-----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, UqpYSH9d30/p+bVdyFY2yuGPtKxBYIZz1IMxn7hoYj4hyfQXuI7pSxm4dUjRm9kP A9bZXHn3p2L8lUHOxBhzTA== 0000892569-98-001582.txt : 19980519 0000892569-98-001582.hdr.sgml : 19980519 ACCESSION NUMBER: 0000892569-98-001582 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980302 ITEM INFORMATION: FILED AS OF DATE: 19980518 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-21123 FILM NUMBER: 98627119 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 8-K/A 1 AMENDMENT TO FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) MARCH 2, 1998 -------------------------------- SRS LABS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 0-21123 33-0714264 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (949) 442-1070 ------------------------------ NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 The undersigned registrant hereby amends, to the extent set forth herein, the registrant's Current Report on Form 8-K dated March 12, 1998, and filed with the Securities and Exchange Commission on March 13, 1998. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired. The audited consolidated financial statements of Valence Technology Inc., a British Virgin Islands company ("Valence"), for the ten months ended January 31, 1998 and for the year ended March 31, 1997, and the related Independent Auditors' Report, are filed as Exhibit 99.1 to this Form 8-K/A and are incorporated herein by reference. (b) Pro Forma Financial Statements. The unaudited pro forma consolidated condensed financial statements of SRS Labs, Inc., a Delaware corporation ("SRS Labs"), for the twelve months ended December 31, 1997 and the three months ended March 31, 1998 reflecting the acquisition of Valence are filed as Exhibit 99.2 to this Form 8-K/A and are incorporated herein by reference. (c) Exhibits. 99.1 Audited consolidated financial statements of Valence for the ten months ended January 31, 1998 and for the year ended March 31, 1997, and the related Independent Auditors' Report. 99.2 Unaudited pro forma consolidated condensed financial statements of SRS Labs for the twelve months ended December 31, 1997 and the three months ended March 31, 1998 reflecting the acquisition of Valence. -2- 3 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 hereunto duly authorized. SRS LABS, INC., a Delaware corporation (Registrant) Date: May 18, 1998 By: /s/ THOMAS C.K. YUEN ------------------------------ Thomas C. K. Yuen Chairman of the Board and Chief Executive Officer -3- 4 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 99.1 Audited consolidated financial statements of Valence for the ten months ended January 31, 1998 and for the year ended March 31, 1997, and the related Independent Auditors' Report. 99.2 Unaudited pro forma consolidated condensed financial statements of SRS Labs for the twelve months ended December 31, 1997 and the three months ended March 31, 1998 reflecting the acquisition of Valence. -4- EX-99.1 2 AUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 EX. - 99.1 AUDITED FINANCIAL STATEMENTS OF VALENCE FOR THE TEN MONTHS ENDED JANUARY 31, 1998 AND FOR THE YEAR ENDED MARCH 31, 1997, AND THE RELATED INDEPENDENT AUDITORS' REPORT INDEX TO AUDITED FINANCIAL STATEMENTS
PAGE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF VALENCE TECHNOLOGY, INC.: Independent auditors' report.................................................................F-2 Consolidated statements of operations and deficit for the ten months ended January 31, 1998 and the year ended March 31, 1997.........................................F-3 Consolidated balance sheets at January 31, 1998 and March 31, 1997.........................................................................F-4 Consolidated statements of cash flows for the ten months ended January 31, 1998 and the year ended March 31, 1997.........................................F-5 Notes to the consolidated financial statements...............................................F-6
F-1 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Valence Technology Inc. We have audited the accompanying consolidated balance sheets of Valence Technology Inc. and its subsidiaries as of January 31, 1998 and March 31, 1997 and the related consolidated statements of operations and cash flows for the ten months ended January 31, 1998 and for year ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Hong Kong which do not differ in any material respect from those in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Valence Technology Inc. and its subsidiaries at January 31, 1998 and March 31, 1997, and the results of their operations and their cash flows for the ten months ended January 31, 1998 and for the year ended March 31, 1997 in conformity with accounting principles generally accepted in Hong Kong (which do not differ in any material reports from accounting principles generally accepted in the United States of America - see note 2). /s/ Deloitte Touche Tohmatsu Hong Kong April 23, 1998 F-2 3 VALENCE TECHNOLOGY INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Ten months ended Year ended January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ Sales ................................................ 248,252,006 148,473,770 Cost of sales ........................................ 