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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.
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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