-----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, QhTNVbuHG5UbJiqqpJH29WIpIya/UCbCeBpcXpX2dnhXh7igbdVHElUdPRspAbX7 l7lDeCtJkozKtw2BEra24w== 0001017062-01-500296.txt : 20010515 0001017062-01-500296.hdr.sgml : 20010515 ACCESSION NUMBER: 0001017062-01-500296 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 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: 1633041 BUSINESS ADDRESS: STREET 1: 2909 DAIMIER ST CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9494421070 MAIL ADDRESS: STREET 1: 2909 DAIMLER ST CITY: SANTA ANA STATE: CA ZIP: 92705 10-Q 1 d10q.txt QUARTERLY REPORT ENDED 03/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ________________ (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 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, 2001, 12,607,744 shares of the issuer's common stock, par value $.001 per share, were outstanding. In addition, as of April 30, 2001, 71,100 shares of the issuer's common stock were held as treasury shares. ================================================================================ SRS LABS, INC. Form 10-Q For the Period Ended March 31, 2001 Index
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. 4 Condensed Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and December 31, 2000 4 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (Unaudited) 5 Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2001 and 2000 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (Unaudited) 6 Notes to the Condensed Interim Consolidated Financial Statements (Unaudited) 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. 17 PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. 18 Item 6. Exhibits and Reports on Form 8-K. 18 SIGNATURES 19
2 FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, reflecting management's current expectations. Examples of such forward-looking statements include the expectations of the Company with respect to its strategy. Although the Company believes that its expectations are based upon reasonable assumptions, there can be no assurances that the Company's financial goals will be realized. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Numerous factors may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words, "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The important factors discussed in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results", herein, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations. The Company assumes no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. SRS LABS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2001 2000 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 20,089,280 $ 24,128,480 Investments available for sale 4,019,441 5,713,881 Accounts receivable, net 1,571,075 787,908 Inventories, net 2,671,218 3,068,478 Prepaid expenses and other current assets 658,842 847,953 Deferred income taxes 38,116 38,116 ------------ ------------ TOTAL CURRENT ASSETS 29,047,972 34,584,816 Investments available for sale 586,569 582,849 Furniture, fixtures & equipment, net 1,842,937 1,808,624 Intangible assets, net 3,322,519 3,692,218 Deferred income taxes 900,839 900,839 ------------ ------------ TOTAL ASSETS $ 35,700,836 $ 41,569,346 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,461,197 $ 1,603,401 Accrued liabilities 1,870,059 1,974,357 Line of credit 4,000,000 8,000,000 Income taxes payable 1,078,845 1,093,107 ------------ ------------ TOTAL CURRENT LIABILITIES 8,410,101 12,670,865 Minority interest 522,897 595,428 Commitments and contingencies 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; 12,657,344 and 12,652,844 shares issued; and 12,586,244 and 12,581,744 shares outstanding at March 31, 2001 and December 31, 2000, respectively 12,658 12,653 Additional paid-in capital 55,063,009 55,060,403 Deferred stock option compensation 395,464 376,052 Cumulative other comprehensive loss (56,654) (64,950) Accumulated deficit (28,383,358) (26,817,824) Less treasury stock at cost, 71,100 shares at March 31, 2001 and December 31, 2000, respectively (263,281) (263,281) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 26,767,838 28,303,053 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,700,836 $ 41,569,346 ============ ============
See accompanying notes to the condensed interim consolidated financial statements 4 SRS LABS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, ------------------------- 2001 2000 ----------- ----------- REVENUES Chip and licensing revenue $ 2,248,394 $ 2,879,079 Product and component sales 2,082,487 4,311,473 ----------- ----------- TOTAL REVENUES 4,330,881 7,190,552 COST OF SALES 2,301,290 4,848,701 ----------- ----------- GROSS MARGIN 2,029,591 2,341,851 EXPENSES Sales and marketing 1,391,380 1,284,734 Research and development 878,094 939,189 General and administrative 1,561,926 1,418,587 Non-cash stock issuance cost - 3,111,859 ----------- ----------- TOTAL EXPENSES 3,831,400 6,754,369 LOSS FROM OPERATIONS (1,801,809) (4,412,518) OTHER INCOME, NET 234,041 209,564 MINORITY INTEREST 72,828 - ----------- ----------- LOSS BEFORE INCOME TAX EXPENSE (1,494,940) (4,202,954) INCOME TAX EXPENSE 70,594 138,093 ----------- ----------- NET LOSS $(1,565,534) $(4,341,047) =========== =========== Net loss per common share: Basic and diluted $(0.12) $(0.36) =========== =========== Weighted average shares used in the calculation of net loss per common share: Basic and diluted 12,582,262 11,982,392 =========== ===========
SRS LABS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended March 31, ------------------------- 2001 2000 ----------- ----------- Net loss $(1,565,534) $(4,341,047) Other comprehensive income (loss) Foreign currency translation - (1,544) Unrealized gain (loss) on investments available for sale, net of tax 8,296 (11,144) ----------- ----------- Comprehensive loss $(1,557,238) $(4,353,735) =========== ===========
See accompanying notes to the condensed interim consolidated financial statements 5 SRS LABS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,565,534) $(4,341,047) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash stock issuance cost -- 3,111,859 Depreciation and amortization 531,487 558,498 Minority interest (72,828) -- Other 2,277 (1,210) Amortization of premium on investments available for sale 4,781 9,185 Increase in deferred stock option compensation 19,412 27,874 Changes in operating assets and liabilities: Accounts receivable (783,167) 60,819 Inventories 397,260 280,008 Prepaid expenses and other current assets 189,111 (371,512) Accounts payable (142,204) (592,071) Accrued liabilities (104,298) (334,749) Income taxes payable (20,027) (79,379) ----------- ----------- Net cash used in operating activities (1,543,730) (1,671,725) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture, fixtures and equipment (196,101) (202,769) Proceeds from sale of investments available for sale 1,700,000 1,500,000 Expenditures related to patents and intangible assets -- (120,000) ----------- ----------- Net cash provided by investing activities 1,503,899 1,177,231 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Common Stock -- 5,000,291 Principal payment on line of credit (4,000,000) -- Proceeds from exercise of stock options 631 610,547 ----------- ----------- Net cash (used in) provided by financing activities (3,999,369) 5,610,838 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,039,200) 5,116,344 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,128,480 15,969,678 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $20,089,280 $21,086,022 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 125,834 $ 140,695 Income taxes $ 90,622 $ 177,191 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Unrealized gain (loss) on investments, net $ 8,296 $ (11,144)