196,581,758 124,001,023 ------------ ------------ Gross profit ......................................... 51,670,248 24,472,747 Selling, general and administrative expenses ......... 51,353,821 25,928,040 ------------ ------------ Operating profit (loss) .............................. 316,427 (1,455,293) Interest expense ..................................... (4,169,277) (2,946,233) Interest income ...................................... 86,522 41,461 Foreign exchange gain (loss), net .................... 380,461 (309,503) Other income ......................................... 52,340 43,835 ------------ ------------ Loss before income taxes ............................. (3,333,527) (4,625,733) Income taxes (Note 4) ................................ (1,400,000) (616) ------------ ------------ Net loss for the period .............................. (4,733,527) (4,626,349) Deficit, beginning of period ......................... (14,463,720) (9,837,371) ------------ ------------ Deficit, end of period ............................... (19,197,247) (14,463,720) ------------ ------------
See notes to consolidated financial statements F-3 4 VALENCE TECHNOLOGY INC. CONSOLIDATED BALANCE SHEETS
January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ ASSETS Current assets: Cash and cash equivalents ........................... 17,669,109 1,831,604 Accounts receivable, net of allowance for doubtful accounts of HK$5,018,895 at January 31, 1998 and HK$1,856,427 at March 31, 1997 .................... 27,702,150 23,933,633 Prepaid expenses and other current assets ........... 3,508,928 2,732,925 Amounts due from a related company (Note 7) ......... -- 111,543 Inventories (Note 5) ................................ 51,396,345 39,699,504 ------------ ------------ Total current assets ...................... 100,276,532 68,309,209 Property and equipment, net (Note 6) .................. 8,814,627 7,819,146 License right, at cost less accumulated amortization at January 31, 1998 of HK$48,750 (Note 7) ........... 2,291,250 -- ------------ ------------ Total assets .............................. 111,382,409 76,128,355 ------------ ------------ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Short-term bank borrowings .......................... 105,280 30,379,977 Accounts payable and accrued expenses ............... 66,171,549 35,480,079 Amounts due to related companies (Note 7) ........... 55,402,211 17,081,403 Income taxes payable ................................ 1,400,616 616 ------------ ------------ Total current liabilities ................. 123,079,656 82,942,075 Minority interests .................................... -- 150,000 Shareholders' deficit: Share capital Authorized, 20,000,000 (1997: 17,500,000) shares of US$0.13 each (1997: HK$1 each); Issued and outstanding, 7,500,000 shares (1997: 7,500,000 shares) ......................... 7,500,000 7,500,000 Deficit ............................................... (19,197,247) (14,463,720) ------------ ------------ Total shareholders' deficit ........................... (11,697,247) (6,963,720) ------------ ------------ Total liabilities and shareholders' deficit 111,382,409 76,128,355 ------------ ------------
See notes to consolidated financial statements F-4 5 VALENCE TECHNOLOGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Ten months ended Year ended January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ Operating activities: Net loss ................................................ (4,733,527) (4,626,349) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation ............................................ 2,195,602 2,139,502 Provision for doubtful accounts ......................... 3,457,308 1,856,428 Loss on disposals of property and equipment ............. 14,387 -- Amortization of license right ........................... 48,750 -- Changes in operating assets and liabilities: Inventories ........................................... (11,696,841) (26,699,682) Accounts receivable ................................... (7,225,825) (19,069,241) Prepaid expenses and other current assets ............. (776,003) (1,867,760) Amounts due from a related company .................... 111,543 (111,543) Accounts payable and accrued expenses ................. 30,691,470 27,085,322 Income taxes payable .................................. 1,400,000 616 ----------- ----------- Net cash provided by (used in) operating activities ..... 13,486,864 (21,292,707) ----------- ----------- Investing activities: Purchase of property and equipment ...................... (3,205,470) (1,508,418) Purchase of minority interests .......................... (150,000) -- ----------- ----------- Net cash used in investing activities ..................... (3,355,470) (1,508,418) ----------- ----------- Financing activities: Advance from a shareholder .............................. 29,625,000 -- Advance from a related company .......................... 15,025,656 -- Repayment of advance from a former shareholder .......... (4,669,848) (916,765) Repayment of advance from a related company ............. (4,000,000) -- (Decrease) increase in short-term bank borrowings ....... (30,274,697) 25,175,625 ----------- ----------- Net cash provided by financing activities ................. 5,706,111 24,258,860 ----------- ----------- Net increase in cash and cash equivalents ................. 15,837,505 1,457,735 Cash and cash equivalents at beginning of period .......... 1,831,604 373,869 ----------- ----------- Cash and cash equivalents at end of period ................ 17,669,109 1,831,604 ----------- ----------- Cash paid during the period for: Interest ................................................ 4,169,277 2,946,233 Income taxes ............................................ -- -- ----------- -----------
