611 shares of the Company's common stock. The acquisition was accounted for as a purchase and as having an effective date of February 1, 1998. In connection with such acquisition, three of the four management shareholders and their respective sole shareholders, each of whom was a key employee of Valence or one of its subsidiaries, entered into noncompetition agreements with the Company. In consideration for these agreements and for a nominal cash payment equal to the par value of the shares, the Company issued an aggregate of an additional 125,000 shares of its common stock to such three shareholders. 7 8 SRS LABS, INC. NOTES TO THE INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following summarizes the consideration granted for the acquisition of Valence and non-compete agreements, the allocation of the purchase price and other purchase accounting adjustments: Cash........................................................ $ 7,394,222 Common Stock................................................ 13,006,178 ----------- Total purchase price........................................ 20,400,400 Deficiency in net assets acquired........................... 1,503,035 Estimated acquisition costs................................. 1,478,633 ----------- Excess of purchase price over net assets.................... $23,382,068 =========== Allocation to: In-process research and development....................... $17,471,668 Intangible assets......................................... 5,910,400 ----------- $23,382,068 ===========
The resulting intangible assets are being amortized on the straight-line basis over periods ranging from three to eleven years. Unaudited proforma combined results of operations for the three months ended March 31, 1998 would have been as follows had the Acquisition occurred on January 1, 1998: Revenues.................................................... $ 9,395,389 Proforma Net Loss........................................... $(1,240,486) Proforma Net Loss Per Share................................. $ 0.11 Weighted Average Shares Outstanding......................... 11,453,923
On February 28, 1998, the Company acquired certain rights to a proprietary technology, Voice Intelligibility Processor, ("VIP") from a third party. The aggregate consideration, including acquisition costs, was $1,138,710 and was comprised of $620,178 in cash, 25,000 shares of the Company's common stock with a fair value of $176,575 and warrants to purchase 100,000 shares of the Company's common stock at $9.47 per share with a fair value of $341,957. The purchase price allocated to in-process research and development was charged to the Company's operations, resulting in a charge of $1,038,710. The remainder of the purchase price was allocated to an intangible asset and is being amortized over 8 years. 3. INVESTMENTS AVAILABLE FOR SALE The Company has classified its investments as available-for-sale in accordance with SFAS No. 115. As of March 31, 1998, the Company's available-for-sale investments had a cost of $13,883,168 and an estimated fair value of $14,091,967, based on quoted market prices. The unrealized gains on these investments of $208,781, net of income taxes of $85,597, have been reported in the Company's Consolidated Balance Sheet as an increase in stockholders' equity. 4. CHANGE IN ACCOUNTING PRINCIPLES Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires than an entity classify items of other comprehensive earnings by their nature in an annual financial statement . For example, other comprehensive earnings may include foreign currency translation adjustments and unrealized 8 9 SRS LABS, INC. NOTES TO THE INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. The Company's total comprehensive income/(loss) is as follows:
FOR QUARTER ENDED FOR QUARTER ENDED MARCH 31, 1998 MARCH 31, 1997 ----------------- ----------------- Net income/(loss)..................................... $(18,210,934) $694,975 Unrealized gain on investments available for sale, net of tax.............................................. 40,414 20,171 ------------ -------- Total comprehensive income (loss)........... $(18,170,520) $715,146 ============ ========
5. NET INCOME/(LOSS) PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting No. 128, "Earnings per Share" (FAS 128) which is effective for financial statements for both interim and annual periods ending after December 15, 1997. FAS 128 requires the Company to disclose a basic and diluted earnings per share (EPS). The Company adopted the provisions of FAS 128 in the fiscal year ending December 31, 1997. The following is an illustration of the reconciliation of the numerators and the denominators of the basic and diluted net income/(loss) per common share computations:
FOR QUARTER ENDED MARCH 31, FOR QUARTER ENDED MARCH 31, 1998 1997 --------------------------------------- --------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- Basic: Income/(loss) available to common stockholders..... (18,210,934) 10,852,052 $(1.68) 694,975 9,493,876 $0.07 ====== ===== Effect of Dilutive Securities: Stock Options............. N/A 1,073,361 Diluted: Income available to common stockholders plus assumed conversion...... N/A N/A N/A $694,975 10,567,237 $0.07 =========== ========== ====== ======== ========== =====
