8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  September 29, 2006

SRS LABS, INC.

(Exact Name of registrant as specified in its charter)

Delaware	0-21123	33-0714264
(State or other jurisdiction of	(Commission File Number)	(IRS Employer
incorporation)		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)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01  Completion of Acquisition or Disposal of Assets

Divestiture of Semiconductor Business – Valence Technology Limited

On September 29, 2006, SRS Labs, Inc. (“SRS”) completed the sale of its semiconductor business, Valence Technology Limited (“Valence”), to Noblehigh Enterprises Inc. (“Noblehigh”).  The transaction was completed pursuant to a Sale and Purchase Agreement dated July 14, 2006 (“Purchase Agreement”).  Noblehigh is owned by Willas Array Electronics (Holding) Limited (“Willas-Array”) as well as certain members of management of Valence, including Lionel Cheng , President of Valence, Hong Wa Poon, Sze Chuen Pele Lai, Kim Chiu Chang, Kwok Kwan Tong and Kai Ming Wong (collectively such individuals are referred to herein as the “Management Buyers”).

The sale to Noblehigh was effected through two simultaneous transactions: (1) the repurchase by Valence of approximately 74% of the outstanding shares of Valence from SRS for an aggregate price of $11.4 million and (2) the purchase by Noblehigh of the remaining outstanding shares of Valence from SRS for $4.3 million.  Valence repurchased shares from SRS using its existing cash, cash equivalents and other current assets, all of which were already reflected on SRS’s balance sheet.

In connection with the sale of Valence to Noblehigh, management personnel of Valence (other than Reivlin Cham) executed Waiver of Change of Control agreements to confirm that they are not entitled to any payments or other benefits as a result of the sale of Valence.  As a result of the sale of Valence, Reivlin Cham, Vice President Finance of Valence, will be paid approximately $156,000 as a result of a Change of Control Agreement.  The change of control payment to Mr. Cham will be paid by SRS.  Also, in connection with the sale of Valence, SRS has repurchased from Management Buyers 357,625 shares of SRS common stock which such individuals acquired through the exercise of vested employee stock options.  The repurchase price paid for such shares was $5.91 per share or $2,114,586 in the aggregate.  The repurchase price was equal to the average closing price of SRS common stock for the seven trading days ending three days prior to the closing date of the sale of Valence.

Item 9.01 Financial Statements and Exhibits

(b)Pro Forma Financial Information

The following pro forma financial information and the notes thereto is attached hereto as Exhibit 99.1 and is incorporated herein by reference:

(i)Unaudited Pro Forma Condensed Consolidated Balance Sheet of SRS Labs, Inc. as of June 30, 2006

(ii)Unaudited Pro Forma Condensed Consolidated Statement of Operations of SRS Labs, Inc. for the fiscal year ended December 31, 2005

(iii)Unaudited Pro Forma Condensed Consolidated Statement of Operations of SRS Labs, Inc. for the six months ended June 30, 2006

(d)Exhibits

Exhibit No.	Description
2.1	Sale and Purchase Agreement Relating to Ordinary Shares in the Issued Share Capital of Valence Tech Ltd dated July 14, 2006 between SRS Labs, Inc. and Noblehigh Enterprises Inc. and Willas-Array Electronics (Holdings) Ltd., previously filed as Exhibit 2.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 17, 2006, which is incorporated herein by reference.
2.2	Deed of Indemnity dated July 14, 2006 between SRS Labs, Inc. and Noblehigh Enterprises Inc., previously filed as Exhibit 2.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 17, 2006, which is incorporated herein by reference.
99.1	Unaudited Pro Forma Condensed Consolidated Financial Statements of SRS Labs, Inc.

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
Date: October 5, 2006	By:	/S/ ULRICH GOTTSCHLING
		Ulrich Gottschling
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
2.1	Sale and Purchase Agreement Relating to Ordinary Shares in the Issued Share Capital of Valence Tech Ltd dated July 14, 2006 between SRS Labs, Inc. and Noblehigh Enterprises Inc. and Willas-Array Electronics (Holdings) Ltd., previously filed as Exhibit 2.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 17, 2006, which is incorporated herein by reference.
2.2	Deed of Indemnity dated July 14, 2006 between SRS Labs, Inc. and Noblehigh Enterprises Inc., previously filed as Exhibit 2.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 17, 2006, which is incorporated herein by reference.
99.1	Unaudited Pro Forma Condensed Consolidated Financial Statements of SRS Labs, Inc.

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EX-99.1

EXHIBIT 99.1

Unaudited Pro Forma Condensed Consolidated Financial Statements of SRS Labs, Inc.