See accompanying notes to the condensed interim consolidated financial statements 6 SRS LABS, INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. General/Basis of Presentation SRS Labs, Inc. ("SRS Labs") is a developer and provider of technology solutions for the consumer electronics, home theater, computer, game, Internet and telecommunications markets. SRS Labs' principal business activities in these markets include: . Developing and licensing audio and voice technologies to original equipment manufacturers ("OEMs") and semiconductor manufacturers around the world; . Through its majority-owned subsidiary, SRSWOWcast.com, Inc., now conducting business under the name SRSWOWcast Technologies ("SRSWOWcast"), developing audio and voice enhancement technology solutions dedicated to the Internet and telecommunications markets; and . Through its wholly-owned subsidiary, ValenceTech Limited and its foreign subsidiaries (collectively "Valence"), designing and selling technology solutions through custom application specific integrated circuits ("ASICs") to OEMs; and designing, distributing and manufacturing components, sub-assemblies and electronics products for the OEM and retail communities within the Company's targeted markets. SRS Labs and its majority-owned and wholly-owned subsidiaries together are hereby collectively referred to as the "Company". The accompanying condensed interim consolidated financial statements have been prepared by the Company without audit in conformity with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. Certain accounts as previously reported have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, the condensed interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Current and future financial statements may not be directly comparable to the Company's historical financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 2. Investments Available for Sale The Company has classified its investments as available-for-sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". As of March 31, 2001, the Company's available-for-sale investments had a cost of $4,556,194 and an estimated fair value of $4,606,010, based on quoted market prices. The unrealized gains on these investments of $49,816 net of income taxes of $20,425 are reported as a separate component of stockholders' equity. 3. Inventories Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value. Cost is calculated using the weighted average method and is comprised of material costs and, where applicable, subcontracting and overhead costs that have been incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling price less estimated costs to completion and costs to be incurred in selling and distribution. 4. Minority Interest in Consolidated Subsidiary Minority interest in consolidated subsidiary represents the minority stockholders' proportionate share of the equity of SRSWOWcast. At March 31, 2001, the Company owned approximately 87% of the outstanding capital stock of SRSWOWcast. 7 SRS LABS, INC. NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Net Loss Per Common Share The Company computes earnings per share (EPS) in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the Company to disclose basic and diluted earnings per share. 6. Contingencies The Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 7. Stockholders' Equity During Fiscal 1998, the Company's Board of Directors authorized the repurchase of up to 500,000 of the outstanding shares of the Company's common stock for a period from December 23, 1998 to December 31, 1999. As of March 31, 2001, 71,100 shares had been repurchased at a cost of $263,281. Such repurchased shares are reflected as treasury stock in the accompanying consolidated balance sheets. In March 2000, the Company entered into a technology and marketing alliance with Microsoft Corporation ("Microsoft"). In conjunction with this transaction, Microsoft purchased 290,529 shares of the Company's common stock for $17.21 per share or approximately $5,000,000 in the aggregate. The difference between the purchase price received and the fair value of the common stock on the date of purchase, totaling approximately $555,000, was recorded as non-cash stock issuance cost by the Company during the quarter ended March 31, 2000. Also in connection with this transaction, Microsoft has a three year warrant to purchase 100,000 shares of common stock of the Company and a three year warrant to purchase up to 2,500,000 shares of common stock of the Company's majority-owned subsidiary, SRSWOWcast. The fair value of these warrants, aggregating approximately $2,555,000, was recorded as non-cash stock issuance cost by the Company during the quarter ended March 31, 2000. During the fiscal year ended December 31, 2000, the Company's majority-owned subsidiary SRSWOWcast and certain investors, which included shareholders, directors and an executive officer of the Company, entered into a Series A Preferred Stock and Warrant Purchase Agreement (the "Private Placement Agreement") relating to the purchase and sale of 3,000,000 shares of SRSWOWcast Series A Convertible Preferred Stock ("Preferred Stock") for a purchase price of $2.00 per share or $6,000,000 in the aggregate (the "Private Placement"). Pursuant to the Private Placement Agreement, investors received an immediately exercisable, three year warrant evidencing a right to purchase one-tenth of a share of SRSWOWcast's common stock for each share of Preferred Stock purchased by such investor, exercisable at $2.50 per whole share. The fair value of the warrants was zero at the date of issuance. In accordance with Staff Accounting Bulletin ("SAB") No. 51 issued by the SEC, "Accounting for Sales of Stock by a Subsidiary" the Company recorded $5,154,995 of additional paid-in capital associated with the Private Placement. 8. Segment Information The Company operates in three business segments: (i) the development and marketing of technology either in the form of ASICs through Valence or the licensing of technologies developed by the Company to original equipment manufacturers and semiconductor manufacturers; (ii) the sale of consumer electronic products and components; and (iii) the SRSWOWcast Internet-based business. The Company's internet-based business generated insignificant revenues and incurred a net loss of $558,345 for the quarter ended March 31, 2001. The Company does not allocate corporate operating expenses or specific assets to these segments. Therefore, the following segment information includes only net revenues, cost of sales and gross margin of the segments described in clauses (i) and 8 (ii) above:
Three Months Ended March 31, 2001 ------------------------------------------- Chips and Product and Licensing Component Sales Total ----------- --------------- ----------- Net revenues $2,248,394 $2,082,487 $4,330,881 Cost of sales 418,382 1,882,908 2,301,290 ---------- ---------- ---------- Gross margin $1,830,012 $ 199,579 $2,029,591 ========== ========== ==========
Three Months Ended March 31, 2000 ------------------------------------------- Chips and Product and Licensing Component Sales Total ----------- --------------- ----------- Net revenues $2,879,079 $4,311,473 $7,190,552 Cost of sales 883,000 3,965,701 4,848,701 ---------- ---------- ---------- Gross margin $1,996,079 $ 345,772 $2,341,851 ========== ========== ==========