9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW SRS Labs, Inc. (the "Company") is known as a leading developer, marketer and licensor of contemporary audio and voice technologies to the various consumer product markets. Through its recent acquisition of Valence Technology Inc. ("Valence"), the Company has added business operations engaged in technology licensing and the design and sale of application-specific integrated circuits (ASIC) and other semiconductor products; the design, manufacture and sale of consumer electronics products; and the distribution of components and products within mainland China and throughout Asia. Valence's principal operations are based in Hong Kong and mainland China. From the Company's inception in 1993 through February of 1998, the Company derived substantially all of its revenue from royalties received from technology licenses. On March 2, 1998, the Company acquired all of the outstanding capital stock of Valence for an aggregate purchase price, excluding non-compete agreements and acquisition costs, of $19,500,000 consisting of approximately $7,400,000 in cash and 1,680,611 shares of the Company's common stock, $.001 par value per share (the "Common Stock"). The acquisition was accounted for as a purchase and as having had an effective date of February 1, 1998. The acquisition of Valence has had, and will have, a material impact on the Company's financial statements for the reporting period ending March 31, 1998 and for the reporting periods thereafter; accordingly current and future financial statements may not be directly comparable to the Company's historical financial statements. During the first quarter of the fiscal year ending December 31, 1998 ("Fiscal 1998"), the Company also acquired all rights to Voice Intelligibility Processor ("VIP"), which is a patented voice processing technology that improves the intelligibility of the spoken voice, especially in high ambient noise environments. Aggregate consideration, including acquisition costs, was $1,138,710 and was comprised of $620,178 in cash, 25,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock at $9.47 per share. RESULTS OF OPERATIONS Revenues Total revenues for the three months ended March 31, 1998 were $7,057,396 which includes revenues generated by Valence since February 1, 1998. This contrasts with the first quarter of 1997 where the revenues were $2,212,100 and were generated strictly from the Company's licensing activities. Chip design and licensing revenue of $2,881,961 increased 30.3% compared to the same period last year. Licensing revenue decreased from the same period last year, but was offset by the custom ASIC chip design and chip sales related to Valence's activities. Revenue generated from product and component sales is attributable to Valence and therefore is not comparable to last year. Gross Margin Gross Margin for the three month period ended March 31, 1998 decreased to 37.7% from 98.2% for the same period in 1997. This decrease results from the shift in the Company's revenue base towards product and electronic component sales which have significantly lower margins from the Company's historic revenue base. The Company's gross margins in the future will depend on the revenue mix between product and electronic component sales and from licensing activities. However, the Company expects product and electronic component sales to make up a significant portion of revenues in the near term causing lower margins. Sales and Marketing Sales and marketing expenses for the first quarter were $1,188,894, compared to $428,662 for the same quarter last year, an increase of 177.3% which is primarily attributable to the Valence acquisition. Sales and marketing expenses as a percentage of total revenue for the three months ended March 31, 1998 decreased slightly to 16.8% from 19.4% for the three months ended March 31, 1997. 10 11 Research and Development Research and development expenses for the first quarter were $399,079, compared to $183,592 for the same quarter last year, an increase of 117.4% which is primarily attributable to the Valence acquisition. Research and development expenses as a percentage of total revenue for the three months ended March 31, 1998 decreased slightly to 5.7% from 8.3% for the three months ended March 31, 1997. General and Administrative General and administrative expenses for the first quarter were $1,252,823, compared to $715,160 for the same quarter last year, an increase of 75.2% which is primarily attributable to the Valence acquisition. General and administrative expenses as a percentage of total revenue for the three months ended March 31, 1998 decreased substantially to 17.8% from 32.3% for the three months ended March 31, 1997, as the Valence operating expenses are concentrated in sales and marketing and research and