The following unaudited pro forma balance sheet as of June 30, 2006 presents the financial position of SRS Labs, Inc. (the “Company”) assuming the sale on September 29, 2006 of Valence Technology Limited (the “Transaction”) had been completed on June 30,2006.

The following unaudited pro forma condensed statements of operations for the six months ended June 30, 2006 and for the fiscal year ended December 31, 2005 present the Company’s results of operations assuming that the Transaction had been completed on January 1, 2005, the first day of the fiscal year ended December 31, 2005. In the opinion of management, these statements include all material adjustments necessary to reflect, on a pro forma basis, the impact of the Transaction on the historical financial information of the Company. The adjustments set forth in the “Pro Forma Adjustments” column are described in the Notes to Unaudited Pro Forma Financial Statements.

The transaction provided $4.3 million in cash from Noblehigh and $11.4 million in cash from Valence.  The cash provided by Valence was already included in SRS’s balance sheet.  The Company expects to recognize a gain on the sale in the Company’s third quarter 2006 financial statements. Proceeds from the sale will be invested in cash equivalents.

The unaudited pro forma financial statements for the periods presented do not purport to represent what the Company’s results of operations or financial position actually would have been had the Transaction occurred on the dates noted above, or to project the Company’s results of operations for any future periods. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. Actual amounts could differ materially from these estimates. The pro forma results should be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Report on Form 10-Q for the six months ended June 30, 2006.

SRS LABS, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

	As Reported June 30, 2006			Pro-forma Adjustments			Footnote	Pro-forma June 30, 2006
ASSETS
Current Assets
Cash and cash equivalents	$	12,071,951		$	2,470,783		A, B	$	14,542,734
Accounts receivable, net	1,453,597			711,841			A	2,165,438
Inventories, net	59,518			—				59,518
Prepaid expenses and other current assets	452,158			(146,151		)	A	306,007
Investments available for sale	11,968,615			—				11,968,615
Assets held for sale	2,264,847			(2,264,847		)	A	—
Total Current Assets	28,270,686			771,626				29,042,312
Investments available for sale	5,099,589			—				5,099,589
Furniture, fixtures and equipment, net	486,460			—				486,460
Intangible assets, net	2,108,121			—				2,108,121
Deferred income taxes	386,412			—				386,412
Long term assets held for sale	2,113,613			(2,113,613		)	A	—
Total Assets	$	38,464,881		$	(1,341,987	)		$	37,122,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	898,905		$	—			$	898,905
Accrued liabilities	852,956			—				852,956
Deferred revenue	110,254			—				110,254
Liabilities related to assets held for sale	1,700,706			(1,700,706		)	A	—
Total Current Liabilities	3,562,821			(1,700,706		)		1,862,115
Commitments and contingencies
Stockholders’ Equity
Preferred stock	—			—				—
Common stock	15,586			—			B	15,586
Additional paid-in capital	66,581,360			(963,051		)	B	65,618,309
Accumulated other comprehensive loss	(506,046		)	—				(506,046		)
Accumulated deficit	(28,185,395		)	1,321,770			A	(26,863,625		)
Treasury stock at cost	(3,003,445		)	—			B	(3,003,445		)
Total Stockholders’ Equity	34,902,060			358,719				35,260,779
Total Liabilities and Stockholders’ Equity	$	38,464,881		$	(1,341,987	)		$	37,122,894

SRS LABS, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	As Reported Year Ended December 31, 2005			Pro-forma Adjustments			Footnote	Pro forma Year Ended December 31, 2005
Revenue:
Licensing	$	14,795,810		$	—			$	14,795,810
Semiconductor	8,432,449			(8,432,449		)	C	—
Total Revenues	23,228,259			(8,432,449		)		14,795,810
Cost of Sales:
Licensing	446,849			—				446,849
Write-off of capitalized production costs	2,757,172			—				2,757,172
Semiconductor	3,411,649			(3,411,649		)	C	—
Total Cost of Sales	6,615,670			(3,411,649		)		3,204,021
Gross Margin	16,612,589			(5,020,800		)		11,591,789
Operating expenses:
Sales and marketing	6,890,666			(1,698,577		)	C	5,192,089
Research and development	4,700,016			(2,475,779		)	C	2,224,237
General and administrative	6,401,021			(1,088,135		)	C	5,312,886
Total operating expenses	17,991,703			(5,262,491		)		12,729,212
Loss from operations	(1,379,114		)	241,691				(1,137,423		)
Write-off of investment	(185,304		)	—				(185,304		)
Equity in income of investee	91,096			—				91,096
Other income, net	669,830			1,579			C	671,409
Loss from operations before income tax expense	(803,492		)	243,270				(560,222		)
Income tax expense	620,893			175,025			C	795,918
Net Loss	$	(1,424,385	)	$	68,245			$	(1,356,140	)
Net income per common share:
Basic	$	(0.10	)					$	(0.10	)
Diluted	$	(0.10	)					$	(0.10	)
Weighted average shares used in the calculation of net income per common share:
Basic	14,117,795							14,117,795
Diluted	14,117,795							14,117,795

