Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT
OF 1934
For the
fiscal year ended December 31, 2009
Commission
File Number: 0-21123
SRS
LABS, INC.
(Exact name of registrant as
specified in its charter)
Delaware
(State of incorporation)
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33-0714264
(I.R.S. Employer Identification No.)
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2909 Daimler Street, Santa Ana, California
(Address of principal executive offices)
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92705
(Zip Code)
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(949) 442-1070
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common Stock, Par Value $0.001 Per Share
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The NASDAQ Stock Market LLC
(NASDAQ Global Market)
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
x
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. Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
The aggregate market value of the registrants voting common stock held
by non-affiliates of the registrant was approximately $77,416,760 (computed
using the closing price of $6.65 per share of common stock on June 30,
2009, as reported by The NASDAQ Stock Market).
As of February 2, 2010, 14,563,715 shares of the registrants
common stock, par value $0.001 per share, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement prepared in
connection with the Annual Meeting of Stockholders to be held in 2010 are
incorporated by reference in Part III of this Form 10-K.
Table of
Contents
As used herein,
the Company, SRS Labs, SRS, we, us, or our means SRS Labs, Inc.,
its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen
Representative Office of SRS Labs, Inc., Shanghai Representative Office of
SRS Labs, Inc, and SRS Labs Japan, KK. Circle Surround®, Circle Surround II,
CS Auto, SRS WOW®, SRS WOW XT, SRS WOW HD, SRS TruBass®, SRS FOCUS®, SRS
Headphone, SRS Dialog Clarity, SRS TruSurround® XT, TruSurround® HD, SRS
3D®, SRS Auto, VIP, TruSurround HD4, CircleCinema, iWOW, SRS Headphone 360,
SRS Premium Sound, SRS TruChat, SRS TruGaming, SRS TruMedia, SRS TruTools,
SRS TruVoice, TruVolume, TruThunder, SRS TruSpeak, Cinema Sound, SRS Noise
Reduction, SRS Audio Sandbox®, SRS Headphone Pro® , MyVolume, SRS HD Audio Lab, SRS Sound,
SRS StudioSound, SRS StudioSound HD, SRS TheaterSound, SRS TRuEQ and
TruCircle are our U.S. trademarks. All
other trademarks and trade names appearing are the property of their respective
owners.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K contain
forward-looking statements regarding our assumptions, projections,
expectations, targets, intentions or beliefs about future events, which involve
risks and uncertainties. All statements other than statements of historical
facts included in this Annual Report, including statements relating to
expectation of future financial performance and capital requirements, continued
growth, changes in economic conditions or capital markets, changes in customer
usage patterns and preferences and the impact of recent accounting
pronouncements, are forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as may, will, should, expect, plan,
intend, forecast, anticipate, believe, estimate, predict, potential, continue
or the negative of these terms or other comparable terminology. The
forward-looking statements contained in this Annual Report involve known and
unknown risks, uncertainties and situations that may cause our or our industrys
actual results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. Factors that might cause
actual events or results to differ materially from those indicated by these
forward-looking statements may include the matters listed in this Annual
Report, including, but not limited to, those listed under Risk Factors in
Item 1A.
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of Contents
PART I
Item 1.
Business
Overview
We are the recognized global leader in the practical application of psychoacoustics
,
the science behind how the human ear operates, and
in the post processing segment of the market for audio delivery. Our award-winning audio enhancement
technologies and solutions dramatically restore audio and voice to its natural state, the way it was originally recorded, in both dimension and
clarity, thus providing a superior
consumer experience for a wide variety of consumer electronic (CE)
devices such as televisions, personal computers and mobile phones.
Our mission is to be the dominant worldwide provider of audio and voice
solutions that allow consumers to effortlessly experience rich, natural sound,
the way their ears were meant to hear it.
Our operations are conducted through SRS Labs, Inc., the parent
company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen
Representative Office of SRS Labs, Inc. (a Chinese company), Shanghai
Representative Office of SRS Labs, Inc. (a Chinese company) and SRS Labs
Japan, KK (a Japanese company). Our business is focused on developing and
licensing audio, voice and surround sound technology solutions to many of the
worlds leading original equipment manufacturers (OEMs), software providers
and semiconductor companies. We also
sell and market stand-alone software
and hardware products through the Internet.
Further financial information regarding mix of revenues by market
sectors, geographic areas and customer concentration is included in this Annual
Report on Form 10-K under Item 8. Financial Statements and
Supplemental Data and in Notes 1 and 7 to the Notes to Consolidated
Financial Statements. We also refer you to Item 1A. Risk Factors for a
discussion of certain risks relating to our business.
We were incorporated in the State of California on June 23, 1993
and reincorporated in the State of Delaware on June 28, 1996. Our
executive offices are located at 2909 Daimler Street, Santa Ana, California
92705. Our telephone number is (949) 442-1070.
Our Products and Technologies
Our licensing business is focused on developing and marketing audio
rendering, voice and surround sound technologies and solutions to OEMs,
original design manufacturers (ODMs), semiconductor manufacturers, and
software providers in the home entertainment, personal computers, personal
telecommunications, automotive, portable media devices and broadcast markets.
Our portfolio of licensable technologies includes a wide range of advanced
technologies and proprietary techniques for the processing and delivery of
audio, voice and surround sound, including the following:
·
Surround Sound
Our surround
sound technologies include SRS TruSurround XT, TruSurround HD, TruSurround HD4,
Circle Surround, Circle Surround II, Circle Surround Automotive and Circle
Surround Automotive DX. Circle Surround,
is a complete encoding and decoding format. Circle Surround
encoding
enables the distribution of up to
6.1 channels of audio over existing two-channel carriers such as digital media
files, standard definition and high-definition television, FM radio and CDs.
Circle Surround
decoding
decodes
Circle Surround encoded material for multi-channel playback or creates up to
6.1 channels of audio from older formats of material, including mono, stereo,
4-channel surround or other matrix surround formats.
·
Audio
Rendering
Our audio rendering technologies optimize device
audio output and enable the presentation of 3D and multichannel audio content
over two speakers. These technologies include the ability to render 5.1
multichannel content over two speakers, to create a wider sound stage for more
natural audio, to improve the perceived bass response in small speakers, to
dynamically position audio sources in a virtual 3D space using headphones, and
to reposition the audio image for non-optimally placed speakers. Our audio
rendering technologies include SRS WOW, SRS WOW XT, SRS WOW HD, SRS 3D Sound,
SRS TruBass, SRS FOCUS, SRS Xspace 3D, SRS Headphone, SRS DialogClarity,
and SRS TruVolume. TruVolume is the de facto industry standard for volume
leveling in the TV and set-top-box applications, effectively eliminating the
volume fluctuations between programming and commercials as well as during
channel changing.
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·
Voice
Processing
Our TruVoice (also known as VIP and VIP+) and SRS
Noise Reduction technologies dramatically reduce noise to produce a much
clearer and crisper dialog over wireless communication devices and improve the
intelligibility of the human voice in a variety of listening situations,
including high ambient background environments. Our Max-V voice and audio
enhancement technology drastically increases the capabilities of built-in
speakers in devices in delivering higher volume while limiting adverse effects
such as clipping and distortion.
·
Solutions
Suite
Our solutions suites combine several of our
technologies in order to deliver a comprehensive, easier to deploy package of
post processing audio enhancement products. Solution suites also enable us to
impact the performance of the OEM products by employing multiple technologies
and techniques to enhance and control the overall audio fidelity and
performance of the product. Our solution suites include SRS Premium Sound and
SRS Premium Voice for personal computers, SRS TruMedia, SRS TruVoice, and SRS
TruTools for mobile phones, and StudioSound HD and TheaterSound for home
entertainment products among others.
Our portfolio of technologies and solution suites addresses a broad
spectrum of product applications within the vertical markets that we have
targeted. Our technologies may be implemented in a variety of methods,
including discrete analog components, chip modules, analog semiconductors,
digital signal processors (DSPs) and software. These various implementation
options offer customers flexibility when incorporating our technologies into
products.
Our Customers and Markets
We license our technologies both in the U.S. and internationally. The
following table presents our revenue by geographic area. Licensing-related
revenue is summarized based on the location of the licensees corporate
headquarters. For standalone software and hardware product and online sales,
revenue is allocated to the Americas. The Americas region includes North,
Central and South America. In 2008, the Greater China region was broken down
into the China and Asia Pacific region. The China region includes all licensees
with their corporate headquarters located in mainland China. The Asia Pacific region includes all
licensees with their corporate headquarters located in Taiwan and Hong Kong.
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Years Ended December 31,
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2009
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%
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2008
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%
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2007
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%
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Geographic Area Revenue:
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Korea
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$
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11,551,403
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46
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%
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$
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9,624,459
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52
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%
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$
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7,834,730
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42
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%
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Americas
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6,440,033
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26
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1,744,502
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10
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1,837,096
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9
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Japan
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4,375,139
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17
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5,357,286
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29
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7,346,548
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39
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China
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1,548,496
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6
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838,754
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5
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843,931
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5
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Asia Pacific
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647,220
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3
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430,598
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2
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805,660
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4
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Europe
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402,286
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2
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337,079
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2
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183,975
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1
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Total
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$
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24,964,577
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100
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%
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$
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18,332,678
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100
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%
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$
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18,851,940
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100
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%
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Through our licensing business, we market our portfolio of technologies
and solution suites to the following markets: home entertainment, personal
computers, personal telecommunications, automotive and portable media devices.
Our license agreements typically have multi-year or automatic renewal terms,
and either require: (a) per-unit royalty payments for all products
implementing our technologies and/or solutions; (b) fixed annual or
quarterly royalty payments; or (c) a minimum fixed annual or quarterly
royalty payment, which allows the licensee to ship up to a predetermined number
of units during the specified time period with additional per-unit royalty
payments thereafter. The license agreements also generally specify the use of
our trademarks and logos on the product, within the packaging and in the users
manual, and require our review and approval of the product to guarantee the
quality of the technology implementation and the correct usage of our logos and
trademarks. We believe these terms ensure the quality and consistency of the
technology and elevate the awareness of the SRS brand in the marketplace. We
also sell some of our products and solutions via the Internet. Revenues associated with those sales are
recognized upon shipment and have not historically been material.
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The following chart shows the percentage of our licensing revenue we
received in 2009 and 2008 from each of these markets.
2009
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2008
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Home Entertainment
Home entertainment products currently represent the largest market for
our technologies and have, in recent years, been the largest revenue
contributor. Manufacturers in this market utilize our technologies and
solutions to improve functionality and product performance and/or to
differentiate their products from their competitors. In many instances, manufacturers license
multiple technologies from us for multiple product lines and divisions. Product
categories within this market include televisions (such as LCD and plasma
televisions) and set-top boxes (STBs).
Televisions.
Our audio technologies and solution suites
are widely used by television manufacturers as a solution to audio challenges
that manufacturers encounter in todays flat panel television designs and/or as
a differentiating feature. As television makers continue to migrate to models
with thinner digital displays, they are finding that they have less room for
speakers, which may compromise the overall audio quality of the television. We
provide manufacturers with patented solutions for accurately presenting
surround sound, improving bass response, increasing dialog clarity, improving
volume consistencies among channels and programming, and creating a more
natural sound stage. These solutions improve the audio quality of the
television set without the expense of additional hardware or designing for
larger speakers. Our technologies suited
for televisions are currently licensed by companies such as, Samsung, VIZIO,
LG, Sharp, and Sony.
Set-top Boxes.
Although STBs receive and present surround
sound content, they are typically connected to televisions with two-channel
speakers. Our TruVolume technology serves as our lead technology in the STB
category as it creates a level volume user experience to offset level
fluctuations during channel changes, changes among different input devices and
changes between the program and commercial. Additionally, our SRS surround
sound technology creates a surround sound experience over any existing
two-speaker system, including the internal speakers of a television. This
technology also creates a virtual surround experience from stereo
material. Our technologies suited for
STBs are currently licensed by companies such as EchoStar and Motorola.
Personal Computers
Personal computers (PCs), especially mobile PCs such as laptops,
notebooks and the new genre of Ultra Mobile Devices (also known as net books)
have become very popular as more users utilize their PCs as their main
entertainment device at home or on the go. At home, PCs are often used as media
hubs. PC users can enjoy and manage collections of music and movies, along with
downloaded and recorded television programming. This content is now being
distributed through the home using networked media adapter products. Throughout
these systems, there is a need for optimizing playback on the computer
speakers, presenting a closer assimilation to a typical home theater
experience, including transmitting surround sound around the home and enjoying
content playback on headphones. On the go, users have to rely on the audio
output capabilities of their PCs which are often inadequate given the inherent
challenges in todays tiny PC enclosures. We believe our technology solutions
are well positioned to fill the need to deliver better sound, with deeper bass,
clarity and volume. Our SRS Premium
Sound and SRS Premium Voice suites address many of the usage cases above,
overcoming related challenges and limitations.
Our technologies suited for PCs are currently licensed by companies such
as Dell, Hewlett Packard, LG, and AsusTek.
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of Contents
Personal Telecommunications
We provide the personal telecommunications market (mobile phones) with
both voice and audio rendering technologies and solution suites. Given the
growth of smart and featured phones, more mobile phones are incorporating
advanced audio and multimedia features and functionality at a rapid pace. New
services include digital music downloads, streaming audio and video content,
gaming, and television viewing. Our solutions are focused on the specific needs
in the mobile market which have not previously been addressed. For example, our
technologies deliver upon needs like
voice intelligibility in noisy environments, louder speaker performance,
clarity of dialog in video content, poor bass-response of small speakers,
hampered stereo imaging in narrowly spaced speakers, and 3D positioning
audio for interactive gaming. We believe we can leverage our strong presence in
the home entertainment market and our suite of voice technologies to provide
good opportunities for growth in the personal telecommunications market. Our technologies are licensed by telecommunications
companies such as Motorola, Samsung and NEC.
Automotive
We have invested in research to create solutions specific to the needs
of the automotive market. Within vehicles, audio and video content is played
from multiple sources and then presented on both speakers and headphones.
Stereo content from sources like CDs, MP3 players, mobile television and radio
needs to be presented on multiple speakers in the car, some of which may not be
optimally placed and may not have strong bass response. Surround sound content
from DVDs, radio and downloaded music needs to be rendered on both car speakers
and on rear-seat headphones with a maximum sweet spot. Our automotive solutions
such as SRS CS Auto, SRS CS Auto DX, SRS Focus and SRS TruSurround XT address
these needs and provide manufacturers in this segment with a fully tunable
solution. Our technologies are currently licensed by companies such as
Fujitsu-ten, Panasonic, Clarion and Kenwood and used on automobiles
manufactured by companies such as Toyota, Subaru, Nissan and Honda.
Portable Media
MP3 (audio) and MP4 (audio and video) players and other portable media
players enable consumers to enjoy audio and video content while on the go. The
audio contents are stored in a compressed industry standard MP3 audio standard.
As such, when the content is decoded and played back through miniature
earphones, the audio generally suffers a loss of quality. Our technologies,
such as SRS WOW and SRS WOW HD, are capable of improving the audio quality
during playback. Our TruMedia suite of technologies also enable rendering of
surround sound through earphones or using external speakers when playing back
surround sound encoded contents often used along with contemporary video
contents. Associated with the increasing popularity of MP3 and MP4 players, there
has been a noticeable growth in the market for accessories, such as portable
media adapters, docking stations and miniature speaker systems. The small
footprint of these devices limits speaker size and speaker spacing. Our
solutions enable vendors of these devices to increase the quality of their
audio output without significantly increasing hardware component costs.
Customer Concentration
For fiscal year 2009, 2008, and 2007, Samsung accounted for
approximately 39%, 42%, and 28%, respectively, of our consolidated
revenues. Given the significant amount
of revenues derived from Samsung, the loss of that customer or the
uncollectibility of related receivables could have a material adverse effect on
our consolidated financial condition and consolidated results of operations.
Our Strategy
Our sales strategy is to identify high-growth markets, develop needed
technology solutions and features, and work with software and semiconductor
platform partners to make these technologies widely available and easy to
implement by OEMs and ODMs. We believe that we will continue to
strengthen our market position as the leader in audio and voice technologies by
employing the strategy of providing a stream of patented audio and voice
technologies, penetrating new licensing accounts, expanding relationships with
existing licensees, creating a broad platform of software and semiconductor
partners, and developing strong awareness of the SRS brand.
The mission of our licensing platform efforts is to achieve broad
coverage for our technology solutions within all of our targeted product
markets in order to expand sales and licensing opportunities. By developing
strong relationships with leading software and semiconductor companies, we
believe our audio technologies and solution suites can be delivered to
customers worldwide across high growth and high volume product applications.
We work together with our platform partners (leading semiconductor
manufacturers and middleware or firmware software providers) to provide our
mutual customers with the technology that best fits their needs. We also
together solicit other new customers to consider using the platform. Many
times, a platform will become enabled with our technology due to customer
requests.
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As a technology licensing company, the strength of our brand is an
important asset. Since brand recognition drives licensing sales, we have invested
in strategies designed to increase consumer awareness of SRS Labs with the
ultimate goal of establishing our brand with both product manufacturers and
consumers around the world as a recognized symbol for high-quality audio. The
six primary vehicles that we use to further the proliferation of our brand are:
(a) placement of the SRS logo by OEMs on products and in co-marketing
programs; (b) public relations and new media outreach programs; c) online
branding programs; (d) cable television and movie theatre advertising; (e) participation
in and/or sponsorship of industry events such as tradeshows and (f) use,
and recognition of use, of SRS technology by content and broadcast
professionals.