development. Acquired In-Process Research and Development Acquired in-process research and development costs of $18,510,378 during the three months ended March 31, 1998 represented an allocation of a portion of the purchase price of the acquisition of certain assets associated with the VIP technology and the acquisition of the outstanding shares of Valence Technology, Inc. to in-process research and development costs, which, based on management assumptions, had no future alternative use. (See Note 2 of Interim Unaudited Consolidated Financial Statements.) Other Income/Interest Income, net Net interest and other income resulted in net other income of $197,492, a decrease from the net interest income amount of $257,644 for the first quarter of 1997. The decrease is primarily due to lower average cash and investment balances during the current quarter as compared to the prior year due to the $7,894,222 paid in conjunction with the acquisitions of Valence and VIP. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity at March 31, 1998 consisted of cash, cash equivalents and long term investments of $21.5 million. At March 31, 1997, the Company had cash, cash equivalents and long term investments of approximately $24.7 million. The Company has historically financed its operations through the cash provided by its operations and proceeds from its initial public offering of its Common Stock in August 1996. The Company's operating activities provided $2,104,669 in cash for the three months ended March 31, 1998 and $451,959 for the three months ended March 31, 1997. The $1,652,718 increase in cash provided by operations was primarily due to decreases in accounts receivable and inventory which were partially offset by the increase in accounts payable. As referenced above, during the first quarter of Fiscal 1998, the Company acquired Valence and VIP. (See Note 2 of Interim Unaudited Consolidated Financial Statements) On March 4, 1998, the Company obtained a revolving line of credit with a bank which expires on June 1, 2000, and is secured by certain of the Company's investments. The total availability under the line of credit is the lesser of $10 million or a percentage of the fair market value of the collateral. The line of credit bears interest at the bank's prime rate or LIBOR plus 0.75%. The Company had $7.0 million outstanding under the line of credit as of March 31, 1998. As a result of the acquisition of Valence, the Company provided Valence $7,000,000 to pay off its short-term debt and other obligations. These funds were drawn by the Company under the above-referenced line of credit. The Company anticipates that its primary uses of working capital in future periods will be for the acquisition of new technologies, to provide Valence with additional working capital and increased sales personnel and marketing expenditures associated with the introduction of new technologies and products into the market. The Company also anticipates making additional capital expenditures for the improvement of its 11 12 operating system infrastructure and management reporting systems in the United States and Hong Kong operations. Management currently estimates these capital expenditures could aggregate $1,500,000. Based on current plans, and business conditions, the Company believes that its cash, cash equivalents, investments and/or available borrowings under its line of credit, together with any amounts generated from operations, will be sufficient to meet the Company's operating and capital requirements for the foreseeable future. However, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company. FORWARD-LOOKING STATEMENTS AND FACTORS WHICH MAY AFFECT FUTURE RESULTS Included in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, are a number of forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual results and financial position to be affected negatively as events unfold in the markets for the Company's products. These events include, but are not limited to, the risks involved in the expansion of the Company's business through acquisitions of new companies like Valence or new technologies like VIP, as well as the risks discussed below. The Company assumes no obligation to update the forward-looking information or the factors listed below to reflect actual results or changes in the factors affecting such forward-looking information. Quarterly Fluctuations The Company's operating results may fluctuate from those in prior quarters and will continue to be subject to quarterly and other fluctuations due to a variety of factors, including the extent to which the Company's licensees incorporate SRS or the Company's other technologies into their products, the gain or loss of significant customers, competitive pressures on selling prices, the acceptance of new or enhanced versions of the Company's technologies, the rate that the Company's semiconductor licensees manufacture and distribute chips to OEMs, the ability of the Company to secure one-time license fees for its technologies from new and existing licensees and general