9. Recent Accounting Pronouncements On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133" which requires derivatives to be reported as assets or liabilities in the balance sheet at fair value. The amendment included expanding the normal purchase and sale exemption for supply contracts, permitting the offsetting of certain intercompany foreign currency derivatives and thus reducing the number of third party derivatives, permitting hedge accounting for foreign-currency denominated assets and liabilities and redefining interest rate risk to reduce sources of ineffectiveness. The adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. In December 1999, the SEC staff issued SAB No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The implementation of SAB No. 101 in the fourth quarter of 2000 did not have a material effect on the Company's consolidated results of operations, financial position or cash flows. In March 2000, FASB issued Interpretation No. ("FIN") 44 of Accounting Principles Board Opinion No. 25 "Accounting for Certain Transactions Involving Stock Compensation", which, among other things, addresses accounting consequences of a modification that reduces the exercise price of a fixed stock option award (otherwise known as repricing). FIN 44 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. 10. Subsequent Events On April 1, 2001, the Company's line of credit facility expired and the outstanding balance of $4,000,000 was repaid on April 2, 2001. On April 1, 2001, a new revolving line of credit was negotiated with the same bank under substantially the same terms and conditions of the previous revolving line of credit except the total availability under the line of credit was reduced to the lesser of $5,000,000 or a percentage of the fair market value of the collateral. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This information should be read in conjunction with the unaudited condensed interim consolidated financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Overview SRS Labs, Inc. ("SRS Labs") is a developer and provider of audio and voice technology solutions for the consumer electronics, home theater, computer, game, Internet and telecommunications markets. SRS Labs' principal business activities in these markets include: . Developing and licensing audio and voice technologies to original equipment manufacturers ("OEMs") and semiconductor manufacturers around the world; . Through its majority-owned subsidiary, SRSWOWcast.com, Inc., now conducting business under the name SRSWOWcast Technologies ("SRSWOWcast"), developing audio and voice enhancement technology solutions dedicated to the Internet and telecommunications markets; and . Through its wholly-owned subsidiary, ValenceTech Limited and its foreign subsidiaries (collectively "Valence"), designing and selling technology solutions through custom application specific integrated circuits ("ASICs") to OEMs; and designing, distributing and manufacturing components, sub-assemblies and finished goods for targeted markets within selected OEM and retail communities. SRS Labs and its majority-owned and wholly-owned subsidiaries together are hereby collectively referred to as the "Company". The Company was formed in 1993 by purchasing all rights and assets of various audio and speaker technologies from the Hughes Aircraft Company. The Company successfully completed its initial public offering in August 1996, raising approximately $22 million. From the Company's inception in 1993 until February 1998, the Company derived substantially all of its revenues from audio technology licensing activities for the consumer electronics, computer and game markets. The primary technologies that contributed to revenue were SRS(R) (Sound Retrieval System(R)) ("SRS"), which produces a 3D sound-enhanced stereo image from any mono or stereo source, and TruSurround(TM), a "virtual" audio technology which processes multi-channel surround sound through any standard pair of stereo speakers. On March 2, 1998, the Company acquired 100% of the outstanding stock of Valence Technology Inc., a British Virgin Islands holding company with its principal business operations in Hong Kong and China. This acquisition significantly expanded the Company's business activities from the original licensing model to include the design, manufacture and marketing of chips, components and products. In addition to the acquisition of Valence Technology, Inc. during the fiscal year ended December 31, 1998 ("Fiscal 1998"), the Company acquired two additional technologies. In the first quarter of Fiscal 1998, the Company acquired certain rights to Voice Intelligibility Processor ("VIP"), a patented voice processing technology that improves the intelligibility of the spoken voice, especially in high ambient noise environments and, in the following quarter, acquired certain rights to Circle Surround, a patented audio delivery system that allows multi-channel surround sound to be encoded into a two-channel stereo format and allows an encoded two-channel audio source to be decoded into a multi-channel surround format. During the fiscal year ended December 31, 1999 ("Fiscal 1999"), the Company re-engineered its business model and operational structure. Valence Technology, Inc., while continuing to expand its ASICs business, exited certain of the lower margin distribution product lines and directed more of its resources to develop and market solutions that integrate the SRS technologies. With respect to its licensing business, the Company changed its focus from entering into technology licenses with PC chip manufacturers to developing a new business model which focuses on Internet radio. This new focus resulted in the Company launching the WOWThing product family and establishing a new wholly-owned subsidiary, SRSWOWcast, to be the platform to launch this business. In March 2000, Microsoft Corporation ("Microsoft") and the Company entered into a strategic alliance whereby Microsoft and the Company 10 entered into a License Agreement relating to the Company's WOW Technology. The License Agreement has facilitated the incorporation of the WOW Technology into the Windows 2000 Media Player and a click-through hyper-link on the interface of the Windows Media Player to the SRSWOWcast website. In addition, Microsoft made an equity investment into the Company and was granted a warrant to purchase additional shares of the Company's common stock as well as a warrant to purchase shares of common stock in SRSWOWcast. During the fiscal year ended December 31, 2000, the Company's wholly-owned subsidiary SRSWOWcast and certain investors, which included shareholders, directors and an executive officer of the Company, entered into a Series A Preferred Stock and Warrant Purchase Agreement (the "Private Placement Agreement") relating to the purchase and sale of 3,000,000 shares of SRSWOWcast Series A Convertible Preferred Stock ("Preferred Stock") for a purchase price of $2.00 per share or $6,000,000 in the aggregate (the "Private Placement"). Pursuant to the Private Placement Agreement, investors received an immediately exercisable, three year warrant evidencing a right to purchase one-tenth of a share of SRSWOWcast's common stock for each share of Preferred Stock purchased by such investor, exercisable at $2.50 per whole share. The fair value of the warrants was zero at the date of issuance. In accordance with Staff Accounting Bulletin ("SAB") No. 51 issued by the U.S. Securities and Exchange Commission ("SEC"), "Accounting for Sales of Stock by a Subsidiary" the Company recorded $5,154,995 of