OEM Marketing Programs.
In the majority of products that use SRS
technologies, our logo is either prominently displayed on the product itself
or, in the case of software products and mobile phones, featured in the
graphical user interface. We believe this logo exposure is a key tool in
reaching consumers worldwide. In addition, we work with our OEM customers as
they prepare for launching new products that feature SRS technologies by
supplying complete SRS corporate and technology tool kits with a wide array of
material, including SRS logos, illustrations, technology explanations and
suggested demonstration material.
Public Relations (PR) and New Media Outreach
Programs.
We believe in the
endorsement power of opinion leaders and expert groups in the CE and IT
industries. As such, we have an active and expanding PR program, both online
and in print, to promote SRS technologies and solutions found in our own
products or products of OEMs that feature SRS technologies and solutions.
Similarly, we have found the viral nature of the new media very effective in
promoting our brand and innovations and therefore, have recently focused on
multiple programs to systematically reach and work with bloggers and relevant
social networks.
Online Branding Programs.
Online exposure has also been an important
part of our branding strategy. One benefit of our relationship with Microsoft
is that the SRS logo displayed in the audio control panel of Microsofts
Windows Media Player links to an SRS technology page. As a result, we have
received significant traffic and opportunities to create brand awareness with
consumers and educate consumers on the benefits of our technology. Our online
efforts also include the direct sale of the iWOW family of products including
plug-in software for both the PC and Mac platforms, as well as a unique adapter
for the Apple iPod. Revenue from the sale of these products has not been
significant historically, but we believe these products gives us a valuable
demonstration platform to showcase our audio technologies.
Cable Television and Movie Theater Advertising.
For technologies that appeal directly to consumers such as our
TruVolume volume leveling solution, we have promoted the applicable solution
brand and the SRS corporate brand directly to consumers with professionally
directed and produced 30-second commercials. Similarly, we have taken the
message directly to consumers who frequent the movie theaters to promote our
brand and our TruVolume technology in the theater before the main show begins
and in public areas inside the theaters, including on the TV screens above the
concession stands and lobbies.
Participation in and/or Sponsorship of Industry
Events.
We participate in several
trade and industry events each year to promote our brand and our technology
solutions. We also sponsor events related to our strategic segments by
providing both financial resources to the event organizers and offering our
insight into the forces that drive the CE industry through speaking engagements
and participation in discussion panels. Some of the popular events SRS
participates or sponsors include the Consumer Electronics Show (CES), the
Mobile World Congress, DisplaySearch, CTIA, and SINOCES in China.
Use of SRS Technology by Content and Broadcast
Professionals.
We develop,
license and sell professional hardware and software products to enable content
companies, broadcasters and music publishers to encode their material using our
Circle Surround technology. When Circle Surround is professionally used, the
SRS and Circle Surround logos are often displayed within the content itself or,
on the packaging material and, in the case of radio, an announcement is made
that the broadcast is being delivered in SRS Circle Surround. We have
concentrated on three key sectors in the professional audio market: television,
radio and music; and we have developed a line of hardware and software products
to address these sectors. These products are sold directly to professional
customers and are also available from selected dealers and distributors
servicing the professional audio and broadcast markets. We did not generate
significant revenue from the sale of professional hardware equipment in 2009;
however, we believe that such sales facilitate the licensing of our technology
to OEMs that benefit from enhanced audio transmissions.
Sales and Marketing
We have two primary types of revenue agreements with our
licenseesdirect and non-direct. Under a non-direct agreement, royalty revenue
may be collected by our platform partner, who include and enable our technology
within their solution, at the time the chip is sold to an OEM or ODM. The
platform partner remits the royalty to us on behalf of the licensee. Most
often, however, we license our technologies to OEMs and ODMs under
direct agreements and collect revenue directly from them. These licensing arrangements
with OEMs or ODMs authorize them to design, build and sell products
containing our technology. Under this licensing approach, the licensees are
free to choose a semiconductor solution from the platform partner that best
suits their technical and cost requirements. We receive royalties directly from
the licensed OEM or ODM for the use of our technologies in licensed products
manufactured and shipped by the OEM or ODM. Many major OEMs have licenses
or purchase products manufactured by a licensed ODM for the use of one or more
of our technologies and for the use and display of our trademarks.
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Our process for selecting particular platform partners for distributing
our technologies is based on several criteria including: (a) segment
leadershipwe target platform partners that hold preeminent positions in market
segments characterized by high growth, volume and/or margins; (b) volumewe
seek platforms that will maximize exposure of our technologies to a large
number of potential OEMs; (c) synergywe seek platforms which serve to
position our technologies with compatible and additive technologies for
integrated delivery; and (d) convergence potentialwe target arrangements
that will enable us to establish a presence on platforms that intersect several
functional features.
To implement our licensing sales strategy within our identified
markets, we have established a direct sales force and an international network
of independent sales agents. In North America, we employ a direct sales force
to market our portfolio of audio and voice technologies to the OEM community.
Internationally, we maintain offices in Japan, Taiwan, China and Korea to
support our multi-national OEM customers. We actively promote the use of our
trademarks and logos and require customers to prominently display the
appropriate SRS technology or solution logos on products and packaging and in
advertising. We plan to continue to work closely with our licensees to enhance
their success in selling finished products and semiconductor products that
incorporate our technologies through a variety of licensee support programs.
These programs include engineering support, sales training, tradeshow support,
publicity and media relations programs, customized marketing materials,
advertising, and support at speaking engagements and industry conferences, as
well as, conducting in-person technology demonstrations or presentations for
the press and other companies to promote our technologies and products.
We also regularly participate in tradeshows and conferences to increase
awareness of who we are and what we do and to market our technologies and
products. We work closely with our licensees and platform partners to actively
explore additional opportunities to place our technologies in new products
and/or markets.
Research and Development
We license our products in markets that are characterized by rapidly
changing technology and continuous improvements in products and services. Our
research and development expenditures in 2009, 2008 and 2007 were $5,721,195,
$3,942,635, and $3,107,482, respectively. These expenses generally consist of
salaries and related costs of employees and consultants engaged in ongoing
research, design and development activities and costs for engineering materials
and supplies.
As of December 31, 2009, we had 37 employees in our research and
development group, representing 43% of our total employees. Our software,
hardware and application engineers generally focus on developing intellectual
property, technology solutions and consumer products. Engineers are based in our offices throughout
the world and support our licensing business.
Competition
Competition in the audio, voice and surround sound technology licensing
business includes other licensing companies who offer competing technologies as
well as the internal engineering departments of our current or prospective
licensees and platform providers, who may develop audio technologies for use in
their own products.
In the field of audio improvement, we compete directly with other audio
providers, including Dolby and DTS. Additionally, some of our OEM customers
maintain or are developing their own audio improvement technologies. Because
our audio technologies work with any existing recorded material, whether mono,
stereo or surround sound, most of our audio technologies can be used either as
an alternative or as a complement to most competing audio technologies.
Many of our competitors have, or may have, substantially greater
resources than us to devote to advancing their existing technologies and
developing and marketing new products and technologies. We believe that we
compete based primarily on the quality, efficiency, and performance of our
proprietary technologies, brand name awareness, the ease, customization
capabilities, and cost of implementing our technologies, the ability to meet
OEMs needs to differentiate their products, and the strength of our licensee
relationships. We believe we compete favorably based on these factors; however,
we cannot guarantee that we will continue to be competitive with the existing
or future products or technologies of our competitors.
Intellectual Property Rights and Proprietary
Information
We operate in industries where innovation, investment in new ideas and
protection of intellectual property rights are important for success. We rely
on a variety of intellectual property protections for our products and
services, including patent, copyright, trademark and trade secret laws and
contractual obligations. We pursue a policy of enforcing such rights. We cannot
guarantee, however, that our intellectual property rights will adequately
protect our competitive position or that competitors will not be able to
produce non-infringing competitive products or services. We cannot guarantee
that third parties will not assert infringement claims against us, or that if
required to obtain any third party licenses as a result of an infringement
dispute, we will be able to obtain such licenses.
9
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In order to protect the underlying technology concepts, we have filed
and/or obtained patents for all of our marketed technologies including
technologies marketed under the following trademarks: TruSurround XT, Circle
Surround, SRS WOW, TruVoice, TruMedia and TruVolume. In addition, we hold numerous
issued patents and patents pending for speaker and other acoustic reproduction
technologies. We pursue a general practice of filing patent applications for
our technologies in the United States and various foreign countries where our
licensees manufacture, distribute or sell licensed products. We continue to
update and add new applications to our patent portfolio to address changing
worldwide market conditions and our new technological innovations. The range of
expiration dates for our patents extend between the years 2010 to 2019. We have
multiple patents covering unique aspects and improvements for many of our
technologies. Accordingly, the expiration of any single patent should not
significantly affect our intellectual property position or the ability to
generate licensing revenue.
We also routinely file U.S. federal and foreign trademark
applications for the various word names and logos used to market our technology
solutions to licensees and the general public. The duration of the U.S. and
foreign registered trademarks can typically be maintained indefinitely,
provided that proper maintenance fees are paid and the trademarks are
continually used or licensed by us.
Seasonality
Due to the dependence on the consumer electronics market, we generally
experience seasonal fluctuation in sales and earnings. In particular, we
believe that our business experiences seasonality relating to the holiday
season, resulting in higher revenues in the fourth and first quarters. As we
have moved toward diversifying our key market segments in the consumer
electronics industry, we expect our business to be less seasonal.
Employees
As of December 31, 2009, we employed 86 persons, including 11 in
finance and administration, 37 in research and development, engineering and
product development, and 38 in sales and marketing. None of our employees
are covered by a collective bargaining agreement or are presently represented
by a labor union. We have not experienced a work stoppage and believe we
have good relations with our employees.
In addition to our direct hire employees, as of December 31, 2009,
we had consulting agreements that provide to us 4 full time consultants in
research and development and 14 consultants in sales and marketing, all of whom
are located outside of the United States.
Available Information
Our Internet address is
www.srslabs.com
.
Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports, are
available free of charge on our website as soon as reasonably practicable after
we electronically file such material with or furnish it to the Securities and
Exchange Commission (SEC). Our SEC reports can be accessed through the
investor relations section of our website. Additionally, the Companys Code of
Ethics and Committee Charters are available on our website. The information found on our website is not
incorporated in and is not part of this or any other report we file with or
furnish to the SEC.
Item 1A.
Risk Factors
You should carefully consider the risk factors described below, as well
as the other information included in this Annual Report on Form 10-K,
prior to making a decision to invest in our securities. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known or that we currently
believe to be less significant may also adversely affect us.
We are exposed to risks in our
licensing business related to product and customer concentration.
Currently, we generate a majority of our revenue in the home
entertainment market, principally through the inclusion of SRS technology
inside flat panel LCD and plasma televisions. We expect that the consumer home
entertainment market will continue to account for a significant portion of our
licensing revenues for the foreseeable future. Consumer spending on home
entertainment products is subject to significant fluctuations, and there is
significant price competition for such products. Retail prices for certain
consumer electronics products that include our audio technology have decreased
significantly, and we expect that this trend will
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continue
for the foreseeable future. In addition, from time to time, certain of our OEM
and semiconductor manufacturer customers may account for a significant portion
of our revenues. For example, for the year ended December 31, 2009,
Samsung accounted for approximately 39% of our consolidated revenues. These
manufacturers could develop their own technologies or decide to exclude our
audio rendering technology from their products altogether in an effort to
reduce cost, our revenues and profitability could be adversely impacted. For example, during 2007, we were informed by
Sony that they were no longer using our technology in the majority of their
televisions. The loss of any key
customer in the future could have a material adverse affect on our financial
condition and results of operations.
General economic conditions may reduce our revenues and harm our
business.
Our
business is exposed to adverse changes in general economic conditions, because
products that incorporate our technologies are entertainment-oriented and
generally discretionary goods. The current slowdown or decline in U.S. and
foreign economic growth has adversely affected consumer confidence, disposable
income and spending. As a result, sales by our licensees of consumer
electronics and other products incorporating our technologies may not grow as
rapidly as in prior periods or may even decrease, which could adversely affect
our licensing revenue.
Our business is highly dependent on
the consumer electronics market, which is characterized by short product life
cycles, fluctuations in demand and seasonality, declining retail prices and is
subject to risks related to product transitions.
The consumer electronics market is characterized by intense
competition, rapidly evolving technology, and ever-changing consumer
preferences. These factors result in the frequent introduction of new products,
short product life cycles and significant price competition. As a result, we
may need to develop new products or technologies to integrate with the new
products and technologies developed by our customers. If we are unable to
develop the necessary technologies to meet the changing needs of our customers
or provide such technologies at competitive prices, our customers may reduce
their use of our technologies and our revenues may decline. In addition, the
dynamic nature of this market limits our ability and the ability of our
customers to accurately forecast quarterly and annual sales. If we, or our
customers, are unable to adequately manage product transitions, our business
and results of operations could be negatively affected.
We depend on the sale by our licensees of products that incorporate our
technologies, and a reduction in those sales would adversely affect our
licensing revenue.
We
derive most of our revenue from the licensing of our technologies to consumer
electronics product manufacturers. We do not manufacture consumer electronics
products ourselves and our licensing revenue is dependent on sales by our
licensees of products that incorporate our technologies. We cannot control
these manufacturers product development or commercialization efforts or
predict their success. In addition, our license agreements, which typically
require manufacturers of consumer electronics products and media software
vendors to pay us a specified royalty for every electronics product shipped
that incorporates our technologies, do not require these manufacturers to
include our technologies in any specific number or percentage of units, and
only a few of these agreements guarantee us a minimum aggregate licensing fee.
Accordingly, if our licensees sell fewer products incorporating our
technologies, decline to actively market products incorporating our
technologies or otherwise face significant economic difficulties, our revenue
will decline. Changes in consumer tastes or trends, changes in industry
standards or adverse changes in business and economic conditions may also adversely
affect our licensing revenue.
Pricing pressures on the consumer
electronics product manufacturers, who incorporate our technologies into their
products, could limit the licensing fees we charge for our technologies, which
could reduce our revenues.
The markets for the consumer electronics products in which our
technologies are incorporated are intensely competitive and price sensitive.
Retail prices for consumer electronics products that include our technologies
have decreased significantly, and we expect prices to continue to decrease for
the foreseeable future. In response, manufacturers have sought to reduce their
product costs, which can result in downward pressure on the licensing fees we
charge our customers who incorporate our technologies into their products.
Alternatively, our customers may seek to eliminate our technologies in their
products in favor of internally developed technologies. A decline in the
licensing fees we charge could materially and adversely affect our operating
results.
We face intense competition from
companies with greater brand recognition and resources.
The digital audio, consumer electronics and entertainment markets are
intensely competitive, subject to rapid change, and significantly affected by
new product introductions and other market activities of industry participants
Many of our current and potential competitors enjoy notable competitive
advantages, including:
·
greater name recognition;
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·
a longer operating history;
·
more developed distribution
channels and deeper relationships with consumer electronics products designers
and manufacturers;
·
a more extensive customer
base;
·
broader product and service
offerings;
·
greater resources for
competitive activities, such as research and development, strategic acquisitions,
alliances, joint ventures, sales and marketing, and lobbying industry and
government standards; and
·
more technicians and
engineers.
As a result, these current and potential competitors may be able to
respond more quickly and effectively than we can to new or changing
opportunities, technologies, standards, or customer requirements.
Inaccurate licensee royalty reporting and
unauthorized use of our intellectual property could materially adversely affect
our operating results.
Our
licensing revenue is generated primarily from consumer electronics product
manufacturers who license our technologies and incorporate them in their
products. Under a significant percentage of our existing arrangements, these
licensees typically pay us a specified royalty for every product they ship that
incorporates our technologies. We rely on our licensees to accurately report
the number of units shipped that incorporate our technologies. We calculate our
license fees, prepare our financial reports, projections and budgets, and
direct our sales and product development efforts based on these reports we
receive from our licensees. However, it can be difficult for us to
independently determine whether or not our licensees are reporting shipments
accurately. This is especially true with respect to software incorporating our
technologies because software can be copied relatively easily and we often do
not have easy ways to determine how many copies have been made. Most of our
license agreements permit us to audit our licensees records, but audits are
generally expensive and time consuming and initiating audits could harm our
customer relationships. We expect that we will continue to be subject to
understatement and non-reporting of royalty bearing revenues by licensees,
which could adversely affect our operating results. Conversely, to the extent
that our licensees overstate the number of products incorporating our
technologies, negative corrections could result in reductions of royalty
revenue in subsequent periods. Some of our licensees may begin to more closely
scrutinize their past licensing statements which may result in an increased
receipt of negative corrective statements.
We
also may experience problems with non-licensee consumer electronics product
manufacturers and media software vendors, particularly in emerging economies,
incorporating our technologies or incorporating our technologies and trademarks
into their products without our authorization and without paying us any
licensing fees. This unauthorized use of our intellectual property could
adversely affect our operating results.
Our business and future prospects
depend upon the strength of our brand. Awareness of our brand depends to a
significant extent upon decisions by our customers to display our trademarks on
their products, and if our customers do not display our trademarks on their
products, our ability to increase our brand awareness may be harmed.