business economic conditions, particularly those effecting the consumer electronics market. Due to the Company's dependence on the consumer electronic market, the substantial seasonality of sales in the market could impact the Company's revenues and net income. In particular, the Company believes that there is seasonality relating to the Christmas season as well as the Chinese New Year within the Asia-Pacific region, which fall into the fourth and first quarters respectively. Changes to Business Model/Integration of Valence/Refinement of Asian Strategy From the Company's inception in 1993 through 1997, the Company derived substantially all of its revenues from licensing activities. As a result of the acquisition of Valence, the Company has added business operations engaged in the design and sale of application-specific integrated circuits (ASIC) and other semiconductor products; the design, manufacture and sale of consumer electronics products; and the distribution of components and products within mainland China and throughout Asia. These operations differ substantially from the Company's previous business model, and future operating results could be affected by a variety of factors including the timing of customer orders, the timing of development revenue, changes in the mix of products distributed and the mix of distribution channels employed, the emergence of new industry standards, product obsolescence and changes in pricing policies by the Company, its competitors or its suppliers. The Company's future success will depend in a large part on its ability to successfully integrate the operations of Valence with the Company. The degree to which the Company can successfully integrate such operations will depend on a number of factors, including the Company's ability to expand the scope of its operations beyond technology licensing into the new business of manufacturing electronic and semiconductor products and the Company's ability to increase its market penetration in China. The integration of certain operations following the acquisition will require the dedication of management and other personnel resources which may temporarily distract from the day-to-day business of the combined company. The geographic separation of these operations is likely to place additional strain on the Company's resources. In addition, the Company's significant operations in China and Asia may require refinement to adapt to the changing and 12 13 expanding market conditions in that region. This refinement may impact certain of the Company's current business directions, including Valence, as the Company attempts to position itself to maximize penetration of these rapidly developing markets. The Company's operations in Asia, and internationally in general, also are subject to risks of unexpected changes in, or impositions of, legislative or regulatory requirements. The acquisition of Valence has added significant diversity to the Company's overall business structure and the Company's opportunities. The Company recognizes that in the presence of such corporate diversity, and in particular with regard to the semiconductor industry, there will always exist a potential for a conflict among sales channels between the Company and certain of the Company's technology licensees. Although the operations of the Company's licensing business and those of Valence are generally complementary. there can be no assurances that sales-channel conflicts will not arise. If such potential conflicts do materialize, the Company may or may not be able to mitigate the effect of such perceived conflicts which, if not resolved, may impact the results of operations. Currency Risk/Stability of Asian Markets The Company expects that international sales will continue to represent a significant portion of total revenues. To date, all of the Company's revenues have been denominated in U.S. dollars and most costs have been incurred in U.S. dollars. It is the Company's expectation that licensing revenues will continue to be denominated in U.S. dollars for the foreseeable future. With its acquisition of Valence and the Company's anticipated expansion of its business in China and other parts of Asia, the Company's consolidated operations and financial results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currency in which the products are sold. In addition, the Company's valuation of assets recorded as a result of the Valence acquisition also may be adversely impacted by the currency fluctuations relative to the U.S. dollar. The Company intends to actively monitor its foreign exchange exposure and to implement strategies to reduce its foreign exchange risk at such time that the Company determines the benefits of such strategies outweigh the associated costs. However, there is no guarantee that the Company will take steps to insure against such risks and should such risks occur, there is no guarantee that the Company will not be significantly impacted therefrom. Countries in the Asia Pacific region have recently experienced weakness in their currency, banking