additional paid-in capital associated with the Private Placement. Recently, the Company changed its Internet strategy in order to focus on the licensing of the Company's audio and voice enhancement technology solutions for Internet streaming, wireless, Voice over Internet Protocol ("VoIP") and telephony applications. To implement this strategy, the Company has established a direct sales force to market the technology solutions to web portals, encoding companies, service providers, wireless technology providers and broadcasting companies. Consistent with the hardware licensing trademark policy, the Company will actively promote the use of its trademarks and logos and will direct its customers to display the appropriate SRS technology logo. SRS currently operates in three business segments: (a) the development and marketing of technology in the form of integrated circuits, distributed through Valence and the licensing of technologies developed by the Company to OEMs and semiconductor manufacturers, (b) the sale of consumer electronic products and components and (c) the SRSWOWcast Internet-based business. A summary of the Company's operations and activities by business segment is included in the accompanying notes to the condensed interim consolidated financial statements. Results of Operations Three Months Ended March 31, 2001 Compared To Three Months Ended March 31, 2000 Revenues Chip and licensing revenue consists of design fees and sales of ASICs by Valence to OEM manufacturers and sales of general purpose integrated circuits ("IC"s) designed by the Company under the brand name ASP Microelectronics. Licensing revenues are royalties generated primarily from the license of the Company's audio and voice technologies. License and royalty agreements generally provide for the license of technologies for a specified period of time for either a single fee or a fee based on the number of units distributed by the licensee. Product and component sales primarily represent (a) the manufacture and sale of Valence's own branded product line of VCD players, amplifiers and game products and (b) the distribution of semiconductor products, manufacturing components and sub-assemblies to OEMs for the Hong Kong and the Peoples Republic of China (the "PRC") markets. Total revenues for the three months ended March 31, 2001 were $4,330,881 consisting of chip and licensing revenue of $2,248,394 and product and component revenue of $2,082,487. This contrasts with the three months ended March 31, 2000, where total revenues were $7,190,552 consisting of chip and licensing revenue of $2,879,079 and product and component revenues of $4,311,473. Total revenues decreased by $2,859,671, or 39.8% for the three months ended March 31, 2001 compared to the same period in 2000. Chip and licensing revenue decreased by $630,685 or 21.9% for the three months ended March 31, 2001, with revenue from custom ASIC chip design and chip sales related to Valence's activities decreasing by 53.1% which was partially offset by an increase in licensing revenue of 105.4% compared to the same period in 2000. The decrease in ASIC chip design and chip sales was primarily due to recent global weakness in the semiconductor industry. The increase in licensing revenues during the quarter was the result of new licensing contracts signed in the second half of 2000 and in the first quarter of 2001. Product and component revenues decreased by $2,228,986 or 51.7% from the same prior year period which was due both to recent global weakness in the semiconductor industry and the Company's decision to focus on higher margin chip and licensing revenues and de-emphasize certain lower margin distribution activities. Revenues generated by the Company's internet-based business were not significant during the three months ended March 31, 2001. 11 Gross Margin Cost of sales consists primarily of fabrication costs, assembly and test costs, and the cost of materials and overhead from operations. The gross margin percentage increased from 32.6% for the quarter ended March 31, 2000, to 46.9% for the same period in 2001. The increase is attributable primarily to continued efforts by Valence to shift away from low margin distribution product lines and an increase in the revenue mix during the quarter ended March 31, 2001 in high margin licensing business. Sales and Marketing Sales and marketing expenses consist primarily of employee salaries, sales consultants' fees and related expenses, sales commissions and product promotion costs. Sales and marketing expenses were $1,391,380 for the three months ended March 31, 2001 compared to $1,284,734 for the same prior year period, an increase of $106,646, or 8.3%. The net increase in sales and marketing expenses for the three months ended March 31, 2001 is primarily attributable to an increase in marketing costs related to SRSWOWcast which was in a development stage during the three months ended March 31, 2000. Research and Development Research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs for engineering materials and supplies. Research and development expenses were $878,094 for the three months ended March 31, 2001 compared to $939,189 for the same prior year period, a decrease of $61,095, or 6.5%. Research and development costs as a percentage of revenues increased from 13.1% of revenues for the quarter ended March 31, 2000 to 20.3% of revenues for the same period this year. Research and development expenses may increase in the future as a result of ongoing product development efforts. General and Administrative General and administrative expenses consist primarily of employee-related expenses, legal costs associated with the administration of intellectual property and other professional fees. General and administrative expenses were $1,561,926 for the three months ended March 31, 2001 compared to $1,418,587 for the same prior year period, an increase of 10.1%. The increase was primarily attributable to higher staffing related expenses, and higher legal and professional fees. As a percentage of total revenues, general and administrative expenses increased from 19.7% for the quarter ended March 31, 2000, to 36.1% for the same period this year. As part of the acquisition of Valence Technology Inc., the Company allocated a portion of the purchase price to various intangible assets totaling approximately $5,910,400. This amount was capitalized and is being amortized on a straight line basis over periods ranging from three to eleven years with the related amortization expense of $332,796 and $332,796 for the quarters ended March 31, 2001 and March 31, 2000, respectively, and is included in general and administrative expenses. Non-cash Stock Issuance Costs In March 2000, the Company entered into a technology and marketing alliance with Microsoft Corporation. In conjunction with this transaction, Microsoft purchased shares of common stock of the Company and was granted a warrant to purchase additional shares of common stock of the Company and a warrant to purchase shares of common stock in SRSWOWcast. As a result of the transaction, the Company recognized one-time, non-cash charges totaling $3,111,859. See Note 7 of the Notes to the Condensed Interim Consolidated Financial Statements for more information concerning the Microsoft transaction. Other Income, Net Other income, net consists primarily of interest income, interest expense and foreign currency transaction gains and losses. Other income, net was $234,041 for the three months ended March 31, 2001 compared to $209,564 for the same prior year period, an increase of $24,477 or 11.7%. The increase is primarily due to higher interest income which is attributable to higher average cash and investment balances during the current year quarter as well as a reduction in interest expense due to a repayment of principal on the Company's line of credit during the current year quarter. 