See notes to consolidated financial statements F-5 6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND CORPORATE AFFILIATION Valence Technology Inc. ("the Company") is a private limited company incorporated in British Virgin Islands. At January 31, 1998, the Company had the following subsidiaries, all of which are wholly-owned:
Name of subsidiary Place of incorporation ASP Microelectronics Limited ("ASP") Hong Kong LEC Electronics Limited Hong Kong LEC Electronic Components Limited ("LEC") Hong Kong LEC Microelectronics Limited Hong Kong Valence Semiconductor Design Limited ("VSD") Hong Kong VSD Electronics (Huiyang) Limited Other region of the People's Republic of China ("PRC") VSD Electronics Limited Hong Kong
On May 22, 1997, the Company acquired for cash of HK$150,000 the 10% interest in LEC held by the minority shareholders. No goodwill arose on the acquisition. The Company is positioning itself to become a leading supplier of multimedia and consumer electronic components and finished products in Asia, in particular the PRC. The Company's business activities are carried out principally by three entities namely: O VSD, which develops, manufactures (through outsourcing) and markets application specific integrated circuits for ASP and other consumer electronic product manufacturers; O ASP, which develops and markets its own brand of consumer and multimedia electronic components (e.g. VCD-related products) by using VSD's design libraries; and O LEC, which markets and distributes international brand multimedia and electronic components. The Company has offices in Hong Kong, Shenzhen, Shanghai and Chengdu, in the PRC. All administrative functions and research and development are performed in the Hong Kong and Shenzhen offices. The Company also leases warehousing facilities in Hong Kong, Wuhan, Shanghai, Huiyang and Changchun. In March 1997, North 22 Capital Partners 2 Inc., a company incorporated in British Virgin Islands acquired a 70% stake in the Company from Legend Holdings Limited, a company incorporated in Hong Kong and sold 15% to management reducing its interest to 55%. On March 2, 1998, SRS Labs, Inc., a United States corporation, completed the acquisition of all of the Company's outstanding shares. F-6 7 VALENCE TECHNOLOGY INC. 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong ("HK GAAP"). The financial statements include certain additional disclosures required under accounting principles generally accepted in the United States of America ("US GAAP"). For the year ended March 31, 1997 and for the ten months ended January 31, 1998, there were no significant differences between the net assets and results of the Company in the financial statements prepared under US GAAP and HK GAAP. The Company and its subsidiaries have been operating at a loss since incorporation and currently principally rely on advances and loans provided by its existing and former shareholders. The Company's new owner, SRS Lab Inc, has given an undertaking to provide adequate funds for the Company and its subsidiaries to meet their liabilities as they fall due. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies which have been adopted in preparing these financial statements and which conform with accounting principles generally accepted in Hong Kong are as follows: Basis of consolidation - The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. Revenue recognition - The Company and its subsidiaries recognize revenue from the sales of products at the time products are shipped and title has passed. Income from the provision of design services is recognized when services are provided. Property and equipment - Property and equipment are stated at cost less depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the property has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the statement of operations in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, the expenditure is capitalized as an additional cost of the property. When assets are sold or retired, their cost and accumulated depreciation are eliminated from the financial statements and any gain or loss resulting from their disposal is included in the statement of operations. Depreciation is provided to write off the cost of property and equipment over their estimated useful lives using the straight line method, at 20% per annum. F-7 8 VALENCE TECHNOLOGY INC. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Inventories - Inventories are stated at the lower of cost and net realizable value. Cost, which comprises material costs and, where applicable, subcontracting costs and these overheads that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realizable value represents the estimated selling price less all further costs to completion and costs to be incurred in selling and distribution. Operating leases - Rentals payable under operating leases are charged to the statement of operations on a straight line basis over the lease terms. Foreign currency transactions - Transactions in foreign currencies are translated at the rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates ruling on the balance sheet date. Gains and losses arising on exchange are recognized in the statements of operations. Income taxes - The charge for taxation is based on the results for the period as adjusted for items which are non-assessable or disallowed. Deferred income taxes include effects of temporary differences arising from the recognition for tax purposes of certain items of income and expense in a different accounting period from that in which they are recognized in the financial statements. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. Actual results could differ from these estimates. 4. INCOME TAXES Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated. The Company and its subsidiaries are each taxed separately. The provision for income taxes represents Hong Kong profits tax calculated at the Hong Kong statutory rate of 16.5% of the estimated assessable profit of a subsidiary. Certain subsidiaries have operating loss carry forwards for income tax purposes which may be available to reduce future taxable income earned by the same legal entity. At January 31, 1998, the Company and its subsidiaries had loss carry forwards in Hong Kong amounting to approximately HK$30,076,000 which are available for carry forward indefinitely. The Company has established a valuation allowance for the full amount of these tax losses. F-8 9 VALENCE TECHNOLOGY INC. 5. INVENTORIES
January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ Raw materials ............ 1,746,255 -- Work in progress ......... 1,692,360 -- Finished goods ........... 47,957,730 39,699,505 ---------- ---------- 51,396,345 39,699,505 ---------- ----------
6. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ At cost: Leasehold improvements ....... 1,783,148 1,690,351 Office equipment ............. 1,305,076 596,809 Computer equipment ........... 10,214,840 8,469,631 Furniture and fixtures ....... 627,973 364,354 Motor vehicles ............... 720,078 350,702 ----------- ----------- Total ........................ 14,651,115 11,471,847 Less: Accumulated depreciation (5,836,488) (3,652,701) ----------- ----------- Net book value ............... 8,814,627 7,819,146 ----------- -----------
F-9 10 VALENCE TECHNOLOGY INC. 7. RELATED PARTY TRANSACTIONS AND BALANCES The Company had the following significant transactions with related parties during the period:
Ten months Year ended ended January 31 March 31, 1998 1997 --------- --------- HK$ HK$ Interest expense on advances from Legend Holdings Limited, former shareholder ...................................... 1,559,697 1,747,286 Interest expense on loan from North 22 Capital Partners 2 Inc., shareholder ..................................... 983,958 -- Interest expense on loan from North 22 Nominees Limited, an affiliated company of North 22 Capital Partners 2 Inc. ........ 331,797 --
In the ten-month period ended January 31, 1998, Creative Technologies Limited, a former subsidiary of North 22 Capital Partners 2 Inc., made available to the Company trade finance banking facilities to finance purchases of raw materials and components. The Company was charged a handling fee amounting to HK$138,735. The amounts due to and from related companies at the end of each period were as follows:
January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ Amounts due from: Legend Holdings Limited ............................... -- 111,543 ---------- ---------- Amounts due to: North 22 Nominees Limited, loan bearing interest at 4% over prime lending rate .......................... 11,625,000 -- North 22 Capital Partners 2 Inc., loan bearing interest at prime lending rate ............................... 18,000,000 -- Creative Technologies Limited ......................... 11,025,656 -- Legend Holdings Limited, bearing interest at 0.5% over prime lending rate ............................. 12,411,555 17,081,403 SRS Labs, Inc. (see note 1), non-interest bearing ..... 2,340,000 -- ---------- ---------- 55,402,211 17,081,403 ---------- ----------
The above amounts are unsecured and are repayable on demand. On December 31, 1997, a subsidiary of the Company entered into an agreement with SRS Labs, Inc. to license the use of patents and trademarks owned by SRS Labs, Inc. for a period of four years from December 31, 1997, subject to extension for additional one year periods. The subsidiary paid a license fee of US$300,000 (HK$2,340,000) and is required to pay royalties at the rate of 20% of the gross profits, as defined, from the sale of licensed chips to non-related parties and a royalty of US$0.50, or the prevailing market rate as agreed by the parties, for each licensed chip sold to parties related to SRS Labs, Inc. through common ownership interests. F-10 11 VALENCE TECHNOLOGY INC. 8. CAPITAL AND STOCK OPTIONS Capital: On November 5, 1997, the authorized share capital of the Company was increased to HK$17,500,000 divided into 17,500,000 ordinary shares of HK$1 each and on December 4, 1997, the authorized share capital of the Company was changed to US$2,600,000 divided into 20,000,000 ordinary shares of US$0.13 each. Stock options: On October 17, 1997, the Company granted options to North 22 Nominees Limited as a condition for that company granting a loan of HK$11,625,000 to the Company. Under the agreement the Company granted North 22 Nominees Limited options to purchase a total of 450,000 common shares, par value HK$1 each, of the Company at an initial exercise price of HK$25.80 per share, subject to adjustment in defined circumstances. The options may be exercised in part or in total at any time from October 17, 1997 until October 17, 1999. On March 2, 1998, such option arrangements were canceled by both parties. 