Because
we engage in relatively little direct brand advertising, the promotion of our
brand depends upon consumer electronics industry participants displaying our
trademarks on their products that incorporate our technologies. Although we do generally require our
customers to place our brand on their products, some are not required to do so.
Maintaining the SRS brand and our position as an industry standard is critical
to maintaining and expanding our licensing revenues and entering into new or
broadening existing licensing relationships.
If our customers choose for any reason not to display our trademarks on their
products, our ability to maintain or increase our brand awareness may be
harmed, which would have an adverse effect on our business and prospects. In
addition, if we fail to maintain high quality standards for our products, or
the products that incorporate our technologies through the quality control
evaluation process that we require of our licensees, the strength of our brand
could be adversely affected.
Licensee products that incorporate
our technologies, from time to time, experience quality problems that could
damage our brand, decrease revenues and increase operating expenses.
Licensee
products that incorporate our technologies often are complex and sometimes
contain undetected software or hardware errors, particularly when first
introduced or when new versions are released. In addition, those products are
often combined with, or incorporated into, products from other companies,
sometimes making it difficult to identify the source of a problem. Any negative
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publicity or negative
impact relating to these product problems (even if unrelated to our
technologies) could adversely affect the perception of our brand. In addition,
these errors could result in loss of, or delay in, market acceptance of those
products or our technologies, or cause delays in delivering them and meeting
customer demands, any of which could reduce our revenue and raise significant customer
relations issues. Although we generally attempt to contractually limit our
liability for our licensees defective products, we may elect to help
reengineer those products, which could increase our expenses and adversely
affect our operating results.
We are subject to risks associated
with substantial international operations.
We conduct sales and customer support operations in a number of
countries throughout the world that require refinement to adapt to the changing
market conditions on a regional basis. In addition, many of our significant
customers are headquartered in the Asia region, particularly Korea and Japan.
Approximately 72%, 88% and 90% of our revenues were derived from customers with
headquarters located in the Asia markets during the years ended December 31,
2009, 2008 and 2007, respectively. We expect to continue to derive a
significant portion of our revenues from sales to customers in these markets
for the foreseeable future. Also, a substantial number of products
incorporating our technologies are manufactured, assembled and tested by third
parties in Asia. As a result, we are subject to a number of risks of conducting
business outside of the United States, any of which could have a material
adverse impact on our business and results of operations, including:
·
global economic downturn;
·
political,
social and economic instability and the risk of war, terrorist activities or
other international incidents in Asia and elsewhere abroad;
·
currency
fluctuations;
·
difficulties and costs of
staffing and managing foreign operations;
·
unexpected changes in, or
impositions of, government requirements;
·
adverse changes in tariffs
and other protectionist laws and business practices that favor local
competitors;
·
potentially longer payment
cycles and greater difficulty in collecting receivables from foreign entities;
·
the burdens of complying
with a variety of non-U.S. laws and reduced protection of our intellectual
property in some countries;
·
potentially adverse tax
consequences and the complexities of foreign value added tax systems; and
·
other factors beyond our
control, including natural disasters and major health concerns.
Our technologies have a long and
unpredictable sales cycle, which can result in uncertainty and delays in
generating additional revenues.
Historically, because of the complexity of our technologies, it can
take a significant amount of time and effort to explain the benefits of our
technologies to potential new customers and to negotiate a sale. For example,
it typically takes six to nine months after our first contact with a
prospective customer before we start licensing our technology to that customer
and another six to nine months to begin generating revenues. In addition,
purchases of our products are usually made in connection with new design starts
by our customers, the timing of which is outside of our control. Accordingly,
we may be unable to predict accurately the timing of any significant future
sales of our products. We may also spend substantial time and management
attention on potential license agreements that are not consummated, or in which
the consumer electronic product ultimately does not sell in large quantities,
thereby foregoing other higher revenue opportunities.
If our patents and other
intellectual property rights do not adequately protect our products, we may
lose market share to our competitors and be unable to operate our business
profitably.
Our ability to compete may be affected by our ability to protect our
proprietary information. We have filed numerous U.S. and foreign patent
applications and to date have a number of issued U.S. and foreign patents
covering various aspects of our technologies. We cannot guarantee that the
steps taken by us to protect our intellectual property will be adequate to
prevent
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misappropriation
of our technology or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
In addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the U.S. It
is possible that third parties may assert claims or initiate litigation against
us or our customers with respect to existing or future products. In addition,
we may initiate claims or litigation against third parties for infringement of
our proprietary rights or to determine the scope and validity of our
proprietary rights. Litigation in the technology industry is common. Claims and litigation brought against us or
initiated by us could be costly and time consuming and could divert our management
from our business. The outcome of any litigation is uncertain and could require
us to pay significant damages or could prevent us from licensing some or all of
our technologies, which could significantly harm our business and results of
operations.
If we lose the services of our key
personnel, or if we are unable to attract and retain other key personnel, we
may not be able to manage our operations or meet our growth objectives.
Our future success depends to a large extent upon the continued service
of key personnel, including engineering, sales and administrative staff. We
anticipate that any future growth will require us to recruit and hire a number
of new personnel in engineering, operations, finance, sales and marketing.
Competition for such personnel can be intense, and it is possible that we may
not be able to recruit and retain necessary personnel to operate our business
and support future growth.
The market price of our common stock
is volatile and your investment in our common stock could suffer a decline in
value.
The trading price of our common stock has been, and will likely
continue to be, subject to wide fluctuations in response to quarterly
variations in our operating results, announcements of new products or
technological innovations by us or our competitors, strategic alliances between
us 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 we do business, or relating to us
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. Even
though our stock is quoted on The NASDAQ Global Market, our stock has had and
may continue to have low trading volume and high volatility. The historically
low trading volume of our stock makes it more likely that a severe fluctuation
in volume, either up or down, will significantly impact the stock price.
Because of the relatively low trading volume of our stock, our stockholders may
have difficulty selling our common stock.
In addition, the stock market in general, and The
NASDAQ Global Market and the market for technology and small market cap
companies in particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of those companies. Further, the market prices of securities of technology
companies have been particularly volatile. These broad market and industry
factors may materially harm the market price of our common stock, regardless of
our operating performance.
Our certificate of incorporation and
bylaws as well as Delaware law contain provisions that could discourage
transactions resulting in a change in control, which may negatively affect the
market price of our common stock.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that might enable our management to discourage, delay or prevent a
change in control. In addition, these provisions could limit the price that
investors would be willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
Our worldwide headquarters are located in Santa Ana, California, in a
23,400 square foot facility consisting of office and warehouse space. The lease
for the facility expires in May 2013.
We lease this facility from Daimler Commerce Partners, L.P., the
general partner of which is Conifer Investments, Inc. (Conifer). The
sole shareholders of Conifer are Thomas C.K. Yuen, our Chairman, Chief
Executive Officer and President, and his spouse, Misako Yuen, as co-trustees of
the Thomas Yuen Family Trust. Mr. and Mrs. Yuen also serve as the
executive officers of Conifer. Mr. and Mrs. Yuen, as co-trustees of
the trust, beneficially own a significant amount of our outstanding shares of
common stock. We paid the Daimler Commerce Partners rent of $238,680, $235,170 and
$230,256, in 2009, 2008 and 2007, respectively. We believe the terms and
conditions of the lease are competitive based on a review of similar properties
in the area with similar terms and conditions.
We entered into two new leases in 2009 for our international operations
in Shanghai, China, and Tokyo, Japan.
The leases for our offices in Shanghai and Tokyo expire in October 2010
and August 2011, respectively.
Additionally, we lease space in Shenzhen, China and Taipei, Taiwan. In total, we paid rent of $426,651, $294,702
and $230,256 during 2009, 2008 and 2007, respectively, for all of our
facilities. We believe that our current
facilities are adequate to support our current requirements.
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Item 3. Legal Proceedings
On June 8, 2007, we
sent a letter to Sony Corporation (Sony) relating to the possible
infringement of several SRS patents by Sonys S-Force technology. Sony
responded to the letter by filing a Complaint for Declaratory Relief in the
U.S. District Court in the Southern District of New York on July 6, 2007.
In November 2007, Sony and SRS entered into a standstill agreement for the
purpose of conducting discussions towards an amicable resolution of the
dispute, and the Complaint for Declaratory Relief was
dismissed. While the standstill agreement has expired, the parties
continue to evaluate the related technologies, patents and claims. Our
discussions with Sony are ongoing; however, we cannot assure you that we will prevail
in this matter and are unable to determine at this time the impact that this
matter may have, if any, on our consolidated financial position, results of
operations or cash flows.
From
time to time, we may be involved in other litigation matters and disputes
arising in the normal course of business. Any such matters and disputes could
be costly and time consuming, subject us to damages or equitable remedies, and
divert our management and key personnel from our business operations.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
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PART II
Item 5. Market for Registrants Co
mmon Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Market for Common Stock
Our common stock trades on The NASDAQ Global Market under the symbol SRSL.
The table below reflects the high and low sales prices of our common stock as
reported by The NASDAQ Stock Market for the periods indicated.
|
|
High
|
|
Low
|
|
Fiscal Year 2009
|
|
|
|
|
|
First Quarter
|
|
$
|
5.59
|
|
$
|
4.27
|
|
Second Quarter
|
|
$
|
7.08
|
|
$
|
4.93
|
|
Third Quarter
|
|
$
|
7.74
|
|
$
|
6.10
|
|
Fourth Quarter
|
|
$
|
7.49
|
|
$
|
6.34
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
|
|
First Quarter
|
|
$
|
5.50
|
|
$
|
3.90
|
|
Second Quarter
|
|
$
|
7.25
|
|
$
|
5.29
|
|
Third Quarter
|
|
$
|
6.19
|
|
$
|
2.75
|
|
Fourth Quarter
|
|
$
|
5.55
|
|
$
|
3.55
|
|
At February 2, 2010, the closing sale price of our common stock
was $6.91 per share.
Holders
At February 2, 2010, there were 396 stockholders of record.
Dividend Policy
We have never paid cash dividends on our common stock. We currently
intend to retain our available funds for future growth and, therefore, we do
not anticipate paying any dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity
Compensation Plans
The following equity compensation plans have been approved by our
stockholders: the SRS Labs, Inc. Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan (the 1993 Plan), the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan (the 1996 Plan), the SRS
Labs, Inc. Amended and Restated 1996 Non-employee Directors Stock Option
Plan (the Non-employee Directors Plan) and the SRS Labs, Inc. 2006 Stock
Incentive Plan (the 2006 Plan). A description of the material features of
each of these plans is included in Note 6 to the Notes to Consolidated
Financial Statements under the caption Stock Award/Option Plans/Warrants. The
1993 Plan expired on December 10, 2003 and no options or other rights to
acquire equity are outstanding under that plan. On June 22, 2006, our
stockholders voted to approve the 2006 Plan, and to discontinue the issuance of
any awards under the 1996 Plan. We do not have any equity compensation plans
other than those approved by our stockholders. The following table sets forth
information regarding the number of shares of our common stock that may be
issued pursuant to our equity compensation plans or arrangements as of December 31,
2009.
Equity Compensation Plan Information
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Plan category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities
reflected in column(a))
|
|
Equity compensation plans approved
by security holders
|
|
3,948,378
|
(1)
|
$
|
6.05
|
|
941,241
|
(2)
|
|
|
|
|
|
|
|
|
|
(1)
Represents
shares of common stock that may be issued pursuant to outstanding options
granted under the following plans: 1,194,698 shares under the 1996 Plan,
177,500 shares under the Non-employee Directors Plan and 2,576,180 shares under
the 2006 Plan.
(2)
Represents
shares of common stock that may be issued pursuant to future grants under the
following plans: 280,000 shares under the Non-employee Directors Plan and
661,241 shares under the 2006 Plan.
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Issuer Purchases of Equity Securities
On November 3, 2008, our Board of Directors approved a stock
repurchase program. The stock repurchase program commenced November 7,
2008 and ended on May 6, 2009. No
purchases were made under the program during fiscal year 2009.
Stock Price Performance Graph
The following graph illustrates a comparison of the total return of our
common stock with the total return for the S & P Smallcap 600 Index
and a peer group selected by us for the five year period ended December 31,
2009.
The peer group
was limited to publicly traded companies in the audio enhancements and
technology business and consisted of the following companies: Dolby, DTS, QSound
and DivX.
The comparison assumes $100 was
invested on December 31, 2004 in our common stock and in each of the
indices shown and assumes that all of the dividends were reinvested.
The comparisons in the table are required by the SEC and are not
intended to forecast or be indicative of possible future performance of our
common stock. This graph shall not be deemed filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended (Exchange Act), or
otherwise subject to the liabilities under the Securities Act of 1933, as amended,
or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among SRS Labs, Inc., The S&P Smallcap 600 Index
And A Peer Group
*
$100 invested on 12/31/04 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
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Item 6. Selected Financial Data
The following selected financial information as of and for the dates
and periods indicated have been derived from our audited consolidated financial
statements. The information set forth below is not necessarily indicative of
results of future operations, and should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations in Part II,
Item 7 of this Annual Report on Form 10-K and our consolidated
financial statements and related notes included elsewhere in this Report.
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands except per share data)
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,965
|
|
$
|
18,333
|
|
$
|
18,852
|
|
$
|
18,547
|
|
$
|
14,608
|
|
Cost of sales
|
|
286
|
|
144
|
|
164
|
|
171
|
|
236
|
|
Gross profit
|
|
24,679
|
|
18,189
|
|
18,688
|
|
18,376
|
|
14,372
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
11,415
|
|
9,220
|
|
6,718
|
|
7,345
|
|
5,192
|
|
Research and development
|
|
5,721
|
|
3,943
|
|
3,107
|
|
2,573
|
|
2,224
|
|
General and administrative
|
|
5,657
|
|
5,913
|
|
5,444
|
|
5,660
|
|
5,170
|
|
Total operating expenses
|
|
22,793
|
|
19,076
|
|
15,269
|
|
15,578
|
|
12,586
|
|
Operating income (loss)
|
|
1,886
|
|
(887
|
)
|
3,419
|
|
2,798
|
|
1,786
|
|
Interest income
|
|
348
|
|
1,275
|
|
2,041
|
|
1,136
|
|
673
|
|
Income from continuing operations before income
taxes
|
|
2,234
|
|
388
|
|
5,460
|
|
3,934
|
|
2,459
|
|
Income taxes
|
|
98
|
|
117
|
|
46
|
|
868
|
|
796
|
|
Income from continuing operations
|
|
2,136
|
|
271
|
|
5,414
|
|
3,066
|
|
1,663
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of
income taxes (benefit)
|
|
|
|
|
|
|
|
1,017
|
|
(3,087
|
)
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
625
|
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
1,642
|
|
(3,087
|
)
|
Net income (loss)
|
|
$
|
2,136
|
|
$
|
271
|
|
$
|
5,414
|
|
$
|
4,708
|
|
$
|
(1,424
|
)
|
Income from continuing operations per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.02
|
|
$
|
0.34
|
|
$
|
0.21
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.02
|
|
$
|
0.32
|
|
$
|
0.20
|
|
$
|
0.11
|
|
Income (loss) from discontinued operations per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.11
|
|
$
|
(0.22
|
)
|
Diluted
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.11
|
|
$
|
(0.22
|
)
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.02
|
|
$
|
0.34
|
|
$
|
0.31
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.02
|
|
$
|
0.32
|
|
$
|
0.30
|
|
$
|
(0.10
|
)
|
Weighted average number of common shares used in
the calculation of per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,460
|
|
15,589
|
|
16,154
|
|
14,956
|
|
14,118
|
|
Diluted
|
|
14,813
|
|
15,842
|
|
16,990
|
|
15,466
|
|
15,199
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
38,923
|
|
$
|
37,519
|
|
$
|
39,272
|
|
$
|
34,697
|
|
$
|
8,849
|
|
Total assets
|
|
51,749
|
|
46,882
|
|
51,383
|
|
45,049
|
|
35,065
|
|
Stockholders equity
|
|
48,394
|
|
43,769
|
|
49,007
|
|
42,744
|
|
30,813
|
|
18
Table of Contents
Item 7.
Managements Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We
are the recognized global leader in the practical application of psychoacoustics
,
the science behind how the human ear operates, and
in the post processing segment of the market for audio delivery. Our award-winning audio enhancement
technologies and solutions dramatically restore audio and voice to its natural state, the way it was originally recorded, in both dimension and
clarity, thus providing a superior
consumer experience for a wide variety of CE devices such as
televisions, personal computers and mobile phones.
Our mission is to be the dominant worldwide provider of audio and voice
solutions that allow consumers to effortlessly experience rich, natural sound,
the way their ears were meant to hear it.
Our operations are conducted through SRS Labs, Inc., the parent
company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen
Representative Office of SRS Labs, Inc. (a Chinese company) Shanghai
Representative Office of SRS Labs, Inc (a Chinese company) and SRS Labs Japan,
KK (a Japanese company). Our business is focused on developing and licensing
audio, voice and surround sound technology solutions to many of the worlds
leading OEMs, software providers and semiconductor companies, and limited sales
and marketing of standalone software and hardware products through the
Internet.
Critical Accounting Policies
Our discussion and analysis of our results of operations and liquidity
and capital resources are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP).