12 Minority Interest Minority interest represents the minority shareholders' proportionate share of losses in SRSWOWcast. Losses in SRSWOWcast are expected to continue as a result of expenditures exceeding revenues in an effort to support the expansion and growth of SRSWOWcast business operations. Should losses continue in SRSWOWcast, the minority interest adjustment in the consolidated statement of operations will continue to reduce the Company's net losses by the minority shareholders' proportionate share of SRSWOWcast's net losses to the extent of their investment. Provision for Income Taxes The income tax expense for the three months ended March 31, 2001 was $70,594 compared to tax expense of $138,093 for the same prior year period, a decrease of $67,499 or 48.9%. The decrease is primarily due to reduced tax expense on lower results at Valence. Liquidity and Capital Resources The Company's principal source of liquidity at March 31, 2001 consisted of cash, cash equivalents and investments aggregating $24,695,290. At December 31, 2000, the Company had cash, cash equivalents and long-term investments of $30,425,210. In March 2000, the Company sold shares of its common stock to Microsoft Corporation, for aggregate cash proceeds of $5,000,000 (See Note 7 to the Condensed Interim Consolidated Financial Statements). In November 2000, the Company's wholly-owned subsidiary, SRSWOWcast sold to investors 3,000,000 shares of its Series A Convertible Preferred Stock for an aggregate amount of $6,000,000 and granted warrants to purchase shares of SRSWOWcast common stock to such investors at an exercise price of $2.50 per share (the "SRSWOWcast Investment"). All remaining proceeds from the SRSWOWcast Investment will be used exclusively by SRSWOWcast. (See Note 7 to the Condensed Interim Consolidated Financial Statements) The Company's operating activities utilized $1,543,730 in cash for the three months ended March 31, 2001, and $1,671,725 for the three months ended March 31, 2000. The use of cash in operations was primarily due to the Company' s loss from operations for the quarter, after adjustment for non-cash charges primarily related to depreciation and amortization. The net decrease in cash and cash equivalents of $4,039,200 for the quarter is primarily attributable to a principal payment on the Company's revolving line of credit. In March, 1998, the Company obtained a revolving line of credit (and letter of credit facility) with a bank which was secured by certain of the Company's cash, cash equivalents and investments. As of March 31, 2001, the outstanding balance on this letter of credit was $4,000,000. This line of credit expired on April 1, 2001 and was fully repaid on April 2, 2001. As of March 31, 2001, approximately $2,459,000 in cash and cash equivalents and approximately $4,606,000 in investments were pledged as collateral for the line of credit. The total availability under the line of credit was the lesser of $10,000,000 or a percentage of the fair market value of the collateral. Interest on the line of credit was at the bank's prime rate or LIBOR plus 0.75%. The collateral requirements under the above-referenced credit facility may have the effect of restricting the amounts of cash available to pay dividends. On April 1, 2001, the Company entered into a new revolving line of credit with the same bank on substantially the same terms and conditions as the previous revolving line of credit except the total availability under the new line of credit was reduced to the lesser of $5,000,000 or a percentage of the fair market value of the collateral. In November 1999, Valence obtained a credit facility with a bank that provided for borrowings aggregating approximately $5,000,000. In January 2001, the credit facility was renegotiated to reduce the amount available to borrow under the new credit facility and to provide for a variety of import/export trade instruments up to $2,000,000 at interest rates ranging from 1% over the Hong Kong Dollar prime rate to 1.75% over LIBOR. The new facility is subject to renewal/expiration on or before October 31, 2001 and is collateralized by certain of Valence's assets on deposit with the bank. At March 31, 2000, there were no obligations outstanding under this credit facility. The Company anticipates that its primary uses of working capital in future periods will be to acquire new technologies and to fund increased costs for additional sales and engineering headcount and marketing activities associated with the introduction of new technologies and products into the market. Based on current plans and business conditions, the Company expects that its cash, cash equivalents, investments and/or available borrowings under its existing or future credit facilities, together with any amounts generated from operations, will be sufficient to meet the Company's cash requirements for the next 12 months. 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. 13 Factors That May Affect Future Results Quarterly Fluctuations The Company's operating results may fluctuate from those in prior quarters and will continue to be subject to quarterly and other fluctuations due to a variety of factors, including the extent to which the Company's licensees incorporate the Company's technologies into their products; the timing of orders from and the shipments to major customers; the timing of new product introductions by the Company; the gain or loss of significant customers; competitive pressures on selling prices; the market acceptance of new or enhanced versions of the Company's technologies; the rate that the Company's semiconductor licensees manufacture and distribute chips to product manufacturers; and fluctuations in general economic conditions, particularly those affecting the consumer electronics market. Due to the Company's dependence on the consumer electronics market, the substantial seasonality of sales in the market has impacted the Company's revenues and net income. In particular, the Company believes that there is seasonality relating to the Christmas season, generally, and the Chinese New Year within the Asia region, which fall into the fourth and first quarters, respectively. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Valence's Business The Company derives a significant amount of its revenue from Valence's ASIC and component distribution business. Valence's engineering team focuses on the design of custom ASICs to meet specific customers' requirements and outsources the production of the design to mask houses, foundaries and packaging houses located primarily in Asia. The operations of Valence 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. Business revenue from ASICs is concentrated in a limited number of customers in the areas of consumer electronics, communications products, computers and computer peripherals. As such, the loss of any such customers or any bad debt arising from them may have a material adverse impact on the Company's financial condition and results of operation. Beginning in Fiscal 1999, Valence began to exit from certain lower margin product offerings in the distribution side of the business and has begun developing and distributing products that are related to, or incorporate, the Company's proprietary technologies. As a result, the immediate loss in revenue of the low margin distribution business will not be entirely offset by the new proprietary technology based products, which will take time to develop and be introduced into the marketplace. There can be no assurance that the Company will be able to quickly introduce new products to offset the loss in revenue or that the new products developed will receive a favorable market acceptance. The acquisition of Valence has added significant diversity to the Company's overall business structure and the Company's opportunities. In the presence of such corporate diversity, and in particular with regard to the semiconductor industry, the Company recognizes 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. Internet Business In Fiscal 1999, the Company launched its Internet business with the formation of SRSWOWcast. In Fiscal 2000, SRSWOWcast commenced operations with a business plan which focused on developing and acquiring audio based content to attract visitor traffic to its website in order to sell advertising and e-commerce products. In 2001, the Company changed its Internet strategy to focus on licensing of the Company's audio and voice enhancement technology solutions for Internet streaming, wireless, VoIP and telephony applications. There can be no assurance that this new business model will develop a sufficient customer base to be able to generate meaningful revenue. Product Business In Fiscal 1999, the Company developed and marketed on its e-commerce site, www.wowthing.com, its first consumer audio product, the WOWThing Processor Box. The WOWThing Processor Box enhances the sound quality of music downloaded over the 14 Internet as well as audio performance of computer and home entertainment products and speakers. This was the Company's first entry into the consumer market in the United States which is both competitive and demands products with short life cycles. The Company intends to expand its offerings of high-end audio enhancement products in 2001 and future years. There can be no assurance that the Company will be able to develop an effective distribution channel and build brand recognition as a product manufacturer. As the business increases, it is anticipated that significant capital will be required to finance product inventory and accounts receivable. As a result, the Company is subject to risks of product obsolescence, bad debt and insufficient financial resources to grow the business. The Company also recognizes that as new consumer audio products are developed and marketed by the Company, there will always exist a potential for a conflict and competition between the Company and certain of the Company's technology licensees. Although the intended products of the Company and those of its licenses do not generally overlap, there can be no assurance that the Company's products will not compete with those of their licensees. If such conflicts do materialize, it is uncertain whether the Company will be able to mitigate the effect of such conflicts, which if not resolved, may impact the results of operations. Economic Risks Associated with Doing Business in Asia, Particularly in Hong Kong and the PRC The Company's significant operations in the PRC and Asia have required, and will continue to require, refinement to adapt to the changing market conditions in the region. The Company's operations in Asia, and internationally in general, are subject to risks of unexpected changes in, or impositions of legislative or regulatory requirements. The PRC economy has experienced significant growth in the past decade. However, such growth has been uneven across geographic and economic sectors and has recently been slowing. There can be no assurance that such growth will not continue to decrease or that any slow down will not have a negative effect on the Company's business, including Valence. The PRC economy has also experienced deflation in the past which may continue in the future. The current economic situation may adversely affect the Company's profitability over time as expenditures for consumer electronics products and information technology may decrease due to the results of slowing domestic demand and deflation. Hong Kong is a Special Administrative Region of the PRC with its own government and legislature. Hong Kong enjoys a high degree of autonomy from the PRC under the principle of "one country, two systems". The Company can give no assurance that Hong Kong will continue to enjoy autonomy from the PRC. The Hong Kong dollar has remained relatively constant due to the US dollar peg and the currency board system that has been in effect in Hong Kong since 1983. Since mid-1997, interest rates in Hong Kong have fluctuated significantly and real estate and retail sales have declined. The Company can give no assurance that the Hong Kong economy will not worsen or that the historical currency peg of the Hong Kong dollar to the U.S. dollar will be maintained. Continued recession in Hong Kong, deflation or the discontinuation of the currency peg could adversely affect the Company's business. Currency Risk/Stability of Asian Markets The Company expects that international sales will continue to represent a significant portion of total revenues. To date, all of the Company's licensing revenues have been denominated in U.S. dollars and most costs have been incurred in U.S. dollars. It is the Company's expectation that licensing revenues will continue to be denominated in U.S. dollars for the foreseeable future. Because Valence and its subsidiaries' business is primarily focused in Asia and because of the Company's anticipated expansion of its business in the PRC and other parts of Asia, the Company's consolidated operations and financial results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currency in which the products are sold. In addition, the Company's valuation of assets recorded as a result of the Valence acquisition may also be adversely impacted by the currency fluctuations relative to the U.S. dollar. The Company 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. Countries in the Asia Pacific region have 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. 15 Competitive Pressures The Company's existing and potential competitors include both large and emerging domestic and international companies that have substantially greater financial, manufacturing, technical, marketing, distribution and other resources. The Company's present or future competitors may be able to develop products and technologies comparable or superior to those offered by the Company, and to adapt more quickly than the Company to new technologies or evolving market needs. The Company believes that the competitive factors affecting the market for the Company's products and technologies include product performance, price and quality; product functionality and features; the ease of integration; and implementation of the products and technologies with other hardware and software components in the OEM's products. In addition, the markets in which the Company competes are intensely competitive and are characterized by rapid technological changes, declining average sales prices and rapid product obsolescence. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in its respective markets, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Importance of Intellectual Property The Company's ability to compete may be affected by its ability to protect its proprietary information. The Company has filed several U.S. and foreign patent applications and to date has a number of issued U.S. and foreign patents covering various aspects of its technologies. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent, as do the laws of the U.S. The semiconductor industry is characterized by frequent claims and litigation regarding patent and other property rights. The Company is not currently a party to any claims of this nature. There can be no assurances 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 continued growth of the Company and its subsidiaries has placed, and will continue to place, a significant strain on its administrative, operational and financial resources, and has increased, and will continue to increase, the level of responsibility for both existing and new management personnel. The Company's future success depends in part on the continued service of its key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel. The Company anticipates that any future growth will require it to recruit and hire a number of new personnel in engineering, operations, finance, sales and marketing. Competition for such personnel is intense, and there can be no assurance that the Company can retain and recruit necessary personnel to operate its business and support future growth. The Company's ability to manage its growth successfully also will require the Company to continue to expand and improve its administrative, operational, management and financial systems and controls. Volatility of Stock Price The trading price of the Common Stock has been, and will likely continue to be, subject to wide fluctuations in response to quarterly variations in the Company's operating results, announcements of new products or technological innovations by the Company or its competitors, strategic alliances between the Company and third parties, general market fluctuations and other events and factors. Changes in earnings estimates made by brokerage firms and industry analysts relating to the markets in which the Company does business, or relating to the Company specifically, have in the past resulted in, and could in the future result in, an immediate and adverse effect on the market price of the Common Stock. 16 Acquisitions From time-to-time, the Company expects to make acquisitions of businesses or technologies that are complementary to its business strategy. Such future acquisitions would expose the Company to risks commonly encountered in acquisitions of businesses. Such risks include, among others, difficulty of assimilating the operations, information systems and personnel of the acquired businesses, the potential disruption of the Company's ongoing business; and the inability of management to maximize the financial and strategic position of the Company through successful incorporation of the acquired technologies, employees and customers. There can be no assurance that any potential acquisition will be consummated or, if consummated, that it will not have a material adverse effect on the Company's business, financial condition and results of operations. Acquired In-Process Research and Development Uncertainties that could impede the progress of converting a development project to a developed technology include the availability of financial resources to complete the project, failure of the technology to function properly, continued economic feasibility of developed technologies, customer acceptance, customer demand and customer qualification of such new technology and general competitive conditions in the industry. There can be no assurance that the acquired in-process research and development projects associated with the acquisitions of Valence and VIP will be successfully completed and commercially introduced. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of its debt. Foreign Currency The Company has subsidiary operations in Hong Kong and the PRC, and accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. The Company uses the local currency (Hong Kong dollars) as the functional currency for its Asian subsidiaries. Translation adjustments resulting from the process of translating foreign currency financial statements into U.S. dollars were not significant in Fiscal 2000 and for the quarter ended March 31, 2001, due to the fact that the value of the Hong Kong dollar is currently pegged to the U.S. dollar, and the exchange rate remained constant throughout such periods. Under the current circumstances, the Company believes that the foreign currency market risk is not material. The Company actively monitors its foreign exchange exposure and, should circumstances change, intends to implement strategies to reduce its risk at such time that it determines that the benefits of such strategies outweigh the associated costs. There can be no assurance that management's efforts to reduce foreign exchange exposure will be successful. Interest Rates The Company's credit facilities bear interest based on the lending bank's prime rate or LIBOR plus 0.75%. The interest rate on the line of credit balance of $4,000,000 outstanding at March 31, 2001 was 7.50%. The outstanding balance of the line of credit as at March 31, 2001 was repaid in full on April 2, 2001. 17 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Use of Proceeds The effective date of the Company's initial public offering of its Common Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). During the first quarter of Fiscal 2001, the Company utilized approximately $2,991,253 of the $22,052,955 net offering proceeds for the repayment of indebtedness. The table below sets forth at March 31, 2001, the amount of the net offering proceeds used for the purposes noted in the table.
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 Direct or indirect of the issuer, 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)/assets -- $9,714,222 Repayment of indebtedness -- $2,991,253 Working capital -- $9,347,480 Temporary investment (cash and municipal bonds) -- $ 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The exhibits listed below are hereby filed with the SEC as part of this Report. Exhibit Number Description ------- ----------- 10.1 First Amendment to Credit and Security Agreement dated as of April 1, 2001, by and between the Company and City National Bank. 10.2 New Revolving Credit Note dated April 1, 2001, by the Company in favor of City National Bank. (b) Reports on Form 8-K. No reports on Form 8-K were filed with the SEC during the three month period ended March 31, 2001. 18 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, 2001 By: /s/ DARRELL E. BAKER --------------------------------- Darrell E. Baker Vice President - Finance, Secretary and acting Treasurer (Authorized Signatory, Principal Financial Officer and Principal Accounting Officer) 19 EXHIBIT INDEX Exhibit Number Description ------- ----------- 10.1 First Amendment to Credit and Security Agreement dated as of April 1, 2001, by and between the Company and City National Bank. 10.2 New Revolving Credit Note dated April 1, 2001, by the Company in favor of City National Bank. 20 EX-10.1 2 dex101.txt FIRST AMENDMENT TO CREDIT & SECURITY AGREEMENT EXHIBIT 10.1 [LOGO] CityNationalBank FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This First Amendment to Credit and Security Agreement is entered into as of April 1, 2001, by and between SRS Labs, Inc., a Delaware corporation ("Borrower") and City National Bank, a national banking association ("CNB"). RECITALS A. Borrower and CNB are parties to that certain Credit and Security Agreement, dated as of July 6, 1999 (the Credit and Security Agreement, as herein amended, hereinafter the "Credit Agreement"). B. Borrower and CNB desire to supplement and amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, the parties agree as follows: 1. Definitions. Capitalized terms used in this Amendment without definition shall have the meanings set forth in the Credit Agreement. 