and equity markets. These weaknesses could adversely affect consumer demand for Valence's products, the U.S. dollar value of the Company's and its subsidiaries' foreign currency denominated sales, the availability and supply of product components to Valence and ultimately the Company's consolidated results of operations. Competitive Pressures The Company's existing and potential competitors include both large and emerging domestic and international companies that have substantially greater financial, manufacturing, technical, marketing, distribution and other resources. Competitors of the Company may also include a number of smaller companies which may have greater flexibility to address specific market needs. In addition, the markets in which the Company competes are intensely competitive and are characterized by rapid technological change, declining average sales prices and rapid product obsolescence. Importance of Intellectual Property The Company's ability to compete may be affected by its ability to protect its proprietary information. The Company has filed several United States and foreign patent applications and to date has a number of issued United States and foreign patents covering various aspects of its technologies. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The semiconductor industry is characterized by frequent claims and related litigation regarding patent and other intellectual property rights. The Company is not a party to any claims of 13 14 this nature. There can be no assurance that third parties will not assert additional claims or initiate litigation against the Company, or its customers with respect to existing or future products. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to determine the scope and validity of the proprietary rights of the Company or others. Management of Growth; Dependence on Key Personnel The Company has recently experienced rapid growth and expansion with the acquisition of Valence. This acquisition has placed, and will continue to place, a significant strain on its administrative, operation and financial resources, and has resulted, and will continue to result, in a continuing increase in the level of responsibility for both existing and new management personnel. The Company's future success depends in part on the continued service of its key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel. The Company anticipates that future growth, if any, will require it to recruit and hire a number of new personnel in engineering, operations, finance, sales and marketing. Competition for such personnel is intense and there can be no assurance that the Company can retain and recruit necessary personnel to operate its business and support future growth. The Company's ability to manage its growth successfully also will require the Company to continue to expand and improve its administrative, operational, management and financial systems and controls. Volatility of Stock Price The trading price of the Common Stock has been, and will likely continue to be, subject to wide fluctuations in response to quarterly variations in the Company's operating results, announcements of new products or technological innovations by the Company or its competitors, general market fluctuations and other events and factors. Changes in earnings estimates made by brokerage firms and industry analysts relating to the markets in which the Company does business, or relating to the Company specifically, have in the past resulted and could in the future result in an immediate and adverse effect on the market price of the Common Stock. Year 2000 Compliance Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Year 2000" issue). The potential costs and uncertainties associated with the Year 2000 issue will depend on a number of factors, including software, hardware and the nature of the industry in which the Company operates. Additionally, companies must coordinate with other entities with which they electronically interact, such as customers and creditors. The Company and its subsidiaries have evaluated all significant internal operating systems and have determined that their Year 2000 compliance efforts will not be material. In addition, the Company and its subsidiaries are actively working with all of its major suppliers and customers to assess their Year 2000 compliance efforts and the Company's exposure to them. At this time, it is not possible to quantify the aggregate cost to the Company and its subsidiaries related to the Year 2000 compliance issues facing the Company's major suppliers and customers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 14 15 PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS SALES OF UNREGISTERED SECURITIES During the first quarter of Fiscal 1998, the Company acquired certain assets, including the VIP technology, of R.G.A. & Associates, Ltd., d/b/a ToteVision and VIP Labs ("R.G.A."), pursuant to an Asset Purchase Agreement dated January 28, 1998 (the "VIP Acquisition"). The approximate aggregate purchase price of such assets