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)
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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)
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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)
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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