The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. We base our estimates on historical and anticipated results and
trends and on various other assumptions that we believe are reasonable under
the circumstances, including assumptions as to future events. These estimates
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. By their nature,
estimates are subject to an inherent degree of uncertainty. Actual results may
differ from our estimates.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe are:
(a) the most important to the portrayal of our financial condition
and results of operations, and (b) that require managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the matters that are inherently uncertain. Our most
critical accounting estimates include revenue recognition; valuation of
accounts receivable, which impacts operating expenses; valuation of intangibles
and long lived assets, which primarily impacts operating expenses when we
impair assets or accelerate their depreciation; recognition and measurement of
current and deferred income tax assets and liabilities, which impacts our tax
provision; and share-based compensation, which impacts operating expenses. We
discuss each of these policies below, as well as the estimates and judgments
involved. We also have other policies that we consider key accounting policies;
however, these policies do not meet the definition of critical accounting
estimates, because they do not generally require us to make estimates or
judgments that are difficult or subjective.
Revenue
Recognition
Our license agreements typically have multi-year or automatic renewal
terms, and either require: a) per-unit royalty payments for all products
implementing our technologies and/or solutions; b) fixed annual or quarterly
royalty payments; or c) a minimum fixed annual or quarterly royalty payment,
which allows the licensee to ship up to a pre-determined number of units during
the specified time period, with additional per-unit royalty payments
thereafter. Royalties for per-unit
arrangements are reported in the quarter following shipment of the consumer
electronics device and are therefore recognized by us one quarter following
shipment by the OEM. Revenues associated
with fixed royalty payments are recognized ratably over the term of the
agreement. We also sell some of our
products and solutions via the Internet.
Revenues associated with those sales are recognized upon shipment and
are not material.
19
Table of Contents
Accounts
Receivable
We perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history, the customers current credit
worthiness and various other factors, as determined by our review of their
current credit information. We continuously monitor collections and payments
from our customers and maintain allowances for doubtful accounts based upon
specific customer circumstances, current economic trends, historical experience
and the age of past due receivables. While such credit losses have historically
been within our expectations and the provisions established, we cannot
guarantee that we will continue to experience the same credit loss rates that
we have in the past. Unanticipated changes in the liquidity or financial
position of our customers may require additional provisions for doubtful
accounts.
Intangible
Assets and Impairment of Long-Lived Assets
Costs paid by the Company related to the establishment and purchase of
patents, primarily legal costs, are capitalized and amortized, depending on the
estimated life of the technology patented. These assets are being amortized
over ten years. The Company evaluates the recoverability of long-lived assets
with finite lives. The Company assesses potential impairments to its long-lived
assets when there is evidence that events or changes in circumstances indicate
that the carrying amount of an asset may not be recovered. An impairment loss
is recognized when the carrying amount of the long-lived asset is not
recoverable and exceeds its fair value. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Any
required impairment loss is measured as the amount by which the carrying amount
of a long-lived asset exceeds its fair value and is recorded as a reduction in
the carrying value of the related asset and a charge to operating results.
Based upon the most recent assessment as of December 31, 2009, the Company
has determined there was no impairment in the value of long-lived assets.
Income
Taxes
In preparing our consolidated financial statements, we estimate our
income taxes in each of the countries in which we operate. The process used to
make these estimates includes an assessment of the current tax expense, the
results from tax examinations and the effects of temporary differences
resulting from the different treatment of transactions for tax and financial
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet.
The Company accounts for deferred income
taxes utilizing an asset and liability method, whereby deferred tax assets and
liabilities are recognized based on the tax effects of temporary differences
between the financial statements and the tax bases of assets and liabilities,
as measured by current enacted tax rates.
Deferred tax assets are
reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized. We evaluate the
realizability of our deferred tax assets by assessing our valuation allowance
and by adjusting the amount of such allowance, if necessary. At December 31,
2009, we had net deferred tax assets primarily resulting from temporary
differences between the book and tax bases of assets and liabilities, and loss
and credit carry forwards. We continue to provide a valuation allowance our
deferred tax assets based on an assessment of the likelihood of their
realization. In reaching our conclusion, we evaluated certain relevant criteria
including deferred tax liabilities that can be used to offset deferred tax
assets, estimates of future taxable income of appropriate character within the
carry-forward period available under the tax laws, and tax planning strategies.
Our judgments regarding future taxable income may change due to market
conditions, changes in U.S. or international tax laws, the Companys business
and results of operations, and other factors. These changes, if any, may require
material adjustments to these deferred tax assets, resulting either in a tax
benefit, if it is estimated that future taxable income is likely, or a
reduction in the value of the deferred tax assets, if it is determined that
their value is impaired, resulting in a reduction in net income or an increase
in net loss in the period when such determinations are made.
Our income tax provision is based on calculations and assumptions that
will be subject to examination by the taxing authorities in the jurisdictions
in which we operate. Should the actual results differ from our estimates, we
would have to adjust the income tax provision in the period in which the facts
and circumstances that give rise to the revision become known. Tax law and rate
changes are reflected in the income tax provision in the period in which such
changes are enacted.
Share-Based
Compensation
The Company accounts for share-based compensation awards using the
fair-value method and records such expense in the consolidated financial statements
over the requisite service period. In 2009, 2008 and 2007, we recorded
share-based compensation expense of $1,956,057, $1,777,468 and $1,727,017,
respectively.
To determine the expected term of our employee stock options granted in
fiscal year 2009, we examined the historical term for our stock options and
those of our peers. To determine the risk-free interest rate, we utilized an
average interest rate based on U.S. Treasury instruments whose term was
consistent with the expected term of our awards. To determine the expected
stock price volatility, we examined the historical volatilities for our common
stock and those of our peers. See Note 6 (Stockholders Equity and
Share-Based Compensation) of our Notes to Consolidated Financial Statements for
further discussion.
20
Table of Contents
Results of Operations
The following table sets forth certain consolidated operating data as a
percentage of revenues for the years ended December 31, 2009, 2008 and
2007:
Percentage
of Total Revenue
|
|
Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Revenues
|
|
100
|
%
|
100
|
%
|
100
|
%
|
Cost of sales
|
|
1
|
|
1
|
|
1
|
|
Gross margin
|
|
99
|
|
99
|
|
99
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales and marketing
|
|
46
|
|
50
|
|
36
|
|
Research and development
|
|
23
|
|
22
|
|
16
|
|
General and administrative
|
|
22
|
|
32
|
|
29
|
|
Total operating expenses
|
|
91
|
|
104
|
|
81
|
|
Operating income (loss)
|
|
8
|
|
(5
|
)
|
18
|
|
Interest income
|
|
1
|
|
7
|
|
11
|
|
Income before income taxes
|
|
9
|
|
2
|
|
29
|
|
Income taxes
|
|
0
|
|
1
|
|
0
|
|
Net income
|
|
9
|
%
|
1
|
%
|
29
|
%
|
Year Ended December 31, 2009 Compared to Year
Ended December 31, 2008
Revenues
Total revenues for the year ended December 31, 2009 (fiscal year
2009) were $24,964,577 compared to $18,332,678 in the year ended December 31,
2008 (fiscal year 2008), an increase of $6,631,899 or 36%. This increase was
primarily attributable to increases in royalties related to the sales of
televisions, set-top-boxes, personal computers and mobile devices containing
our technologies by our licensees. In the home entertainment segment, royalty
revenues increased $4,227,065 from fiscal year 2008 to fiscal 2009, of which
$3,375,008 resulted from royalties related to sales of flat panel televisions
and monitors. We noted increases in
royalty revenues from several of our largest television customers; including
Samsung and Vizio, as well as increases in revenues related China based OEMs.
Revenues related to set-top boxes increased by $852,057 from fiscal year 2008
to fiscal year 2009, primarily due to our agreement with EchoStar, which we
entered into in March 2009. Revenue
growth in the home entertainment segment during 2009 was also positively
impacted by our royalty compliance program, through which we were able to
identify and collect approximately $1,200,000 of previously under reported
royalties in fiscal year 2009. The
increase in revenues in the personal computer market from fiscal year 2008 to
fiscal year 2009 was $2,040,992. We
noted increased revenues from many of our licensees, including Hewlett Packard,
Dell, AsusTek, and BenQ among others. We
expect that during 2010, our revenues in the personal computer segment will
continue to increase as our solutions are deployed on a larger number of products. In the personal telecommunications segment,
revenues increased $1,270,997 from 2008 to 2009. This increase was primarily due to increased
revenues from Samsung Mobile. We
anticipate that during 2010 we will continue to experience increased revenues
in this segment as compared to 2009.
Revenues in the automotive market decreased by $293,484 in 2009 as
compared to 2008 primarily due to the global decrease of new car sales. Revenues in the portable media devices market
decreased by $553,672 in 2009 as compared to 2008 due to decreased revenues
from MP3/MP4 players.
The following table represents our mix of licensing revenues by market
source:
|
|
Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
Home entertainment (TV, set-top box)
|
|
68
|
%
|
69
|
%
|
PC (software, hardware)
|
|
12
|
|
5
|
|
Personal telecommunications (mobile phone, PDA)
|
|
11
|
|
9
|
|
Automotive
|
|
5
|
|
8
|
|
Portable media devices (digital media player,
headphone)
|
|
4
|
|
9
|
|
|
|
100
|
%
|
100
|
%
|
21
Table of Contents
Sales and
Marketing
Sales expenses consist primarily of employee salaries, sales
consultants fees and related expenses, commissions, training, and travel and
entertainment expenses. Marketing
expenses consist primarily of employee salaries and related expenses, market
research, advertising and co-marketing, and costs associated with brand
building activities. Sales and marketing
expenses were $11,415,115 for fiscal year 2009, as compared to $9,220,098 for
fiscal year 2008. Overall sales and marketing expenses were $2,195,017, or 24%,
higher in fiscal 2009. This increase was
primarily attributable to higher payroll and related costs associated with
increasing the size of our sales and marketing staff by approximately 21% in
2009. In addition to increasing the
sales and marketing personnel, we have also increased our branding efforts by
creating new marketing assets, through both direct and co-marketing activities,
and increased our participation in trade show activities. We recorded $511,301 in share-based
compensation expense for sales and marketing personnel during 2009 as compared
to $458,610 in 2008. As a percentage of total revenues, sales and marketing
expenses decreased from 50% for fiscal year 2008 to 46% for fiscal year 2009.
Research
and Development
Research and development expenses consist of salaries and related costs
of employees engaged in ongoing research, design and development activities,
customer support, technology porting activities, and costs for engineering
materials and supplies. Research and development expenses were $5,721,195 for
fiscal year 2009, as compared to $3,942,635 for fiscal year 2008. The overall
increase in research and development expenses of $1,778,560, or 45%, was
primarily attributable to increasing the size of our research and development
staff by approximately 41% in 2009. We recorded $457,464 in share-based
compensation expense for engineering personnel during 2009 as compared to
$399,630 in 2008. We expect that research and development expenses will
continue to increase in absolute costs as we plan to continue to add to our
engineering team in order to support our global licensees and to accelerate the
implementation of our technologies with a greater number of customers and
devices. As a percentage of total
revenues, research and development expenses increased from 22% for fiscal year
2008 to 23% for fiscal year 2009.
General
and Administrative
General and administrative expenses consist primarily of
employee-related expenses, legal costs associated with the administration of
intellectual property, facilities costs, insurance, public company costs, and
depreciation and amortization. General and administrative expenses were $5,656,616
for fiscal year 2009 as compared to $5,913,081 for fiscal year 2008. The
overall decrease $256,456 or 4%, was primarily attributable to a decrease in
professional fees and expenses of $166,000, associated with our Dutch Auction
repurchase program, which was terminated in September 2008. We recorded $987,292 in stock-based
compensation expense during 2009 as compared to $919,228 in 2008. As a
percentage of total revenues, general and administrative expenses decreased
from 32% for fiscal year 2008 to 22% for fiscal year 2009.
Interest Income
Interest income was $347,528 for fiscal year 2009, compared to
$1,275,047 for fiscal year 2008, a decrease of $927,519, or 73%. Our goal during 2009 was to ensure asset
protection of our cash, and as such we invested our cash in low-risk, high
liquidity investments such as fully insured certificates of deposits and assets
backed by the United States Treasury. We
continue to monitor our cash assets to maximize our interest income while maintaining
an acceptable level of risk. During 2009
and 2008, the company did not incur any losses related to our cash and
investments.
Provision
for Income Taxes
The
income tax provision for fiscal 2009 was $98,006 compared to $117,543 for
fiscal year 2008, representing a decrease of $19,537, or 17%. The current and
prior year provision consists primarily of estimated taxes payable to the state
of California.
We had federal and state net operating loss carryforwards at December 31,
2009 of $8,463,418 and $5,598,943, respectively. The net operating loss
carryforwards begin to expire in 2014 and will continue through 2027. In
addition, we had federal foreign tax credit carryforwards of approximately
$7,376,260 at December 31, 2009, which begin to expire in 2014, and
federal and state tax capital loss carryforwards of approximately $16,219,585,
which begin to expire in 2011. As of December 31, 2009, we continued to
have a valuation allowance of $13,313,163 against our deferred tax assets,
which was established primarily due to our cumulative losses in recent years
and based on our assessment of our future ability to realize certain deferred
tax assets.
22
Table of Contents
Year Ended December 31, 2008 Compared to Year
Ended December 31, 2007
Revenues
Total revenues for fiscal year 2008 were $18,332,678 compared to
$18,851,940 in the year ended December 31, 2007 (fiscal year 2007), a
decrease of $519,262, or 3%. This decrease was primarily attributable to
decreases in royalties related to the sales of personal computers, set top
boxes, CRT televisions and personal media devices containing our
technologies. The decrease in revenues
in the personal computer market from fiscal year 2007 to fiscal year 2008 was
$649,153, of which $594,378 related to decreased royalties from Toshiba, while
revenues in the personal media devices market decreased by $155,086 during the
same period, related to several customers.
In the home entertainment market, total revenues decreased $209,120 from
fiscal 2007 to fiscal 2008. Within this
market, revenues related to set-top boxes decreased $139,219 and revenues from
CRT televisions decreased $124,062. Some
of these decreases were offset by increased revenues in the amount of $145,942
related to flat panel televisions and monitors.
The majority of the increase in flat panel televisions and monitors
revenues were the direct result of our receipt of larger royalty payments from
some of the multi-national television OEMs, including Samsung, offset by a
decrease in revenues from Sony, Toshiba and LG. Home entertainment continues to
represent our largest revenue market. We
entered into license agreements with several new television licensees during
2008, including Vizio. Revenues in the
automotive market increased by $160,356 in 2008 as compared to 2007 primarily
due to increased revenues from several customers in Japan who provide line
install, dealer option and aftermarket automotive audio systems to many of the
significant Japanese automotive manufactures, including Toyota, Honda, Subaru
and Nissan. In the personal telecommunications segment, revenues increased
$298,741 from 2007 to 2008. This
increase was primarily due to increased revenues from Samsung Mobile.
The following table represents our mix of licensing revenues by market
source:
|
|
Years Ended
December 31,
|
|
|
|
2008
|
|
2007
|
|
Home entertainment (TV, set-top box)
|
|
69
|
%
|
68
|
%
|
Portable media devices (digital media player,
headphone)
|
|
9
|
|
9
|
|
Personal telecommunications (mobile phone, PDA)
|
|
9
|
|
7
|
|
Automotive
|
|
8
|
|
7
|
|
PC (software, hardware)
|
|
5
|
|
9
|
|
|
|
100
|
%
|
100
|
%
|
Sales and
Marketing
Sales and marketing expenses were $9,220,098 for fiscal year 2008, as
compared to $6,717,906 for fiscal year 2007. Overall sales and marketing
expenses were $2,502,192, or 37%, higher in fiscal year 2008. This increase was primarily attributable to
higher payroll and related costs, including one-time recruitment and severance
costs of approximately $525,000, associated with hiring an additional eleven
sales and marketing employees and full-time consultants in 2008 including our
Vice President of Sales and our Vice President of Marketing. We recorded $458,610 in share-based compensation
expense for sales and marketing personnel during 2008 as compared to $495,132
in 2007. As a percentage of total revenues, sales and marketing expenses
increased from 36% for fiscal year 2007 to 50% for fiscal year 2008.
Research
and Development
Research and development expenses were $3,942,635 for fiscal year 2008,
as compared to $3,107,482 for fiscal year 2007. The overall increase in
research and development expenses of $835,153, or 27%, was primarily
attributable to hiring an additional five engineers in 2008, as well as
incurring additional travel costs associated with supporting our global
licensees. We recorded $399,630 in share-based compensation expense for
engineering personnel during 2008 as compared to $428,516 in 2007. As a percentage of total revenues, research
and development expenses increased from 16% for fiscal year 2007 to 22% for
fiscal year 2008.
General
and Administrative
General and administrative expenses were $5,913,081 for fiscal year
2008 as compared to $5,443,735 for fiscal year 2007. The overall increase of
$469,346, or 9%, was primarily attributable to an increase in professional fees
and expenses of $166,000, associated with our Dutch Auction repurchase program,
which was terminated in September 2008.
We also incurred increased professional and legal fees associated with
corporate matters and an increase in share-based compensation expense. We recorded $919,228 in stock-based
compensation expense during 2008 as compared to $803,369 in 2007. As a
percentage of total revenues, general and administrative expenses increased
from 29% for fiscal year 2007 to 32% for fiscal year 2008.