was $1,000,000. In connection with the VIP Acquisition, on January 28, 1998, the Company (i) issued to R.G.A. 25,000 shares of Common Stock; (ii) granted to R.G.A. a four-year warrant (the "VIP Warrant"), whereby R.G.A., or its registered assigns, may purchase up to 100,000 shares of Common Stock for $9.467 per share (subject to adjustment) and (iii) paid R.G.A. $500,000 in cash. In addition, the Company agreed to pay to R.G.A. for four years' royalties based upon certain percentages from 10% to 15% of licensing royalties generated from use of the VIP patents. Subsequent to the closing of the VIP Acquisition and pursuant to the terms of the VIP Warrant, on February 20, 1998, R.G.A. nominated three persons who performed services for R.G.A. in connection with the VIP Acquisition to receive a portion of the VIP Warrant. On February 27, 1998, such three persons acknowledge receipt of warrants dated February 26, 1998 to purchase 2,500, 2,500 and 1,000 shares of Common Stock, respectively, with R.G.A. acknowledging on February 27, 1998 receipt of the balance of the VIP Warrant dated February 26, 1998 (i.e., to purchase 94,000 shares of Common Stock). In addition, during the first quarter of Fiscal 1998, the Company acquired all of the outstanding stock of Valence in two separate, but related, transactions with Valence's five shareholders (the "Valence Acquisition"), pursuant to two Stock Purchase Agreements dated as of February 24, 1998. Pursuant to one of the Stock Purchase Agreements, the Company acquired 45% of the outstanding shares of capital stock of Valence from four British Virgin Islands corporations, in each case, the sole shareholder of which was a key employee of Valence or one of Valence's subsidiaries (the "Management Shareholders"). The aggregate purchase price paid by the Company to the Management Shareholders was $13,500,000, payable $1,394,222 in cash and $12,105,778 in shares of Common Stock valued at $7.2032 per share, or 1,680,611 shares, pursuant to a formula set forth in the Stock Purchase Agreement. Such shares of Common Stock were issued to three of the four Management Shareholders. Pursuant to the second Stock Purchase Agreement, the Company acquired 55% of the outstanding shares of capital stock of Valence from the remaining shareholder of Valence for $6,000,000 in cash. In connection with the Valence Acquisition, three of the four Management Shareholders (the same three that acquired the shares of Common Stock, referenced above) and their respective sole shareholders entered into noncompetition agreement with the Company. In consideration for these agreements and for a nominal cash payment equal to the par value of the shares, the Company issued an aggregate of an additional 125,000 shares of Common Stock to such Management Shareholders. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Securities Act of 1933, as amended, on the basis that they were issued under circumstances not involving a public offering. 15 16 USE OF PROCEEDS The effective date of the Company's initial public offering of its Common Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). During the first quarter of Fiscal 1998, the Company utilized $7,894,222 of the $22,052,955 net offering proceeds as follows:
DIRECT OR INDIRECT PAYMENTS TO DIRECTORS, OFFICERS, GENERAL PARTNERS OF THE ISSUER OR THEIR ASSOCIATES TO PERSONS OWNING TEN PERCENT OR MORE OF ANY CLASS OF EQUITY SECURITIES OF THE ISSUER, DIRECT OR INDIRECT AND TO AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS -------------------------------- ------------------ Construction of plant, building and facilities.............................. -- -- Purchase and installation of machinery and equipment............................... -- -- Purchase of real estate................... -- -- Acquisition of other business(es)......... -- $ 7,894,222(1) Repayment of indebtedness................. -- -- Working capital........................... -- -- Temporary investment (cash and municipal bonds).................................. -- $14,158,733(2)
- --------------- (1) In connection with the VIP Acquisition, the Company utilized $500,000 of the proceeds as part of the consideration to purchase the VIP technology. In connection with the Valence Acquisition, the Company utilized an aggregate of $7,394,222 of the net proceeds, $1,394,222 in partial payment for 45% of the outstanding shares of Valence common stock held by four of the five shareholders of Valence, and $6,000,000 in payment for 55% of the outstanding shares of Valence common stock held by the remaining shareholder of Valence. (2) The remaining funds are temporarily invested in cash and municipal bonds pending application. 16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits listed below are hereby filed with the U.S. Securities and Exchange Commission (the "Commission") as part of this Report.