2. Amendments. The Credit Agreement is amended as follows: 2.1 Section 1.24 of the Credit Agreement is stricken and replaced with the following: "1.24 "Revolving Credit Commitment" shall mean, CNB's commitment, in accordance with the terms of this Agreement, to make Revolving Credit Loans in the aggregate principal amount at any one time up to Five Million Dollars ($5,000,000.00)." 2.2 Section 1.28 of the Credit Agreement is stricken and replaced with the following: "1.28 "Termination Date" shall mean May 30,2002, unless the Revolving Credit Commitment shall have been renewed for an additional term by CNB giving Borrower prior written notice of such renewal, in which event the Termination Date shall mean such renewed maturity date of the Revolving Credit Commitment, as set forth in the notice. Notwithstanding the foregoing, CNB may, at its option, terminate this Agreement pursuant to Section 8.3 hereof; the date of any termination under Section 8.3 shall thereupon become the Termination Date as that term is used in this Agreement." 2.3 Section 2.1.3 of the Credit Agreement is stricken and replaced with the following: 1 "2.1.3 Procedure for Revolving Credit Loans. Each Revolving Credit Loan may be made by CNB at the oral or written request, accompanied by the Collateral Reports required by Section 5.4, of anyone who is authorized in writing by Borrower to request and direct the disposition of the Revolving Credit Loans until written notice of the revocation of such authority is received by CNB. Any Revolving Credit Loan shall be conclusively presumed to have been made to or for the benefit of Borrower when CNB in its sole discretion believes that such request and directions have been made by such authorized persons (whether in fact that is the case), or when the Revolving Credit Loans are deposited to the credit of Borrower's account with CNB regardless of the fact that persons other than those authorized hereunder may have authority to draw against such account" 2.4 Section 5.4 of the Credit Agreement is stricken and replaced with the following: "5.4 Collateral Reports. Borrower shall provide CNB with the following reports: 5.4.1 At the time and as of the date of any request for CNB to make a Revolving Credit Loan, and also within fifteen (15) days of each month-end, a listing and pricing of each item of Collateral held pursuant to the Account Control Agreement; 5.4.2 At the time and as of the date of any request for CNB to make a Revolving Credit Loan, and also within fifteen (15) days of each month-end, a certification detailing the amount of the Borrowing Base as of the date of such request or month-end." 3. Existing Agreement. Except as expressly amended herein, the Credit Agreement shall remain in full force and effect, and in all other respects is affirmed. 4. Conditions Precedent. This Amendment shall become effective upon the fulfillment of all of the following conditions to CNB's satisfaction: 4.1 CNB shall have received this Amendment duly executed by Borrower. 5. Counterparts. This Amendment may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 6. Governing Law. This Amendment and the rights and obligations of the parties hereto shall be construed in accordance with, and governed by the laws of the State of California. 2 IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written "Borrower" SRS Labs, Inc., a Delaware corporation By: /s/ Thomas C.K. Yuen ---------------------------------------- Thomas C.K. Yuen, Chief Executive Officer "CNB" City National Bank, a national banking association By: /s/ Sajeda Simjee ---------------------------------------- Sajeda Simjee, Vice President 3 EX-10.2 3 dex102.txt NEW REVOLVING CREDIT NOTE DATED APRIL 1, 2001 EXHIBIT 10.2 NEW REVOLVING CREDIT NOTE 639864/33540 $5,000,000.00 Irvine, California April 1, 2001 For Value Received, the undersigned, SRS Labs, Inc., a Delaware corporation ("Borrower"), promises to pay on the Termination Date to the order of City National Bank, a national banking association ("CNB"), at its Office located at 100 Pacifica, Suite 100, Irvine, California 92714-9037, the principal amount of Five Million and 00/100 Dollars ($5,000,000.00) or so much thereof as may be advanced and be outstanding, with interest thereon to be computed on each Revolving Credit Loan from the date of its disbursement at a rate computed on the basis of a 360-day year, actual days elapsed, at the rates, times and in accordance with the terms of that certain Credit Agreement between Borrower and CNB, dated as of July 6, 1999, as may be amended from time to time (the "Credit Agreement"). Capitalized terms not defined herein shall have the meanings given them in that certain Credit Agreement. All or any portion of the principal of this New Revolving Credit Note ("Note") may be borrowed, repaid and reborrowed from time to time prior to the Termination Date, provided at the time of any borrowing no default exists under this Note and no Event of Default or Potential Event of Default exists under the terms and conditions of the Credit Agreement and provided, further that the total borrowings outstanding at any one time shall not exceed the $5,000,000.00. Each borrowing and repayment of a Revolving Credit Loan shall be noted in the books and records of CNB. The excess of borrowings over repayments as noted on such books and records shall constitute presumptive evidence of the principal balance due hereon from time to time and at any time. Interest is payable monthly on the first day of each and every month commencing May 1, 2001. If payment on this Note becomes due and payable on a non-business day, the maturity thereof shall be extended to the next business day and, with respect to payments of principal or interest thereon shall be payable during such extension at the then applicable rate. Upon the occurrence of one or more of the Events of Default specified in the Credit Agreement, all amounts remaining unpaid on this Note may become or be declared to be immediately payable as provided in the Credit Agreement, without presentment, demand or notice of dishonor, all of which are expressly waived. Borrower agrees to pay all costs of collection of this Note and reasonable attorneys' fees (including attorneys'' fees allocable to CNB's in-house counsel) in connection therewith, irrespective of whether suit is brought thereon. This is the Revolving Credit Note referred to in the Credit Agreement and is entitled to the benefits thereof. Upon CNB's written notice to Borrower of the occurrence of an Event of Default, the outstanding principal balance (and interest, to the extent permitted by law) shall bear additional interest from the date of such notice at the rate of Five Percent (5.0%) per annum higher than the interest rate as determined and computed above, [provided, however, for the purposes hereof, a LIBOR Loan shall be treated as a Prime Loan upon the termination of the Interest Period,] and continuing thereafter until the Event of Default is cured. 1 This Note shall be governed by the laws of the State of California. If this Note is executed by more than one Borrower, all obligations are joint and several. "Borrower" SRS Labs, Inc., a Delaware corporation By: /s/ Thomas C.K. Yuen ------------------------------------------ Thomas C.K. Yuen, Chief Executive Officer 2 -----END PRIVACY-ENHANCED MESSAGE-----