23
Table of Contents
Interest Income
Interest income was $1,275,047 for fiscal year 2008, compared to
$2,041,288 for fiscal year 2007, a decrease of $766,241, or 38%. This decrease
was primarily attributable to the decrease in interest income due to lower
interest rates and lower cash balances.
Provision
for Income Taxes
The
income tax provision for fiscal year 2008 was $117,543 compared to $45,558 for
fiscal year 2007, representing an increase of $71,985, or 158%. The current and
prior year provision consists primarily of estimated taxes payable to the state
of California. The increase in the provision is the result of change in
California tax law in fiscal year 2008, whereby net operating loss
carryforwards may not be used in 2008 or 2009 and research and development
credits are limited to 50% of the Companys net tax.
Selected Quarterly Operating Results
The following table sets forth certain quarterly summary consolidated
financial data for the eight quarters in the period ended December 31,
2009. The quarterly information is based upon financial statements prepared by
us on a basis consistent with our audited consolidated financial statements
and, in managements opinion, includes all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. This information should be read in
conjunction with our audited consolidated financial statements and notes
thereto appearing elsewhere in this Report. Our quarterly operating results
have varied significantly in the past and are expected to vary significantly in
the future. Due to rounding differences, the quarters in a given year may not
add precisely to the annual numbers for that year.
|
|
Three Months Ended
|
|
|
|
Mar 31,
2009
|
|
June 30,
2009
|
|
Sep 30,
2009
|
|
Dec 31,
2009
|
|
Mar 31,
2008
|
|
June 30,
2008
|
|
Sep 30,
2008
|
|
Dec 31,
2008
|
|
|
|
(In thousands except per share amounts)
|
|
Revenues
|
|
$
|
5,704
|
|
$
|
5,055
|
|
$
|
7,230
|
|
$
|
6,975
|
|
$
|
4,941
|
|
$
|
4,178
|
|
$
|
4,319
|
|
$
|
4,894
|
|
Gross profit
|
|
5,632
|
|
4,993
|
|
7,162
|
|
6,891
|
|
4,915
|
|
4,138
|
|
4,297
|
|
4,839
|
|
Operating expenses
|
|
5,346
|
|
5,275
|
|
5,745
|
|
|
6,428
|
|
4,509
|
|
4,864
|
|
4,924
|
|
4,779
|
|
Net income (loss)
|
|
$
|
386
|
|
$
|
(198
|
)
|
$
|
1,475
|
|
$
|
473
|
|
$
|
858
|
|
$
|
(408
|
)
|
$
|
(316
|
)
|
$
|
137
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
(0.01
|
)
|
$
|
0.10
|
|
$
|
0.03
|
|
$
|
0.05
|
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
(0.01
|
)
|
$
|
0.10
|
|
$
|
0.03
|
|
$
|
0.05
|
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
Liquidity and Capital Resources
At December 31, 2009, cash and cash equivalents, short and
long-term investments were $41,489,164 compared to $39,435,087 as of December 31,
2008, an increase of $2,054,077. Our cash and cash equivalents were $27,988,164
as of December 31, 2009, a decrease of $3,610,923 from cash and cash
equivalents of $31,599,087 held at December 31, 2008. The decrease in cash
and cash equivalents was primarily a result of the purchase of short and
long-term investments, partially offset by positive cash flow generated by
operating activities. Cash and cash
equivalents generally consist of cash, certificates of deposits, and money
market funds with original maturities of three months or less. The money market
funds are primarily invested in US government obligations. The cash and certificates of deposit are FDIC
insured. We held $12,963,000 in short-term investments and $538,000 in
long-term investments at December 31, 2009. Short-term investments consist of
certificates of deposit with original maturities ranging from 6 to 12
months. Long-term investments consist of
certificates of deposit with original maturities ranging from 18 months to 2
years. In fiscal 2009, 2008 and 2007,
our operations were funded primarily from cash from operating activities.
Net cash provided by
operating activities was $2,776,720 and $2,629,133 for 2009 and 2008,
respectively. The $147,587 increase in net cash provided by operating
activities in fiscal 2009, compared to fiscal year 2008, was primarily a result
of an increase in net income, from $270,887 during the year ended December 31,
2008 to $2,135,630 for the year ended December 31, 2009. Offsetting the increase in net income was a
decrease of deferred revenue by $608,570, due to the recognition of revenue
from prepaid royalties. Prepaid expenses
also increased $283,056 due to timing of payments to vendors.
Net cash used in investing activities was $6,920,993 and $3,310,826 in
2009 and 2008, respectively. The $3,610,167 increase in cash used in investing
activities in 2009, compared to 2008, was primarily due to the purchase of
$5,665,000 in short and long-term investments.
24
Table of Contents
Net cash provided by financing activities was $533,350 in 2009. Net cash used in financing activities was
$7,334,511 during 2008. In 2009, the
Company did not repurchase any of its outstanding common stock and stock option
exercises increased.
We
believe our existing cash, cash equivalents, short and long-term investment
balances together with cash generated from operating activities will be
sufficient to meet our anticipated cash needs for at least the next twelve
months. Our future capital requirements will depend on many factors, including
our level of revenues, the timing and extent of spending to support product
development efforts, the expansion of sales and marketing activities, the
timing of introductions of new products and the continuing market acceptance of
our products.
Contractual Cash Obligations and Contingent
Liabilities and Commitments
We have contractual obligations and commitments with regards to
operating lease arrangements. The following table quantifies our expected
contractual obligations and commitments subsequent to December 31, 2009:
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
More than
3 years
|
|
Operating lease obligations
|
|
$
|
1,166,162
|
|
$
|
419,699
|
|
$
|
746,463
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In January 2010, the
Financial Accounting Standards Board (FASB)
issued guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair
value measurement hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance will become effective for us with the reporting
period beginning January 1, 2010, except for the disclosure on the roll
forward activities for Level 3 fair value measurements, which will become
effective for us January 1, 2011.
Other than requiring additional disclosures, adoption of this new
guidance will not have a material impact on the Companys consolidated
financial statements.
Effective
September 2009, the Company revised references to authoritative accounting
literature in accordance with
FASB
Accounting Standards Codification (the Codification)
.
The
Codification became the source of authoritative GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative.
The
adoption
of this new guidance did not have a material impact on the Companys
consolidated financial statements. In April 2009, FASB issued guidance in
order to establish principles and requirements for reviewing and reporting
subsequent events and requires disclosure of the date through which subsequent
events are evaluated and whether the date corresponds with the time at which
the financial statements were available for issue (as defined) or were issued.
The adoption of this new guidance did not have a material impact on the Companys
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
Our exposure to market risk includes changes in interest rates, which
relates primarily to our invested balances of cash, cash equivalents and
investments. Our investment policy specifies excess funds are to be invested in
a manner that preserves capital, provides liquidity and generates the highest
available after-tax return. To limit exposure to market risk, we place our cash
in banks, cash equivalents in certificates of deposits with original maturities
of three months or less and money market funds, which are primarily invested in
US government obligations. Short-term
investments consist of certificates of deposits with original maturities
ranging from 6 to 12 months. We do not
invest in any derivative instruments. All cash, cash equivalents and investments
are carried at fair value, which approximates cost.
Item 8. Financial Statements and Supplementary Data
The financial statement information, including the Report of
Independent Registered Public Accounting Firm, required by this Item 8 is
set forth on pages 34 to 48 of this Annual Report on Form 10-K and is
hereby incorporated into this Item 8 by reference. The quarterly financial
information required by this Item 8 is set forth in Item 7 of this
Annual Report on Form 10-K and is hereby incorporated into this
Item 8 by reference.
25
Table of Contents
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Subject to the limitations noted above, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the year covered by this Annual Report
on Form 10-K. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of such date, our disclosure
controls and procedures were effective to meet the objective for which they
were designed and operate at the reasonable assurance level.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company as defined in Rule 13a-15(f) or
15d-15(f) of the Exchange Act. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2009 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in its report,
Internal
Control-Integrated Framework
. Based on this assessment and those
criteria, management concluded that our internal control over financial
reporting was effective as of December 31, 2009.
Attestation
Report of Independent Registered Public Accounting Firm
Our internal control over financial reporting has been audited by
Squar, Milner, Peterson, Miranda & Williamson, LLP, an
independent registered public accounting firm, as stated in their report, which
is included herein on page 33.
Changes in
Internal Controls
There have been no changes in our internal controls over financial
reporting that occurred during our fourth quarter ended December 31, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
26
Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
The information set forth under the captions Election of Directors, Information
About the Board of Directors and Committees of the Board, Executive Officers
and Transactions with Management and OthersSection 16(a) Beneficial
Ownership Reporting Compliance in our definitive proxy statement for the
Annual Meeting of Stockholders to be held in 2010 (the Proxy Statement) is
incorporated herein by reference. The Proxy Statement will be filed with the
SEC no later than 120 days after the end of fiscal year 2009.
Item 11. Executive Compensation
Except as specifically provided, the information set forth under the
captions Compensation of Executive Officers and Information About the Board
of Directors and Committees of the BoardCompensation of Directors in the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the information set forth under
the caption Security Ownership of Certain Beneficial Owners and Management in
the Proxy Statement.
Information regarding equity compensation plans required by this
Item 12 is included in Item 5 of Part II of this Annual Report
on Form 10-K and is incorporated into this Item by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
The information set forth under the captions Transactions with
Management and Others and Information About the Board of Directors and
Committees of the Board in the Proxy Statement is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services is
incorporated by reference to the information set forth under the caption Relationship
of the Company with Independent Registered Public Accounting Firm in the Proxy
Statement.
27
Table of Contents
PART IV
Item 15.
Exhibits and Financial Statement Schedule
(1)
Financial Statements
|
Page
|
Report of Independent Registered Public Accounting
FirmSquar, Milner, Peterson, Miranda & Williamson, LLP
|
33
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
34
|
Consolidated Statements of Operations for the years
ended December 31, 2009, 2008 and 2007
|
35
|
Consolidated Statements of Stockholders Equity and
Comprehensive Income for the years ended December 31, 2009, 2008 and
2007
|
36
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2009, 2008 and 2007
|
37
|
Notes to Consolidated Financial Statements
|
38
|
(2)
Financial Statement Schedule
The financial statement schedule included on page 48 to this
Annual Report on Form 10-K and in Part II, Item 8 herein is
filed as part of this Annual Report on Form 10-K. All other schedules are
omitted because they are not applicable or the required information is shown in
the consolidated financial statements or related notes.
28
Table of Contents
(3)
Exhibits
The exhibits listed below are hereby filed with the SEC as part of this
Annual Report on Form 10-K. We will furnish a copy of any exhibit upon
request, but a reasonable fee will be charged to cover our expenses in
furnishing such exhibit.
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate
of Incorporation of the Company, previously filed with the SEC as
Exhibit 3.1 to the Companys Registration Statement on Form SB-2,
specifically included in Amendment No. 1 to such Registration Statement
filed with the SEC on July 3, 1996 (File No. 333-4974-LA) (the
Registration Statement Amendment No. 1), which is incorporated herein
by reference.
|
|
|
|
3.2
|
|
Bylaws
of the Company, previously filed with the SEC as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the period ended
September 30, 1999, filed with the SEC on November 12, 1999, which
is incorporated herein by reference.
|
|
|
|
|
|
Material Contracts Relating to Management Compensation
Plans or Arrangements
|
|
|
|
10.1
|
|
Employment
Agreement dated July 1, 1996, between the Company and Thomas C.K. Yuen,
previously filed with the SEC as Exhibit 10.8 to the Registration
Statement Amendment No. 1, which is incorporated herein by reference.
|
|
|
|
10.2
|
|
Amendment
to Employment Agreement dated as of March 14, 1997, between the Company
and Thomas C.K. Yuen, previously filed with the SEC as Exhibit 10.2 to
the Companys Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed with the SEC on March 31, 1997 (the 1996
Annual Report), which is incorporated herein by reference.
|
|
|
|
10.3
|
|
Employment
Agreement dated July 1, 1996, between the Company and Alan D. Kraemer,
previously filed with the SEC as Exhibit 10.11 to the Registration
Statement Amendment No. 1, which is incorporated herein by reference.
|
|
|
|
10.4
|
|
SRS
Labs, Inc. Amended and Restated 1996 Non-employee Directors Stock Option
Plan, as amended, previously filed with the SEC as Appendix B to the
Companys Definitive Proxy Statement dated and filed with the SEC on
April 30, 2003, which is incorporated herein by reference.
|
|
|
|
10.5
|
|
Form of
Indemnification Agreement, previously filed with the SEC as
Exhibit 10.20 to the Registration Statement Amendment No. 1, which
is incorporated herein by reference.
|
|
|
|
10.6
|
|
Non-employee Director
Compensation Policy adopted by the Companys Board of Directors on
January 28, 2005, previously filed with the SEC as Exhibit 10.1 to
the Companys Current Report on Form 8-K filed with the SEC on
February 3, 2005, which is incorporated herein by reference.
|
|
|
|
10.7
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Non-Employee Directors Stock Option Plan (Initial
Appointment), previously filed with the SEC as Exhibit 10.2 to the
Companys Current Report on Form 8-K filed with the SEC on
February 3, 2005, which is incorporated herein by reference.
|
|
|
|
10.8
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Non-Employee Directors Stock Option Plan
(Re-Election), previously filed with the SEC as Exhibit 10.3 to the
Companys Current Report on Form 8-K filed with the SEC on
February 3, 2005, which is incorporated herein by reference.
|
|
|
|
10.9
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan, previously filed with the
SEC as Exhibit 10.4 to the Companys Current Report on Form 8-K
filed with the SEC on February 3, 2005, which is incorporated herein by
reference.
|
|
|
|
10.10
|
|
Form of
Nonqualified Stock Option Agreement under the SRS Labs, Inc. Amended and
Restated 1996 Long-Term Incentive Plan dated March 29, 2005 (Current
participants under this plan include the following officers: Thomas C.K.
Yuen, Ulrich E. Gottschling, Sarah Yang and Alan D. Kraemer), previously
filed with the SEC as Exhibit 10.1 to the Companys Current Report
Form 8-K filed with the SEC on April 4, 2005, which is incorporated
herein by reference.
|
|
|
|
10.11
|
|
SRS
Labs, Inc. Amended and Restated Change in Control Protection Plan
approved August 3, 2009, previously filed with the SEC as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed
with the SEC on August 6, 2009, which
|
29
Table of Contents
Exhibit
Number
|
|
Description
|
|
|
is
incorporated herein by reference.
|
|
|
|
10.12
|
|
Form of
Participation Agreement under the SRS Labs, Inc. Amended and Restated
Change in Control Protection Plan for Selected Executive Officers (Current
participants under this plan include the following officers: Thomas C.K.
Yuen, Ulrich E. Gottschling, Sarah Yang, Jeff Klaas and Alan D. Kraemer)
previously filed with the SEC as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q filed with the SEC on August 6, 2009, which is
incorporated herein by reference.
|
|
|
|
10.13
|
|
SRS
Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan, as
amended, approved April 27, 2005, previously filed with the SEC as
Exhibit 10.5 to the Form 8-K filed with the SEC on May 3,
2005, which is incorporated herein by reference.
|
|
|
|
10.14
|
|
Offer
Letter dated April 22, 2008 by and between the Company and Jeff Klaas,
previously filed with the SEC as Exhibit 10.15 to the Companys Annual
Report on Form 10-K for the fiscal period ended December 31, 2008,
filed with the SEC on February 24, 2009 which is incorporated herein by
reference.
|
|
|
|
10.15
|
|
Employment
Letter Agreement dated December 21, 2005 by and between the Company and
Ulrich E. Gottschling, previously filed with the SEC as Exhibit 99.1 to
the Companys Current Report on Form 8-K filed with the SEC on
December 29, 2005, which is incorporated herein by reference.
|
|
|
|
10.16
|
|
Form of
Nonqualified Stock Option Agreement under the SRS Labs, Inc. 1996
Amended and Restated Long-Term Incentive Plan, as amended, previously filed
with the SEC as Exhibit 99.8 to the Companys Current Report on Form 8-K
filed with the SEC on January 18, 2006, which is incorporated herein by
reference.
|
|
|
|
10.17
|
|
SRS
Labs, Inc. Profit Sharing and Bonus Plan, as amended on June 20,
2007, previously filed with the SEC as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on June 25, 2007,
which is incorporated herein by reference.
|
|
|
|
10.18
|
|
SRS
Labs, Inc. 2006 Stock Incentive Plan, as amended on December 17,
2007, previously filed with the SEC as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on December 21, 2007,
which is incorporated herein by reference.
|
|
|
|
10.19
|
|
Form of Stock Option
Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC as Exhibit 10.9 to the Companys Quarterly
Report on Form 10-Q, Amendment No. 1, filed with the SEC on
September 22, 2006, which is incorporated herein by reference.
|
|
|
|
10.20
|
|
Form of
Restricted Share Award Agreement under the SRS Labs, Inc. 2006 Stock
Incentive Plan, previously filed with the SEC as Exhibit 10.10 to the
Companys Quarterly Report on Form 10-Q, Amendment No. 1, filed
with the SEC on September 22, 2006, which is incorporated herein by
reference.
|
|
|
|
10.21
|
|
Form of
Restricted Share Unit Award Agreement under the SRS Labs, Inc. 2006
Stock Incentive Plan, previously filed with the SEC as Exhibit 10.11 to
the Companys Quarterly Report on Form 10-Q, Amendment No. 1, filed
with the SEC on September 22, 2006, which is incorporated herein by
reference.
|
|
|
|
10.22
|
|
Form of
SAR Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC as Exhibit 10.12 to Amendment No. 1
to the Companys Quarterly Report on Form 10-Q, Amendment No. 1,
filed with the SEC on September 22, 2006, which is incorporated herein
by reference.
|
|
|
|
10.23
|
|
SRS
Labs, Inc. Patent Reward Program, previously filed as Exhibit 10.2
to the Companys Form 8-K filed with the SEC on June 28, 2006,
which is incorporated herein by reference.
|
|
|
|
|
|
Other Material Contracts
|
|
|
|
10.24
|
|
Industrial
Real Estate Lease dated May 27, 2008, between the Company and Daimler
Commerce Partners, L.P., previously filed with the SEC as
Exhibit 10.25 to the Companys Annual Report on Form 10-K for the
fiscal period ended December 31, 2008, filed with the SEC on
February 24, 2009 which is incorporated herein by reference.
|
30
Table of Contents
Exhibit
Number
|
|
Description
|
10.25
|
|
Stock
Divestment Agreement dated July 1, 1996, between the Company, Thomas
C.K. Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed
with the SEC as Exhibit 10.17 to the Companys Registration Statement on
Form SB-2, specifically included in Amendment No. 2 to such
Registration Statement file with the SEC on August 2, 1996 (File
No. 333-4974-LA), which is incorporated herein by reference.
|
|
|
|
|
|
Other Exhibits
|
|
|
|
21
|
|
Subsidiaries
of the Company.