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 Stock Purchase Agreement dated as of February 24, 1998, by and among the Company, Valence Technology Inc., Thomrose Holdings (BVI) Limited, Rayfa (BVI) Limited, Cape Spencer International Limited, and Anki (BVI) Limited, previously filed with the Commission as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on March 13, 1998 (the "Form 8-K"), which is incorporated herein by reference. 2.2 Stock Purchase Agreement dated as of February 24, 1998, by and between the Company and North 22 Capital Partners 2, Inc., previously filed with the Commission as Exhibit 2.2 to the Form 8-K, which is incorporated herein by reference. 2.3 Asset Purchase Agreement dated as of January 28, 1998, between the Company and R.G.A. & Associates, Ltd. d/b/a ToteVision and VIP Labs(R), previously filed with the Commission as Exhibit 2.3 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997, filed with the Commission on March 31, 1998 (the "1997 Annual Report"), which is incorporated herein by reference. Material Contracts Relating to Management Compensation Plans or Arrangements 10.1 Employment Agreement dated as of March 2, 1998, by and among the Company, Valence Technology Inc. and Thomas Wah Tong Wan, previously filed with the Commission as Exhibit 10.16 to the 1997 Annual Report, which is incorporated herein by reference. 10.2 Employment Agreement dated as of March 2, 1998, by and among the Company, Valence Semiconductor Design Limited, and Choi Yat Ming, previously filed with the Commission as Exhibit 10.17 to the 1997 Annual Report, which is incorporated herein by reference. 10.3 Employment Agreement dated as of March 2, 1998, by and among the Company, LEC Electronic Components Limited, and Wong Yin Bun, previously filed with the Commission as Exhibit 10.18 to the 1997 Annual Report, which is incorporated herein by reference. 10.4 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Thomrose Holdings (BVI) Limited, and Thomas Wah Tong Wan, previously filed with the Commission as Exhibit 2.5 to the Form 8-K, which is incorporated herein by reference. 10.5 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Cape Spencer International Limited and Wong Yin Bun, previously filed with the Commission as Exhibit 2.6 to the Form 8-K, which is incorporated herein by reference. 10.6 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Rayfa (BVI) Limited and Choi Yat Ming, previously filed with the Commission as Exhibit 2.7 to the Form 8-K, which is incorporated herein by reference. Other Material Contracts 10.7 Tenancy Agreement commencing January 1, 1998, by and between Jugada Company Limited and Valence Semiconductor Design Limited relating to the premises located at Workshops Nos. 1, 2, 3, 4, 5, 6, 7 and 8 on the 19th Floor of APEC Plaza, No. 49 Hoi Yuen Road, Kwun Tong, Hong Kong, previously filed with the Commission as Exhibit 10.34 to the 1997 Annual Report, which is incorporated herein by reference. 10.8 Registration Rights Agreement dated as of January 28, 1998, by and between the Company and R.G.A. & Associates, Ltd., d/b/a ToteVision and VIP Labs(R) and William S. Taraday, previously filed with the Commission as Exhibit 10.37 to the 1997 Annual Report, which is incorporated herein by reference.
17 18
EXHIBIT NO. DESCRIPTION ------- ----------- 10.9 Warrant to Purchase 94,000 Shares of Common Stock of the Company dated February 26, 1998, held by R.G.A. & Associates, Ltd., d/b/a ToteVision and VIP Labs(R), previously filed with the Commission as Exhibit 10.38 to the 1997 Annual Report, which is incorporated herein by reference. 10.10 Warrant to Purchase 2,500 Shares of Common Stock of the Company dated February 26, 1998, held by Herbert H. Wax, previously filed with the Commission as Exhibit 10.39 to the 1997 Annual Report, which is incorporated herein by reference. 10.11 Warrant to Purchase 2,500 Shares of Common Stock of the Company dated February 26, 1998, held by Steven E. Loyd, previously filed with the Commission as Exhibit 10.40 to the 1997 Annual Report, which is incorporated herein by reference. 10.12 Warrant to Purchase 1,000 Shares of Common Stock of the Company dated February 26, 1998, held by the Van Valkenberg Furber Law Group, P.L.L.C., previously filed with the Commission as Exhibit 10.41 to the 1997 Annual Report, which is incorporated herein by reference. 10.13 Business Loan Agreement dated March 4, 1998, between the Company and Bank of America National Trust and Savings Association, previously filed with the Commission as Exhibit 10.42 to the 1997 Annual Report, which is incorporated herein by reference. 27 Financial Data Schedule