9. COMMITMENTS AND CONTINGENCIES (a) Operating leases: At the balance sheet dates, the Group had commitments payable within the next year under noncancelable operating leases in respect of rented facilities as follows:
January 31, 1998 March 31, 1997 ---------------- -------------- HK$ HK$ Operating leases which expire: Within one year ..................... 1,677,150 625,832 In the second to fifth year inclusive 1,758,602 2,768,532 Over five years ..................... -- 82,312 --------- --------- 3,435,752 3,476,676 --------- ---------
At January 31, 1998, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows:
Year ending January 31 HK$ 1999 ...................................... 3,435,752 2000 ...................................... 1,758,600 2001 ...................................... 1,478,360 2002 ...................................... 89,616
F-11 12 VALENCE TECHNOLOGY INC. 9. COMMITMENTS AND CONTINGENCIES - continued (b) Capital expenditure: At January 31, 1998, the Company was obligated to contribute capital of HK$3 million to its subsidiary incorporated in the People's Republic of China. (c) Long service payments: At January 31, 1998, the Group was contingently obligated to compensate its employees who have completed the required number of years of service under the Hong Kong Employment Ordinance to be eligible for long service payments on termination of their employment. The aggregate amount, if payable in full on termination of services with all such eligible employees, is estimated to be HK$1,090,000. The Company does not expect that such a payment will be paid. - -------------------------------------------------------------------------------- F-12 EX-99.2 3 UNAUDITED PRO FORMAS 1 EX. - 99.2 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF SRS LABS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 REFLECTING THE ACQUISITION OF VALENCE INDEX TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
PAGE PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF SRS LABS, INC. (UNAUDITED): Pro forma consolidated condensed statement of operations for the twelve months ended December 31, 1997 (Unaudited)........................... PF-2 Pro forma consolidated condensed statement of operations for the three months ended March 31, 1998 (Unaudited)............................... PF-3 Notes to pro forma consolidated condensed financial statements (Unaudited).... PF-4
PF-1 2 SRS LABS, INC. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) - --------------------------------------------------------------------------------
SRS VTI TWELVE MONTHS TWELVE MONTHS ENDED ENDED DECEMBER 31, MARCH 31, PRO FORMA PRO FORMA 1997 1998 ADJUSTMENTS COMBINED REVENUES $ 10,081,283 $ 37,595,737 $ (300,000)(d) $ 47,377,020 COST OF SALES 210,348 29,473,639 29,683,987 ------------ ------------ ------------ GROSS MARGIN 9,870,935 8,122,098 (300,000) 17,693,033 OPERATING EXPENSES 5,323,234 7,667,707 1,205,989 (a) 14,196,930 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 4,547,701 454,391 (1,505,989) 3,496,103 INTEREST INCOME 1,088,718 (399,898)(b) 688,820 INTEREST EXPENSE 924,447 (451,947)(b) 472,500 OTHER INCOME (239,217) (239,217) ------------ ------------ INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 5,636,419 (230,839) (1,453,940) 3,951,640 PROVISION FOR INCOME TAXES 1,863,200 180,645 (100,000)(c) 1,943,845 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 3,773,219 $ (411,484) $ (1,353,940) $ 2,007,795 ============ ============ ============ ============ NET INCOME PER SHARE - Basic $ 0.39 $ 0.18 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 9,556,015 1,805,611 11,361,626 ============ ============ ============ NET INCOME PER SHARE - Diluted $ 0.35 $ 0.16 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 10,852,281 1,805,611 12,657,892 ============ ============ ============
See accompanying notes to unaudited pro forma consolidated financial statements. PF-2 3 SRS LABS, INC. PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) - --------------------------------------------------------------------------------
SRS VTI THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, PRO FORMA PRO FORMA 1998 1998 ADJUSTMENTS COMBINED ------------ ------------ ------------ ------------ REVENUES $ 1,439,007 $ 7,956,382 $ - $ 9,395,389 COST OF SALES 26,932 7,014,285 7,041,217 ------------ ------------ ------------ GROSS MARGIN 1,412,075 942,097 2,354,172 OPERATING EXPENSES 2,938,732 1,789,995 938,211 (a)(e) 3,790,516 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (1,526,657) (847,898) 938,211 (1,436,344) INTEREST INCOME 265,851 (66,647) (b) 199,204 INTEREST EXPENSE (37,797) (183,899) (105,152) (b) (116,544) OTHER INCOME 76,277 2,443 78,720 ------------ ------------ ------------ LOSS BEFORE INCOME TAX BENEFIT (1,222,326) (1,029,354) 976,716 (1,274,964) INCOME TAX BENEFIT 283,768 (249,290) (c) 34,478 ------------ ------------ ------------ NET LOSS $ (938,558) $ (1,029,354) $ 727,426 $ (1,240,486) ============ ============ ============ ============ NET LOSS PER SHARE $ (0.09) $ (0.11) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 10,852,052 601,871 11,453,923 ============ ============ ============