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm, Squar, Milner, Peterson,
Miranda & Williamson, LLP, dated February 22, 2010.
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer of SRS Labs, Inc., pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer of SRS Labs, Inc., pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer of SRS Labs, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer of SRS Labs, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
31
Table of
Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
Dated:
February 23, 2010
|
By:
|
/S/ THOMAS C.K. YUEN
|
|
|
Chairman of the Board and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ THOMAS C.K. YUEN
|
|
Director,
Chairman of the Board and Chief Executive Officer (Principal Executive
Officer)
|
|
February 23, 2010
|
Thomas C.K. Yuen
|
|
|
|
|
|
|
|
|
/s/ ULRICH GOTTSCHLING
|
|
Chief
Financial Officer (Principal Financial and Accounting Officer)
|
|
February 23, 2010
|
Ulrich Gottschling
|
|
|
|
|
|
|
|
|
/s/ DAVID R. DUKES
|
|
Director
|
|
February 23, 2010
|
David R. Dukes
|
|
|
|
|
|
|
|
|
|
/s/ WINSTON E. HICKMAN
|
|
Director
|
|
February 23, 2010
|
Winston E. Hickman
|
|
|
|
|
|
|
|
|
|
/s/ CAROL L. MILTNER
|
|
Director
|
|
February 23, 2010
|
Carol L. Miltner
|
|
|
|
|
|
|
|
|
|
/s/ SAM YAU
|
|
Director
|
|
February 23, 2010
|
Sam Yau
|
|
|
|
|
32
Table of
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
SRS
Labs, Inc.
Santa
Ana, California
We have audited the accompanying consolidated balance sheets of SRS
Labs, Inc. and Subsidiaries (collectively the Company) as of December 31,
2009 and 2008, and the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2009. We also have audited
the Companys internal control over financial reporting as of December 31,
2009, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our audit also included the financial
statement schedule listed in Item 15(2) herein. The Companys
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in
Item 9A. Our responsibility is to express an opinion on these financial
statements and an opinion on the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (a) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (b) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (c) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SRS
Labs, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based
on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Also, in our opinion, the aforementioned financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the financial
information set forth therein.
/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
|
|
Squar, Milner, Peterson, Miranda & Williamson, LLP
|
|
Newport
Beach, California
February 22,
2010
33
Table of Contents
SRS
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2009
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,988,164
|
|
$
|
31,599,087
|
|
Accounts receivable, net
|
|
179,114
|
|
332,711
|
|
Prepaid expenses and other current assets
|
|
1,147,151
|
|
864,095
|
|
Short-term investments
|
|
12,963,000
|
|
7,836,000
|
|
Total Current Assets
|
|
42,277,429
|
|
40,631,893
|
|
|
|
|
|
|
|
Long-term investments
|
|
538,000
|
|
|
|
Property and equipment, net
|
|
599,794
|
|
423,921
|
|
Intangible assets, net
|
|
2,702,160
|
|
2,354,725
|
|
Deferred income taxes, net
|
|
5,631,442
|
|
3,471,421
|
|
Total Assets
|
|
$
|
51,748,825
|
|
$
|
46,881,960
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
|
$
|
583,157
|
|
$
|
314,382
|
|
Accrued liabilities
|
|
$
|
1,577,891
|
|
996,268
|
|
Deferred revenue
|
|
1,193,454
|
|
1,802,024
|
|
Total Current Liabilities
|
|
$
|
3,354,502
|
|
3,112,674
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
Preferred stock$0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
Common stock$0.001 par value; 56,000,000 shares
authorized; 14,563,715 and 14,419,418 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
|
14,565
|
|
14,420
|
|
Additional paid-in capital
|
|
65,128,337
|
|
62,639,075
|
|
Accumulated deficit
|
|
|
(16,748,579
|
)
|
(18,884,209
|
)
|
Total Stockholders Equity
|
|
|
48,394,323
|
|
43,769,286
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
51,748,825
|
|
$
|
46,881,960
|
|
See accompanying notes to
the consolidated financial statements
34
Table of Contents
SRS
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
24,964,577
|
|
$
|
18,332,678
|
|
$
|
18,851,940
|
|
Cost of sales
|
|
285,543
|
|
143,481
|
|
164,112
|
|
Gross profit
|
|
24,679,034
|
|
18,189,197
|
|
18,687,828
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales and marketing
|
|
11,415,115
|
|
9,220,098
|
|
6,717,906
|
|
Research and development
|
|
5,721,195
|
|
3,942,635
|
|
3,107,482
|
|
General and administrative
|
|
5,656,616
|
|
5,913,081
|
|
5,443,735
|
|
Total operating expenses
|
|
22,792,926
|
|
19,075,814
|
|
15,269,123
|
|
Operating income (loss)
|
|
1,886,108
|
|
(886,617
|
)
|
3,418,705
|
|
Interest income
|
|
347,528
|
|
1,275,047
|
|
2,041,288
|
|
Income before income taxes
|
|
2,233,636
|
|
388,430
|
|
5,459,993
|
|
Income taxes
|
|
98,006
|
|
117,543
|
|
45,558
|
|
Net income
|
|
$
|
2,135,630
|
|
$
|
270,887
|
|
$
|
5,414,435
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.02
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.02
|
|
$
|
0.32
|
|
Weighted average shares used in the per share
calculation:
|
|
|
|
|
|
|
|
Basic
|
|
14,460,490
|
|
15,588,815
|
|
16,154,313
|
|
Diluted
|
|
14,813,372
|
|
15,842,336
|
|
16,989,839
|
|
See accompanying notes to
consolidated financial statements
35
Table of Contents
SRS
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
|
|
Common Stock
|
|
Additional
Paid-In
|
|
Accumulated
Other
Comprehensive
|
|
Accumulated
|
|
Treasury
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income (Loss)
|
|
Deficit
|
|
Stock
|
|
Total
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
15,886,938
|
|
16,562
|
|
70,574,176
|
|
(273,295
|
)
|
(24,569,531
|
)
|
(3,003,445
|
)
|
42,744,467
|
|
4,930,583
|
|
Proceeds
from exercise of stock options
|
|
385,341
|
|
385
|
|
1,842,579
|
|
|
|
|
|
|
|
1,842,964
|
|
|
|
Purchase
of treasury stock
|
|
(493,564
|
)
|
|
|
|
|
|
|
|
|
(2,946,736
|
)
|
(2,946,736
|
)
|
|
|
Share-based
compensation
|
|
|
|
|
|
1,727,017
|
|
|
|
|
|
|
|
1,727,017
|
|
|
|
Unrealized
gain on investments available for sale, net of tax
|
|
|
|
|
|
|
|
225,170
|
|
|
|
|
|
225,170
|
|
225,170
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
5,414,435
|
|
|
|
5,414,435
|
|
5,414,435
|
|
BALANCE,
December 31, 2007
|
|
15,778,715
|
|
16,947
|
|
74,143,772
|
|
(48,125
|
)
|
(19,155,096
|
)
|
(5,950,181
|
)
|
49,007,317
|
|
5,639,605
|
|
Proceeds
from exercise of stock options
|
|
116,847
|
|
117
|
|
329,051
|
|
|
|
|
|
|
|
329,168
|
|
|
|
Purchase
of treasury stock
|
|
(1,476,144
|
)
|
|
|
|
|
|
|
|
|
(7,663,679
|
)
|
(7,663,679
|
)
|
|
|
Cancellation
of treasury stock
|
|
|
|
(2,644
|
)
|
(13,611,216
|
)
|
|
|
|
|
13,613,860
|
|
|
|
|
|
Share-based
compensation
|
|
|
|
|
|
1,777,468
|
|
|
|
|
|
|
|
1,777,468
|
|
|
|
Unrealized
gain on investments available for sale, net of tax
|
|
|
|
|
|
|
|
48,125
|
|
|
|
|
|
48,125
|
|
48,125
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
270,887
|
|
|
|
270,887
|
|
270,887
|
|
BALANCE,
December 31, 2008
|
|
14,419,418
|
|
14,420
|
|
62,639,075
|
|
|
|
(18,884,209
|
)
|
|
|
43,769,286
|
|
319,012
|
|
Proceeds
from exercise of stock options
|
|
144,297
|
|
145
|
|
533,205
|
|
|
|
|
|
|
|
533,350
|
|
|
|
Share-based
compensation
|
|
|
|
|
|
1,956,057
|
|
|
|
|
|
|
|
1,956,057
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
2,135,630
|
|
|
|
2,135,630
|
|
2,135,630
|
|
BALANCE,
December 31, 2009
|
|
14,563,715
|
|
$
|
14,565
|
|
$
|
65,128,337
|
|
|
|
$
|
(16,748,579
|
)
|
|
|
$
|
48,394,323
|
|
$
|
2,135,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements
36
Table of Contents
SRS
LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,135,630
|
|
$
|
270,887
|
|
$
|
5,414,435
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
704,718
|
|
660,954
|
|
733,873
|
|
Provision for doubtful accounts
|
|
47,527
|
|
11,190
|
|
108,321
|
|
Deferred taxes
|
|
(2,160,021
|
)
|
(1,695,219
|
)
|
(1,389,790
|
)
|
Share-based compensation
|
|
1,956,057
|
|
1,777,468
|
|
1,727,017
|
|
Loss on disposition of furniture, fixtures and
equipment
|
|
14,818
|
|
|
|
10,459
|
|
Write-off of intangible assets
|
|
13,149
|
|
42,569
|
|
34,058
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
106,070
|
|
794,524
|
|
(65,867
|
)
|
Prepaid expenses and other current assets
|
|
(283,056
|
)
|
29,293
|
|
(84,448
|
)
|
Accounts payable
|
|
268,775
|
|
(214,681
|
)
|
(80,836
|
)
|
Accrued liabilities
|
|
581,623
|
|
306,960
|
|
(605,928
|
)
|
Deferred revenue
|
|
(608,570
|
)
|
645,188
|
|
757,271
|
|
Net cash provided by operating activities
|
|
2,776,720
|
|
2,629,133
|
|
6,558,565
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
Proceeds from sale of investments available for
sale
|
|
|
|
5,500,000
|
|
|
|
Purchase of short and long-term investments
|
|
(5,665,000
|
)
|
(7,836,000
|
)
|
|
|
Purchase of property and equipment
|
|
(417,191
|
)
|
(302,602
|
)
|
(147,466
|
)
|
Expenditures related to intangible assets
|
|
(856,402
|
)
|
(672,224
|
)
|
(703,461
|
)
|
Proceeds from property and equipment
|
|
17,600
|
|
|
|
|
|
Net cash used in investing activities
|
|
(6,920,993
|
)
|
(3,310,826
|
)
|
(850,927
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
(7,663,679
|
)
|
(2,946,736
|
)
|
Proceeds from exercise of stock options
|
|
533,350
|
|
329,168
|
|
1,842,964
|
|
Net cash provided by (used in) financing
activities
|
|
533,350
|
|
(7,334,511
|
)
|
(1,103,772
|
)
|
Net (Decrease) Increase in Cash
and Cash Equivalents
|
|
(3,610,923
|
)
|
(8,016,204
|
)
|
4,603,866
|
|
Cash and Cash Equivalents,
Beginning of Year
|
|
31,599,087
|
|
39,615,291
|
|
35,011,425
|
|
Cash and Cash Equivalents, End
of Year
|
|
$
|
27,988,164
|
|
$
|
31,599,087
|
|
$
|
39,615,291
|
|
Supplemental Disclosures of
Cash Flow Information:
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,203,771
|
|
$
|
2,377,114
|
|
$
|
1,392,197
|
|
Supplemental Disclosure of
Non-Cash Investing/Financing Activities:
|
|
|
|
|
|
|
|
Unrealized gain on investments, net
|
|
$
|
|
|
$
|
48,125
|
|
$
|
225,170
|
|
Retirement of treasury stock
|
|
$
|
|
|
$
|
13,613,860
|
|
$
|
|
|
See accompanying notes to
consolidated financial statements
37
Table
of Contents
SRS
LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
SRS Labs, Inc. (collectively with its subsidiaries, the Company,
SRS Labs, SRS, us, we or our) is the recognized global leader in the
practical application of psychoacoustics
,
the science behind how the human
ear operates, and in the post processing segment of the market for audio
delivery. Our award-winning audio
enhancement technologies and solutions dramatically restore audio and voice to
its natural state, the way it was originally recorded,
in both dimension and clarity, thus providing a superior consumer experience for a wide variety of consumer
electronic devices such as televisions, personal computers and mobile phones.
Our operations are conducted through SRS Labs, Inc., the parent
company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen
Representative Office of SRS Labs, Inc. (a Chinese company), Shanghai
Representative Office of SRS Labs, Inc (a Chinese company) and SRS Labs Japan,
KK (a Japanese company). Our business is focused on developing and licensing
audio, voice and surround sound technology solutions to many of the worlds
leading original equipment manufacturers (OEMs), software providers and
semiconductor companies, and limited sales and marketing of stand-alone
software and hardware products through the Internet.
Basis of
Presentation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the Company and its wholly-owned subsidiaries SRSWOWcast, Shenzhen
Representative Office of SRS Labs, Inc., Shanghai Representative Office of
SRS Labs, Inc. and SRS Labs Japan, KK after elimination of all
intercompany accounts and transactions.
Certain amounts in the notes to the consolidated financial statements
have been reclassified in order to conform to the current year presentation.
Use of
Estimates
The preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported revenues and expenses during the reporting periods. Some of the
estimates needed to be made by management include the allowance for doubtful
accounts, estimated useful lives of property and equipment and intangible
assets, valuation of equity instruments associated with share-based
compensation and the valuation allowance for the Companys deferred tax asset.
Actual results could materially differ from these estimates.
Cash and
Cash Equivalent; Short-term and Long-term Investments
Cash and cash equivalents generally consist of cash, certificates of
deposit, and money market funds with original maturities of three months or
less at the date of purchase. The money
market funds are primarily invested in U.S. government obligations. Short-term investments consist of
certificates of deposit with original maturities ranging from 6 to 12 months.
Long-term investments consist of certificates of deposits with original
maturities ranging from 18 to 24 months.
Property
and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. The cost of additions and improvements are
capitalized, while repairs and maintenance are expensed as incurred.
Depreciation and amortization are calculated using the straight-line method,
which amortizes cost over the lesser of the estimated useful lives of the
respective assets or the term of the related lease. Useful lives range from
three to five years.
Intangible
Assets
Costs paid by the Company related to the establishment, transfer and
purchase of patents and other intangibles, primarily legal costs, are
capitalized and amortized, depending on the estimated useful life of the
technology patented. These assets are being amortized using the straight line
method over three to ten years.
38
Table of Contents
Impairment
of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets with
finite lives. The Company assesses
potential impairments to its long-lived assets when there is evidence that
events or changes in circumstances indicate that the carrying amount of an
asset may not be recovered. An impairment loss is recognized when the carrying
amount of the long-lived asset is not recoverable and exceeds its fair value.
The carrying amount of a long-lived asset is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. Any required impairment loss is measured as the
amount by which the carrying amount of a long-lived asset exceeds its fair
value and is recorded as a reduction in the carrying value of the related asset
and a charge to operating results. Based upon the most recent assessment as of December 31,
2009, management has determined there was no impairment in the carrying value
of long-lived assets.