(b) Reports on Form 8-K During the three month period ended March 31, 1998, the Company filed one Current Report on Form 8-K dated March 12, 1998 with the Commission on March 13, 1998, reporting under Item 2 therein, the acquisition of Valence. Pursuant to Instruction (a) (4) to Item 7 of Form 8-K, the Company undertook to file the financial information required by Items 7 (a) and 7 (b) by amendment no later than May 18, 1998. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SRS LABS, INC., a Delaware Corporation Date: May 14, 1998 By: /s/ JANET M. BISKI ------------------------------------ Janet M. Biski Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 19 20 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 Stock Purchase Agreement dated as of February 24, 1998, by and among the Company, Valence Technology Inc., Thomrose Holdings (BVI) Limited, Rayfa (BVI) Limited, Cape Spencer International Limited, and Anki (BVI) Limited, previously filed with the Commission as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on March 13, 1998 (the "Form 8-K"), which is incorporated herein by reference. 2.2 Stock Purchase Agreement dated as of February 24, 1998, by and between the Company and North 22 Capital Partners 2, Inc., previously filed with the Commission as Exhibit 2.2 to the Form 8-K, which is incorporated herein by reference. 2.3 Asset Purchase Agreement dated as of January 28, 1998, between the Company and R.G.A. & Associates, Ltd. d/b/a ToteVision and VIP Labs(R), previously filed with the Commission as Exhibit 2.3 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997, filed with the Commission on March 31, 1998 (the "1997 Annual Report"), which is incorporated herein by reference. Material Contracts Relating to Management Compensation Plans or Arrangements 10.1 Employment Agreement dated as of March 2, 1998, by and among the Company, Valence Technology Inc. and Thomas Wah Tong Wan, previously filed with the Commission as Exhibit 10.16 to the 1997 Annual Report, which is incorporated herein by reference. 10.2 Employment Agreement dated as of March 2, 1998, by and among the Company, Valence Semiconductor Design Limited, and Choi Yat Ming, previously filed with the Commission as Exhibit 10.17 to the 1997 Annual Report, which is incorporated herein by reference. 10.3 Employment Agreement dated as of March 2, 1998, by and among the Company, LEC Electronic Components Limited, and Wong Yin Bun, previously filed with the Commission as Exhibit 10.18 to the 1997 Annual Report, which is incorporated herein by reference. 10.4 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Thomrose Holdings (BVI) Limited, and Thomas Wah Tong Wan, previously filed with the Commission as Exhibit 2.5 to the Form 8-K, which is incorporated herein by reference. 10.5 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Cape Spencer International Limited and Wong Yin Bun, previously filed with the Commission as Exhibit 2.6 to the Form 8-K, which is incorporated herein by reference. 10.6 Noncompetition Agreement dated as of March 2, 1998, by and among the Company, Rayfa (BVI) Limited and Choi Yat Ming, previously filed with the Commission as Exhibit 2.7 to the Form 8-K, which is incorporated herein by reference. Other Material Contracts 10.7 Tenancy Agreement commencing January 1, 1998, by and between Jugada Company Limited and Valence Semiconductor Design Limited relating to the premises located at Workshops Nos. 1, 2, 3, 4, 5, 6, 7 and 8 on the 19th Floor of APEC Plaza, No. 49 Hoi Yuen Road, Kwun Tong, Hong Kong, previously filed with the Commission as Exhibit 10.34 to the 1997 Annual Report, which is incorporated herein by reference. 10.8 Registration Rights Agreement dated as of January 28, 1998, by and between the Company and R.G.A. & Associates, Ltd., d/b/a ToteVision and VIP Labs(R) and William S. Taraday, previously filed with the Commission as Exhibit 10.37 to the 1997 Annual Report, which is incorporated herein by reference. 10.9 Warrant to Purchase 94,000 Shares of Common Stock of the Company dated February 26, 1998, held by R.G.A. & Associates, Ltd., d/b/a ToteVision and VIP Labs(R), previously filed with the Commission as Exhibit 10.38 to the 1997 Annual Report, which is incorporated herein by reference.
21
EXHIBIT NO. DESCRIPTION ------- ----------- 10.10 Warrant to Purchase 2,500 Shares of Common Stock of the Company dated February 26, 1998, held by Herbert H. Wax, previously filed with the Commission as Exhibit 10.39 to the 1997 Annual Report, which is incorporated herein by reference. 10.11 Warrant to Purchase 2,500 Shares of Common Stock of the Company dated February 26, 1998, held by Steven E. Loyd, previously filed with the Commission as Exhibit 10.40 to the 1997 Annual Report, which is incorporated herein by reference. 10.12 Warrant to Purchase 1,000 Shares of Common Stock of the Company dated February 26, 1998, held by the Van Valkenberg Furber Law Group, P.L.L.C., previously filed with the Commission as Exhibit 10.41 to the 1997 Annual Report, which is incorporated herein by reference. 10.13 Business Loan Agreement dated March 4, 1998, between the Company and Bank of America National Trust and Savings Association, previously filed with the Commission as Exhibit 10.42 to the 1997 Annual Report, which is incorporated herein by reference. 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 7,371,702 14,091,967 5,813,967 693,935 4,369,032 18,693,438 2,487,618 1,121,817 40,435,092 15,566,998 0 0 0 11,506 24,856,588 40,435,092 7,057,396 7,057,396 4,398,416 7,239,212 18,312,886 0 145,797 (18,494,702) (283,768) 0 0 0 0 (18,210,934) (1.68) (1.68)
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