See accompanying notes to unaudited pro forma consolidated financial statements. PF-3 4 SRS LABS, INC. NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) - -------------------------------------------------------------------------------- 1. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS On March 2, 1998, SRS Labs, Inc. ("SRS" or the "Company") acquired 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" or "VTI"). 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 electronic 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. The unaudited pro forma consolidated condensed statement of operations, which are presented in U.S. dollars, give effect on a purchase accounting basis to the acquisition of Valence. The pro forma consolidated condensed statement of operations for the twelve months ended December 31, 1997 has been prepared by combining the statement of operations of SRS for the twelve months ended December 31, 1997 with the consolidated statement of operations of Valence for the twelve months ended March 31, 1998. The pro forma consolidated condensed statement of operations for the three months ended March 31, 1998 have been prepared by combining the statements of operations of SRS and Valence for the three months ended March 31, 1998. The unaudited pro forma consolidated condensed statements of operations for the twelve months ended December 31, 1997 and the three months ended March 31, 1998 assume that the acquisition occurred on January 1, 1997 and 1998, respectively. The unaudited pro forma consolidated condensed statements of operations do not purport to represent the results of operations of SRS had the transaction and events assumed therein occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The pro forma adjustments are based on management's preliminary assumptions regarding purchase accounting adjustments. The actual allocation of the purchase price will be adjusted to the extent that actual amounts differ from management's estimates in accordance with Statement of Financial Accounting Standards (SFAS) No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. The pro forma consolidated financial information is based upon certain assumptions and adjustments described in the notes to the pro forma consolidated financial statements. The pro forma consolidated financial information should be read in conjunction with (a) the historical financial statements, and related notes, of SRS contained in SRS' quarterly report on Form 10-Q for the quarter ended March 31, 1998 and in the Annual Report on Form 10-KSB for the year ended December 31, 1997 and (b) Valence's historical financial statements referenced on page F-1 of this report. PF-4 5 SRS LABS, INC. NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- 2. PRO FORMA ADJUSTMENTS 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 =========== Allocated to: In-process research and development $17,471,668 Intangible assets 5,910,400 ----------- $23,382,068 ===========
The following items describe the pro forma adjustments made to reflect the acquisition of Valence: (a) To record amortization related to the intangible assets based on the straight-line method over three to eleven years. (b) To record the reduction in interest income and the net decrease in interest expense due to the use of previously invested cash for the acquisition of Valence and borrowings aggregating $7,000,000 incurred to repay certain higher interest rate Valence indebtedness upon the acquisition. (c) To record the tax effect of the pro forma adjustments. (d) Represents the elimination of certain revenue derived from Valence by SRS during the twelve months ended December 31, 1997. (e) In accordance with the Financial Accounting Standards Board (FASB) Interpretation No. 4, SRS is required to write-off $1,038,710 in-process research and development acquired by SRS in a separate and unrelated transaction during the three months ended March 31, 1998. The amount is reflected as a component of the pro forma adjustments to operating expenses in the pro forma condensed consolidated statements of operations because it is a one-time nonrecurring charge. PF-5 6 SRS LABS, INC. NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- In accordance with FASB Interpretation No. 4, SRS is required to write-off the $17,471,668 in-process research and development acquired in the acquisition. This write-off was reflected in the quarter ending March 31, 1998 and has not been reflected in the pro forma condensed consolidated statements of operations because it is a one-time nonrecurring charge. 3. PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING Pro forma weighted average shares outstanding assumes as outstanding the 1,805,611 new shares issued by SRS required to consummate the acquisition of Valence. PF-6 -----END PRIVACY-ENHANCED MESSAGE-----