Revenue
Recognition
Our license agreements typically have multi-year or automatic renewal
terms, and either require: a) per-unit royalty payments for all products
implementing our technologies and/or solutions; b) fixed annual or quarterly
royalty payments; or c) a minimum fixed annual or quarterly royalty payment,
which allow the licensee to ship up to a pre-determined number of units during
the specified time period, with additional per-unit royalty payments
thereafter. Royalties for per-unit
arrangements are reported in the quarter following shipment of the consumer
electronics device and are therefore recognized by us generally one quarter
following shipment by the OEM. Revenues
associated with fixed royalty payments are generally recognized ratably over
the term of the agreement. We also sell
some of our products and solutions via the Internet. Revenues associated with those sales are
recognized upon shipment and are not material.
Research
and Development
Research and development expenses include costs and expenses associated
with the development of our design methodology and the design and development
of new products, including initial nonrecurring engineering and product
verification charges. Research and development is expensed as incurred.
Income
Taxes
Deferred taxes on income result from temporary differences between the
reporting of income for financial statement and tax reporting purposes. A valuation
allowance related to a deferred tax asset is recorded when it is more likely
than not that some or all of the deferred tax asset will not be realized.
We provide tax contingencies, if any, for federal, state, local and
international exposures relating to audit results, tax planning initiatives and
compliance responsibilities. The
development of these reserves requires judgments about tax issues, potential
outcomes and timing. Although the
outcome of these tax audits is uncertain, in managements opinion adequate
provisions for income taxes have been made for potential liabilities emanating
from these reviews. If actual outcomes
differ materially from these estimates, they could have a material impact on
our results of operations.
Income Per
Common Share
Basic net income or loss per common share is computed by dividing net
income or loss available to common stockholders by the weighted average number
of common shares outstanding during each year. Diluted net income or loss per
common share reflects the maximum dilution, based on the average price of our
common stock each period and is computed similar to basic income or loss per
share except that the denominator is increased to include the number of
additional shares that would have been outstanding if potentially dilutive
stock options and warrants had been exercised.
Basic
and diluted net income per share for the years ended December 31, 2009,
2008 and 2007 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
BASIC EPS
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,135,630
|
|
$
|
270,887
|
|
$
|
5,414,435
|
|
Denominator: Weighted average common shares
outstanding
|
|
14,460,490
|
|
15,588,815
|
|
16,154,313
|
|
Net income per share
|
|
$
|
0.15
|
|
$
|
0.02
|
|
$
|
0.34
|
|
DILUTED EPS
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,135,630
|
|
$
|
270,887
|
|
$
|
5,414,435
|
|
Denominator: Weighted average common shares
outstanding
|
|
14,460,490
|
|
15,588,815
|
|
16,154,313
|
|
Common equivalent shares outstanding: Dilutive
options
|
|
352,883
|
|
253,521
|
|
835,526
|
|
Total diluted common shares
|
|
14,813,372
|
|
15,842,336
|
|
16,989,839
|
|
Net income per share
|
|
$
|
0.14
|
|
$
|
0.02
|
|
$
|
0.32
|
|
There were options outstanding at December 31, 2009, 2008 and 2007
to purchase 2,311,784, 2,201,570 and 542,660 shares of the Companys common
stock, respectively, that were not included above because they would be
anti-dilutive.
39
Table of Contents
Share-Based
Compensation
The Company measures all employee stock-based compensation awards using
a fair-value method and recording of such expense in the consolidated financial
statements over the requisite service period. We recorded stock-based
compensation expense of $1,956,057, $1,777,468 and $1,727,017 in 2009, 2008 and
2007, respectively. See Note 6.
Fair Value
of Financial Instruments
Effective January 1,
2008, the Company measures the fair value of applicable financial and
non-financial assets based on the following levels of inputs.
·
Level 1 inputs:
Level 1 inputs are quoted market prices
in active markets for identical assets or liabilities that are accessible at
the measurement date.
·
Level 2 inputs:
Level 2 inputs are from other than
quoted market prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly.
·
Level 3 inputs:
Level 3 inputs are unobservable and
should be used to measure fair value to the extent that observable inputs are
not available.
The
hierarchy noted above requires us to minimize the use of unobservable inputs
and to use observable market data, if available, when determining fair value.
Financial assets carried at fair value as of December 31, 2009 are
classified below:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Money market funds
|
|
$
|
27,988,164
|
|
$
|
|
|
$
|
|
|
$
|
27,988,164
|
|
Total
|
|
$
|
27,988,164
|
|
$
|
|
|
$
|
|
|
$
|
27,988,164
|
|
Customer
Concentration
For fiscal years 2009, 2008 and 2007, Samsung accounted for
approximately 39%, 42% and 28%, respectively, of the Companys consolidated
revenues. Given the significant amount
of revenues derived from Samsung, the loss of such customer or the
uncollectibility of related receivables could have a material adverse effect on
our consolidated financial condition and consolidated results of operations.
Concentrations
of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents,
investments and accounts receivable. Due to the relative short nature of such
investments, the carrying amount approximates fair value. The Company places
its cash in banks and its cash equivalents in certificates of deposit and money
market funds at certain financial institutions in excess of amounts insured by
federal agencies. The Company does not believe that it is subject to any
unusual financial risk beyond the normal risk associated with commercial
banking relationships. The Company performs periodic evaluations of the
relative credit standing of these financial institutions. The Company has not experienced any
significant losses on its cash equivalents or investments.
The Companys accounts receivable are derived from sales to OEMs,
original design manufacturers (ODMs) and platform partners primarily in
Asia, North America and Europe. Customers headquarters geographically located
in the Asia Pacific markets accounted for approximately 72%, 88% and 90%, of
the Companys revenues in 2009, 2008 and 2007, respectively, and are expected
to continue to account for a substantial percentage of revenues in the future.
The Company makes periodic evaluations of the creditworthiness of its customers
and manages its exposure to losses from bad debts by limiting the amount of
credit extended whenever deemed necessary and generally does not require
collateral. The Company maintains an allowance for estimated uncollectible
accounts receivable, as appropriate, and such losses have historically been
minimal and within managements expectations.
40
Table of Contents
Recent
Accounting Pronouncements
In January 2010, the
Financial Accounting Standards Board (
FASB)
issued guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair
value measurement hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance will become effective for us with the reporting
period beginning January 1, 2010, except for the disclosure on the roll
forward activities for Level 3 fair value measurements, which will become
effective for us January 1, 2011.
Other than requiring additional disclosures, adoption of this new
guidance will not have a material impact on the Companys consolidated
financial statements.
Effective
September 2009, the Company revised references to authoritative accounting
literature in accordance with
FASB
Accounting Standards Codification (the Codification)
.
The
Codification became the source of authoritative GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative. The
adoption of this new guidance did not have a material
impact on the Companys consolidated financial statements.
In April 2009, FASB
issued guidance in order to establish principles and requirements for reviewing
and reporting subsequent events and requires disclosure of the date through
which subsequent events are evaluated and whether the date corresponds with the
time at which the financial statements were available for issue (as defined) or
were issued. The adoption of this new guidance did not have a material impact
on the Companys consolidated financial statements. Subsequent events were evaluated through February 22,
2010.
2. Property and Equipment
Property and equipment, net, consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Property and equipment
|
|
$
|
540,934
|
|
$
|
1,299,121
|
|
Computer equipment
|
|
588,346
|
|
534,960
|
|
Leasehold improvements
|
|
379,495
|
|
202,854
|
|
|
|
1,508,775
|
|
2,036,935
|
|
Less accumulated depreciation and amortization
|
|
(908,981
|
)
|
(1,613,014
|
)
|
|
|
$
|
599,794
|
|
$
|
423,921
|
|
Depreciation and amortization expense for property and equipment
totaling $208,901, $188,407 and $216,948 for the years ended December 31,
2009, 2008 and 2007, respectively, is reflected in general and administrative
expenses.
3. Intangible Assets
Intangible assets, net consist of the following:
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Patents
|
|
$
|
4,100,363
|
|
$
|
3,618,338
|
|
Accumulated amortization
|
|
(2,072,763
|
)
|
(1,785,531
|
)
|
Patents, net
|
|
2,027,600
|
|
1,832,807
|
|
Other intangibles:
|
|
|
|
|
|
License agreements acquired in purchase of
SRSWOWcast
|
|
640,071
|
|
640,071
|
|
Capitalized software and hardware for several
technologies
|
|
851,508
|
|
582,800
|
|
Total other intangibles
|
|
1,491,579
|
|
1,222,871
|
|
Accumulated amortization, other intangibles
|
|
(817,019
|
)
|
(700,953
|
)
|
Other intangibles, net
|
|
674,560
|
|
521,918
|
|
Intangible assets, net
|
|
$
|
2,702,160
|
|
$
|
2,354,725
|
|
41
Table of Contents
Amortization periods range from three to ten years depending on the
estimated useful life of the asset. Amortization expense consists of the
following:
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Patents
|
|
$
|
287,232
|
|
$
|
284,244
|
|
$
|
296,118
|
|
Other intangibles:
|
|
|
|
|
|
|
|
License agreements acquired in purchase of
SRSWOWcast
|
|
64,007
|
|
64,007
|
|
64,007
|
|
Capitalized software and hardware for several
technologies
|
|
144,579
|
|
124,296
|
|
156,800
|
|
Total intangible amortization expense
|
|
$
|
495,818
|
|
$
|
472,547
|
|
$
|
516,925
|
|
As of December 31, 2009, the weighted average remaining useful
life of the Companys patents and intangible assets was approximately
6 years. The following table shows the estimated amortization expense for
those assets for each of the five succeeding fiscal years and thereafter.
Years Ending December 31,
|
|
|
|
2010
|
|
$
|
572,823
|
|
2011
|
|
543,757
|
|
2012
|
|
450,617
|
|
2013
|
|
287,772
|
|
2014
|
|
240,051
|
|
Thereafter
|
|
607,140
|
|
Total
|
|
$
|
2,702,160
|
|
4. Commitments and Contingencies
Leases
The Company leases office space and certain equipment under
non-cancelable operating leases expiring through 2009. The Company leases its
corporate office and storage facilities located in Santa Ana, California, under
a lease agreement with a partnership that is affiliated with a principal
stockholder, who is also an executive officer and a director, of the Company.
The lease term is until May 2013.
We paid rent of $238,680, $235,170 and $230,256 in 2009, 2008 and 2007,
respectively, under this lease agreement.
We entered into two new leases in 2009 for our international operations
in Shanghai, China, and Tokyo, Japan.
The leases for our offices in Shanghai and Tokyo expire in October 2010
and August 2011, respectively.
Additionally, we lease space in Shenzhen, China and Taipei, Taiwan. In total, we paid rent of $426,651, $294,702
and $230,256 during 2009, 2008 and 2007, respectively, for all of our
facilities. We believe that our current
facilities are adequate to support our current requirements
Future annual minimum lease payments under non-cancelable operating
leases for the remaining periods at December 31, 2009 are as follows:
Years Ending December 31,
|
|
Facility
|
|
Office
Equipment
|
|
Total
|
|
2010
|
|
$
|
398,427
|
|
$
|
21,272
|
|
$
|
419,699
|
|
2011
|
|
338,797
|
|
2,029
|
|
340,826
|
|
2012
|
|
288,608
|
|
|
|
288,608
|
|
2013
|
|
117,029
|
|
|
|
117,029
|
|
Total
|
|
$
|
1,142,861
|
|
$
|
23,301
|
|
$
|
1,166,162
|
|
Litigation
On
June 8, 2007, we sent a letter to Sony Corporation (Sony) relating to
the possible infringement of several SRS patents by Sonys S-Force technology.
Sony responded to the letter by filing a Complaint for Declaratory Relief in
the U.S. District Court in the Southern District of New York on July 6,
2007. In November 2007, Sony and SRS entered into a standstill agreement
for the purpose of conducting discussions towards an amicable resolution of the
dispute, and the Complaint for Declaratory Relief was
dismissed. While the standstill agreement has expired, the parties
continue to
evaluate
the related technologies, patents and claims. Our discussions with Sony
are ongoing; however, we cannot assure you that we will prevail in this matter
and are unable to determine at this time the impact that this matter may have,
if any, on our consolidated financial position, results of operations or cash
flows.
From
time to time, the Company may be involved in other litigation matters and
disputes arising in the normal course of business. Any such matters and
disputes could be costly and time consuming, subject the Company to damages or
equitable remedies, and divert our management and key personnel from our
business operations.
42
Table
of Contents
Indemnifications
The Company enters into standard license agreements in its ordinary
course of business. Pursuant to these agreements, the Company agrees to indemnify
its customers for losses suffered or incurred by them as a result of any
patent, copyright, or other intellectual property infringement claim by any
third party with respect to the Companys products. These agreements generally
have perpetual terms. The maximum amount of indemnification the Company could
be required to make under these agreements is generally limited to the license
fees received by the Company. The Company estimates the fair value of its
indemnification obligation as insignificant, based upon its history of
litigation concerning product and patent infringement claims. Accordingly, the
Company has no liabilities recorded for indemnification under these agreements
as of December 31, 2009 and 2008.
The Company has agreements whereby its officers and directors are
indemnified for certain events or occurrences while the officer or director is,
or was, serving at our request in such capacity. The maximum potential amount
of future payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a directors and officers
insurance policy that reduces its exposure and enables the Company to recover a
portion of any future amounts paid. As a result of the insurance policy
coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. Currently, the Company has no
liabilities recorded for these agreements as of December 31, 2009 and
2008.
Warranties
The Company offers its customers a warranty that its software products
will substantially conform to their functional specifications. To date, there
have been no payments or material costs incurred related to fulfilling these
warranty obligations. Accordingly, the Company has no liabilities recorded for
these warranties as of December 31, 2009 and 2008.
Employment Contracts
The Company has employment agreements with its Chief Executive Officer
and one other employee (collectively Agreements). Each of the Agreements was
entered into for an initial term that has since expired and all are now
automatically renewed annually on various anniversary dates. Under the terms of
each of the Agreements, the Company may be obligated to pay a severance payment
ranging from one to two years of the respective employees base salary,
depending on the date of termination, if the employee is terminated by the
Company without cause.
Amended and Restated Change in Control Plan
The Compensation Committee of the Board, the sponsor of the Companys
Amended and Restated Change in Control Protection Plan (the Change in Control
Plan), has designated certain of its executive officers as participants in the
Change in Control Plan. The Change in Control Plan generally provides that if a
participants employment is terminated without cause or if the participant
resigns for good reason during a two-year period following a change in control,
as defined in the Change in Control Plan, the participant will be entitled to
receive a severance payment. Under the Change in Control Plan, the size of the
severance payment that would be due to a participant upon the occurrence of a
covered termination ranges from to one to two times the participants average
taxable income during the five years preceding the change in control, depending
on the participants position with the Company. The Change in Control Plan also
provides that the Company will pay a participants COBRA premiums for a period
of 18 months following a covered termination.
43
Table of Contents
5. Income Taxes
The components of income from continuing operations before income taxes
are as follows:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
United States
|
|
$
|
2,233,636
|
|
$
|
388,430
|
|
$
|
5,459,993
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes on continuing operations consists of the
following:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
|
|
98,006
|
|
144,923
|
|
45,558
|
|
Foreign
|
|
2,160,021
|
|
1,667,839
|
|
1,389,372
|
|
Total
|
|
2,258,027
|
|
1,812,762
|
|
1,434,930
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(1,528,883
|
)
|
(1,704,301
|
)
|
(234,654
|
)
|
State
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Change in valuation allowance, net
|
|
(631,138
|
)
|
9,082
|
|
(1,154,718
|
)
|
Total
|
|
(2,160,021
|
)
|
(1,695,219
|
)
|
(1,389,372
|
)
|
Total income tax provision
|
|
$
|
98,006
|
|
$
|
117,543
|
|
$
|
45,558
|
|
The
reconciliation of the income tax expense computed at U.S. federal statutory
rates to the provision for income taxes is as follows:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Tax at U.S. federal statutory rates
|
|
$
|
759,436
|
|
$
|
179,821
|
|
$
|
1,856,398
|
|
State income taxes, net of federal benefit
|
|
130,320
|
|
30,857
|
|
151,796
|
|
Nondeductible expenses
|
|
39,433
|
|
32,692
|
|
9,983
|
|
Change in valuation allowance, net
|
|
(631,138
|
)
|
9,082
|
|
(1,154,718
|
)
|
Research and development credit
|
|
(199,984
|
)
|
(131,768
|
)
|
(110,996
|
)
|
Foreign tax rate differential and other
|
|
(61
|
)
|
(3,141
|
)
|
(706,905
|
)
|
Total income tax expense
|
|
$
|
98,006
|
|
$
|
117,543
|
|
$
|
45,558
|
|
44
Table of
Contents
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Companys
deferred tax assets are as follows:
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Deferred tax assets:
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
504,561
|
|
$
|
705,430
|
|
Accruals
|
|
663,537
|
|
915,872
|
|
Net operating loss carryforwards
|
|
16,492
|
|
883,338
|
|
Tax credit carryforwards
|
|
8,871,580
|
|
6,553,617
|
|
Capital loss carryforwards
|
|
6,460,261
|
|
6,460,261
|
|
Other
|
|
2,428,174
|
|
1,897,204
|
|
Valuation allowance
|
|
(13,313,163
|
)
|
(13,944,301
|
)
|
Total net deferred tax assets
|
|
$
|
5,631,442
|
|
$
|
3,471,421
|
|
The Company has federal and state net operating loss carryforwards at December 31,
2009 of $8,463,418 and $5,598,943, respectively. Approximately $8.0 million
dollars of the net operating losses have not been recognized relating to excess
tax benefits. These net operating loss
carryforwards will begin to expire in 2014 and will continue to expire through
2027. The Company also has federal and state research credits of approximately
$1,054,315 and $462,917, respectively, which will begin to expire in 2011 and
will continue to expire through 2029 for federal and carryforward indefinitely
for state purposes. In addition, the Company has federal foreign tax credit
carryforwards of $7,376,260 at December 31, 2009, which will begin to
expire in 2014 and will continue to expire through 2019. The Company also has
federal and state capital loss carryforwards at December 31, 2009 of
$16,219,585, which will expire in 2011.