SRS LABS, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

	As Reported 6 Months Ended June 30, 2006		Pro-forma Adjustments			Footnote	Pro-forma 6 Months Ended June 30, 2006
Revenues	$	8,595,507	$	—			$	8,595,507
Cost of Sales	83,105		—				83,105
Gross Margin	8,512,402		—				8,512,402
Operating expenses:
Sales and marketing	3,750,785		—				3,750,785
Research and development	1,286,028		—				1,286,028
General and administrative	2,994,997		—				2,994,997
Total operating expenses	8,031,810		—				8,031,810
Income from continuing operations	480,592		—				480,592
Other income, net	403,718		—				403,718
Income from continuing operations before income tax expense	884,310		—				884,310
Income tax expense	327,168		—				327,168
Income from continuing operations	557,142		—				557,142
Discontinued operations :
Income from discontinued operations before income tax expense	194,252		(98,488		)	C	95,764
Gain on Disposal	371,295		—				371,295
Income tax expense	30,696		(30,696		)	C	—
Income from discontinued operations	534,851		(67,792		)		467,059
Net income	$	1,091,993	$	(67,792	)		$	1,024,201
Income from continuing operations per common share:
Basic	$	0.04					$	0.04
Diluted	$	0.03					$	0.03
Income from discontinued operations per common share:
Basic	$	0.04					$	0.03
Diluted	$	0.03					$	0.03
Net income per common share:
Basic	$	0.08					$	0.07
Diluted	$	0.07					$	0.06
Weighted average shares used in the calculation of net income per common share:
Basic	14,523,459						14,523,459
Diluted	16,206,277						16,206,277

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements of SRS Labs, Inc.

A.The asset allocation of the sale of Valence Technology Limited

Purchase price paid by Valence - Cash	$	11,447,000
Purchase price paid by Noblehigh - Cash	4,300,000
	15,747,000
Less Net Assets Sold:
Cash included in SRS’s balance sheet	(11,597,604		)
Short term assets	(2,264,847		)
Long term assets:
Goodwill	(533,031		)
Intangibles	(437,143		)
Furniture, Fixtures & Equipment	(1,143,439		)
Subtotal	(2,113,613		)
Short term liabilities	1,700,706
Inter-company payable	711,841
Total Net Assets Sold	(13,563,517		)
Less Estimated Transaction Expenses	(861,713		)
Gain on Sale of Valence	$	1,321,770

B.To record Management Buyers exercise of 357,625 vested stock options, the Company’s repurchase of the issued shares to Management Buyers, and the cancellation of the repurchased shares.  The repurchase price paid for such shares was $5.91 per share or $2,114,586 in the aggregate.  The repurchase price was equal to the average closing price of SRS common stock for the seven trading days ending three days prior to the closing date of the sale of Valence.

Cash	$	1,151,535
Common stock	(358		)
APIC	(1,151,177		)
To record the stock option exercises by Management Buyers
Treasury Stock	$	2,114,586
Cash	(2,114,586		)
To repurchase the issued shares to Management Buyers
Common stock	$	358
APIC	2,114,228
Treasury Stock	(2,114,586		)
To cancel the treasury shares

C.To eliminate Valence’s revenue, costs and expenses assuming the sale was consummated on January 1, 2005. Reflects the elimination of historical amortization expense of Valence intangibles with definite lives.

	6 Months Ended June 30, 2006			Year Ended December 31, 2005
Semiconductor Revenue	$	—		$	(8,432,449	)
Semiconductor Cost of Sales	—			(3,411,649		)
Gross Margin	—			(5,020,800		)
Operating expenses:
Sales and marketing	—			(1,698,577		)
Research and development	—			(2,475,779		)
General and administrative	—			(1,088,135		)
Total operating expenses	—			(5,262,491		)
Loss from continuing operations	—			241,691
Other income, net	—			1,579
Loss from continuing operations before income tax expense	—			243,270
Income tax expense	—			175,025
Loss from continuing operations	—			68,245
Discontinued operations :
Income from discontinued operations before income tax expense	(98,488		)	—
Income tax expense	(30,696		)	—
Income from discontinued operations	(67,792		)	—
Net income	$	(67,792	)	$	68,245