As of December 31, 2009, a valuation allowance of $13,313,163 has
been provided based on the Companys assessment of the future realizability of
deferred tax assets. The valuation allowance on deferred tax assets relates to
future deductible temporary differences, capital loss carryforwards, foreign
tax credit carryforwards, research and development credit carryforwards, and
net operating loss carryforwards for which the Company has concluded it is more
likely than not that these items will not be realized in the ordinary course of
operations. Management periodically evaluates the recoverability of the
deferred tax assets and recognizes the tax benefit only as reassessment
demonstrates they are realizable. At such time it is determined that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance is adjusted. This assessment is based on projections of future
taxable income, which is impacted in future periods by income before taxes and
stock option exercises. The amount of the net deferred tax assets considered
realizable, however, could be reduced in the near term if actual future
earnings are lower than estimated, or if there are differences in the timing or
amount of future reversals of existing taxable temporary differences. The Companys deferred tax asset at December 31,
2009 do not include approximately $3.2 million of excess tax benefits from
employee stock option exercises that are a component of the Companys net
operating loss carryovers.
The
use of loss carryforwards and tax credit carry forwards may become limited in
the event of an ownership change as defined under Internal Revenue Code
section 382. The Company commissioned a section 382 study in 2008, which
confirmed that there have been no ownership changes through 2007. Further, due to a change in California tax
law in fiscal year 2008, net operating loss carryforwards may not be used in
2008 or 2009 and research and development credits are limited to fifty percent
of the Companys net tax.
The Company determined at the beginning of fiscal year 2007 that it did
not have any unrecorded tax contingencies and therefore a rollforward of the
tax contingency reserve that reconciles the beginning and ending balance of the
reserve was not necessary as there was no tax contingency reserve. The Company
will recognize interest and penalties related to unrecognized tax benefits
within the income tax expense line in the accompanying consolidated statement
of operations. As of December 31, 2009, the Company has not recognized
liabilities for penalty and interest as the Company does not have liability for
unrecognized tax benefits. The tax years 2005 through 2008 remain open to
examination by the major taxing jurisdictions.
Revenue is recognized gross
of foreign withholding taxes that are remitted by our licensees directly to
foreign tax authorities. Withholding taxes were $2.2 million, $1.7 million and
$1.4 million in 2009, 2008 and 2007, respectively.
45
Table of
Contents
6. Stockholders Equity and Share-Based Compensation
Stock Award/Option Plans/Warrants
In July 1996, the Board adopted and the Companys stockholders approved
the 1996 Long-Term Incentive Plan (as amended and restated, the 1996 Plan),
for which 1,000,000 shares of the Companys common stock were initially
reserved for issuance to officers, employees and consultants of the Company.
The number of shares reserved for issuance under the 1996 Plan was increased in
June 1997, June 1998, June 2000 and June 2003 by 1,000,000,
2,500,000, 2,500,000 and 1,500,000 shares, respectively. The Compensation Committee or, in the absence
of a Compensation Committee, the Board, as a whole, has been appointed to
administer the 1996 Plan. Options issued under the 1996 Plan vest in the manner
prescribed by the Compensation Committee or the Board, as applicable. As of December 31,
2009, options to purchase 1,194,698 shares of the Companys common stock were
outstanding under the 1996 Plan. No additional options have been, or will be,
granted under the 1996 Plan since the date of stockholder approval of the 2006
Plan (defined below).
In July 1996, the Board adopted and the Companys stockholders
approved the 1996 Non-employee Directors Stock Option Plan (the Non-employee
Directors Plan), a non-discretionary formula plan for which 120,000 shares of
the Companys common stock were reserved for issuance to the Companys
non-employee directors. A committee consisting of all directors who are not
eligible to participate in the Non-employee Directors Plan administers the
Non-employee Directors Plan. With the exception of the initial option granted
to a non-employee director, which vests immediately, options granted under the
Non-employee Directors Plan vest over a three-year period, the first
installment vesting on the date of grant. In June 1999, the Companys
stockholders approved the Amended and Restated 1996 Non-employee Directors
Stock Option Plan (the Amended Non-employee Directors Plan). Among the
changes set forth in the Amended Non-employee Directors Plan was to increase by
130,000 the number of shares of common stock that may be issued under the plan.
In June 2001, the Board adopted and the Companys stockholders approved an
amendment to the Amended Non-employee Directors Plan to increase the number of
shares reserved for issuance under the plan by 250,000. As of December 31,
2009, options to purchase 177,500 shares of common stock were outstanding under
the Amended Non-employee Directors Plan. There are 280,000 shares of common
stock available for grant under the Non-employee Directors Plan as of December 31,
2009.
On June 22, 2006, the Board adopted and the Companys stockholders
approved the 2006 Stock Incentive Plan (the 2006 Plan), for which 1,500,000
shares of the Companys common stock were initially reserved for issuance under
the plan. Either the Board or a committee appointed by the Board (the Committee)
will administer the 2006 Plan. The Compensation Committee is currently acting
as the Committee for purposes of the 2006 Plan. Under the 2006 Plan, the
Committee may grant options that are intended to qualify as incentive stock
options. Additionally, the Committee may also grant share appreciation rights,
restricted shares, restricted share units, unrestricted shares, deferred share
units, and performance awards. The vesting period is dependent on the type of
award granted and may be determined by the Committee. In June 2008, the
Board adopted and the Companys stockholders approved an amendment to the 2006
Plan to increase the number of shares reserved for issuance under the plan by
1,750,000. As of December 31, 2009, options to purchase 2,576,180 shares
of common stock were outstanding under the 2006 Plan. There are 661,241 shares
of common stock available for grant under the 2006 Plan as of December 31,
2009.
Share-Based Compensation
We account for
stock-based compensation by measuring all employee stock-based compensation
awards using a fair-value method and record such expense in the consolidated
financial statements over the requisite service period.
Total compensation cost recognized in 2009 and 2008 is as follows:
|
|
Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Sales and marketing
|
|
$
|
511,301
|
|
458,610
|
|
495,132
|
|
Research and development
|
|
457,464
|
|
399,630
|
|
428,516
|
|
General and administrative
|
|
987,292
|
|
919,228
|
|
803,369
|
|
Total compensation cost recognized
|
|
1,956,057
|
|
1,777,468
|
|
1,727,017
|
|
|
|
|
|
|
|
|
|
|
Option awards are granted with an exercise price equal to the market
price of the Companys stock at the date of grant. Option awards generally have
a term of 10 years and vest and become exercisable over a four-year
service period.
The fair value of each share-based award is estimated on the grant date
using the Black-Scholes-Merton (BSM) option-pricing model. Expected
volatilities are based on the historical volatility of the Companys stock
price. The expected term for options
granted in 2009 and 2008 was calculated based upon the historical term of the
Companys option grants and review of the terms of the Companys peers. The expected term for options granted in 2007
is derived using the simplified method. The
risk-free rate for
46
Table of
Contents
periods
within the contractual life of the option is based on the U.S. Treasury
interest rates in effect at the time of grant. The fair value of options
granted was estimated using the following weighted-average assumptions:
|
|
Years Ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected term (in years)
|
|
4.23
|
|
4.67
|
|
6.25
|
|
Expected volatility
|
|
54
|
%
|
56
|
%
|
56
|
%
|
Risk-free interest rate
|
|
1.96
|
%
|
3.4
|
%
|
4.8
|
%
|
Dividend yield
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
The following table summarizes the weighted-average fair value of stock
options granted and the total intrinsic value of stock options exercised during
the years ended December 31, 2009, 2008 and 2007:
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Weighted-average fair value at date of grant
|
|
$
|
2.86
|
|
$
|
2.80
|
|
$
|
5.66
|
|
Intrinsic value of options exercised
|
|
$
|
464,136
|
|
$
|
192,314
|
|
$
|
2,846,841
|
|
A summary of option activity under the stock option plans and changes
during the year ended December 31, 2009 is presented below:
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Remaining
Contractual
Term (in Yrs)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2009
|
|
2,879,538
|
|
$
|
5.83
|
|
|
|
|
|
Granted
|
|
1,306,800
|
|
6.31
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(93,663
|
)
|
6.57
|
|
|
|
|
|
Exercised
|
|
(144,297
|
)
|
3.70
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
3,948,378
|
|
$
|
6.05
|
|
7.13
|
|
$
|
6,339,904
|
|
Options exercisable, December 31, 2009
|
|
1,988,474
|
|
$
|
5.77
|
|
5.27
|
|
$
|
4,039,205
|
|
A summary of the
activity of the Companys non-vested shares during the year ended December 31,
2009 is presented below:
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Weighted-Average
|
|
Unrecognized
|
|
|
|
Shares
|
|
Grant Date
Fair Value
|
|
Remaining
Years to Vest
|
|
Compensation
Cost
|
|
Nonvested, January 1, 2009
|
|
1,274,504
|
|
$
|
3.41
|
|
|
|
|
|
Granted
|
|
1,306,800
|
|
2.76
|
|
|
|
|
|
Vested
|
|
(562,042
|
)
|
3.42
|
|
|
|
|
|
Forfeited
|
|
(59,358
|
)
|
3.06
|
|
|
|
|
|
Nonvested, December 31, 2009
|
|
1,959,904
|
|
$
|
2.97
|
|
3.07
|
|
$
|
5,947,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning currently
outstanding and exercisable options and warrants at December 31, 2009.
Range of Exercise Prices
|
|
Number of
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
(in Years)
|
|
Weighted
Average
Exercise Price
|
|
Exercisable
As of
12/31/2009
|
|
Weighted
Average
Exercise Price
|
|
$1.91$3.80
|
|
390,014
|
|
2.1
|
|
$
|
2.82
|
|
390,014
|
|
$
|
2.82
|
|
$3.81$5.70
|
|
1,404,504
|
|
7.6
|
|
4.92
|
|
600,078
|
|
4.92
|
|
$5.71$7.60
|
|
1,694,840
|
|
8.0
|
|
6.63
|
|
681,246
|
|
6.11
|
|
$7.61$9.50
|
|
294,020
|
|
7.1
|
|
9.29
|
|
202,136
|
|
9.29
|
|
$9.51$11.40
|
|
145,000
|
|
7.0
|
|
10.62
|
|
95,000
|
|
10.61
|
|
$17.10$19.00
|
|
20,000
|
|
0.2
|
|
19.00
|
|
20,000
|
|
19.00
|
|
|
|
3,948,378
|
|
7.1
|
|
$
|
6.05
|
|
1,988,474
|
|
$
|
5.77
|
|
47
Table of
Contents
The total shares subject to options exercisable as of December 31,
2009, 2008, and 2007 were 1,988,474, 1,605,034, and 1,492,892, respectively,
with weighted average exercise prices of $5.77, $5.41 and $4.67, respectively.
7. Segment Information
The Companys revenue is solely derived from licensing related revenue.
The following schedule presents the Companys revenue by geographic area. For
product sales, revenue is allocated based on the country to which product was
shipped. Licensing-related revenue is summarized based on the location of the
licensees corporate headquarters. For product and online sales, revenue is
allocated to the Americas. The Americas region includes North, Central and
South America. In 2008, the Greater China region was broken down into the China
and Asia Pacific region. The China region includes all licensees with their
corporate headquarters located in mainland China. The Asia Pacific region includes all
licensees with their corporate headquarters located in Taiwan and Hong Kong.
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
%
|
|
2008
|
|
%
|
|
2007
|
|
%
|
|
Geographic Area Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea
|
|
$
|
11,551,403
|
|
46
|
%
|
$
|
9,624,459
|
|
52
|
%
|
$
|
7,834,730
|
|
42
|
%
|
Americas
|
|
6,440,033
|
|
26
|
|
1,744,502
|
|
10
|
|
1,837,096
|
|
9
|
|
Japan
|
|
4,375,139
|
|
17
|
|
5,357,286
|
|
29
|
|
7,346,548
|
|
39
|
|
China
|
|
1,548,496
|
|
6
|
|
838,754
|
|
5
|
|
843,931
|
|
5
|
|
Asia Pacific
|
|
647,220
|
|
3
|
|
430,598
|
|
2
|
|
805,660
|
|
4
|
|
Europe
|
|
402,286
|
|
2
|
|
337,079
|
|
2
|
|
183,975
|
|
1
|
|
Total
|
|
$
|
24,964,577
|
|
100
|
%
|
$
|
18,332,678
|
|
100
|
%
|
$
|
18,851,940
|
|
100
|
%
|
8. Employee Benefit Plan
The Companys employees based in the United States may participate in a
salary deferral plan (the 401(k) Plan) in which eligible employees can
contribute up to 75% of their eligible compensation. The Company also may
contribute on a discretionary basis. The Companys matching contribution vests
ratably over a four year period. During the years ended December 31, 2009,
2008 and 2007, the Company contributed approximately $153,141, $121,723 and
$126,675, respectively, to the 401(k) Plan.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|
|
Balance at
Beginning
of Period
|
|
Additions
Charged to
Expense
|
|
Deductions
|
|
Balance
at End
of Period
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
|
|
$
|
60,000
|
|
$
|
12,473
|
|
$
|
47,527
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
72,714
|
|
$
|
11,189
|
|
$
|
83,903
|
|
$
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
39,256
|
|
$
|
108,321
|
|
$
|
74,863
|
|
$
|
72,714
|
|
48
Table of
Contents
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate
of Incorporation of the Company, previously filed with the SEC as
Exhibit 3.1 to the Companys Registration Statement on Form SB-2,
specifically included in Amendment No. 1 to such Registration Statement
filed with the SEC on July 3, 1996 (File No. 333-4974-LA) (the
Registration Statement Amendment No. 1), which is incorporated herein
by reference.
|
|
|
|
3.2
|
|
Bylaws
of the Company, previously filed with the SEC as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the period ended
September 30, 1999, filed with the SEC on November 12, 1999, which
is incorporated herein by reference.
|
|
|
|
|
|
Material Contracts Relating to Management
Compensation Plans or Arrangements
|
|
|
|
10.1
|
|
Employment
Agreement dated July 1, 1996, between the Company and Thomas C.K. Yuen,
previously filed with the SEC as Exhibit 10.8 to the Registration
Statement Amendment No. 1, which is incorporated herein by reference.
|
|
|
|
10.2
|
|
Amendment
to Employment Agreement dated as of March 14, 1997, between the Company
and Thomas C.K. Yuen, previously filed with the SEC as Exhibit 10.2 to
the Companys Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed with the SEC on March 31, 1997 (the 1996
Annual Report), which is incorporated herein by reference.
|
|
|
|
10.3
|
|
Employment
Agreement dated July 1, 1996, between the Company and Alan D. Kraemer,
previously filed with the SEC as Exhibit 10.11 to the Registration
Statement Amendment No. 1, which is incorporated herein by reference.
|
10.4
|
|
SRS
Labs, Inc. Amended and Restated 1996 Non-employee Directors Stock Option
Plan, as amended, previously filed with the SEC as Appendix B to the
Companys Definitive Proxy Statement dated and filed with the SEC on
April 30, 2003, which is incorporated herein by reference.
|
|
|
|
10.5
|
|
Form of
Indemnification Agreement, previously filed with the SEC as
Exhibit 10.20 to the Registration Statement Amendment No. 1, which
is incorporated herein by reference.
|
|
|
|
10.6
|
|
Non-employee
Director Compensation Policy adopted by the Companys Board of Directors on
January 28, 2005, previously filed with the SEC as Exhibit 10.1 to
the Companys Current Report on Form 8-K filed with the SEC on
February 3, 2005, which is incorporated herein by reference.
|
|
|
|
10.7
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Non-Employee Directors Stock Option Plan (Initial
Appointment), previously filed with the SEC as Exhibit 10.2 to the
Companys Current Report on Form 8-K filed with the SEC on
February 3, 2005, which is incorporated herein by reference.
|
|
|
|
10.8
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Non-Employee Directors Stock Option Plan (Re-Election),
previously filed with the SEC as Exhibit 10.3 to the Companys Current
Report on Form 8-K filed with the SEC on February 3, 2005, which is
incorporated herein by reference.
|
|
|
|
10.9
|
|
Form of
Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan, previously filed with the
SEC as Exhibit 10.4 to the Companys Current Report on Form 8-K
filed with the SEC on February 3, 2005, which is incorporated herein by
reference.
|
|
|
|
10.10
|
|
Form of Nonqualified Stock Option Agreement under the SRS
Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan dated
March 29, 2005 (Current participants under this plan include the
following officers: Thomas C.K. Yuen, Ulrich E. Gottschling, Sarah Yang and
Alan D. Kraemer), previously filed with the SEC as Exhibit 10.1 to the
Companys Current Report Form 8-K filed with the SEC on April 4,
2005, which is incorporated herein by reference.
|
|
|
|
10.11
|
|
SRS
Labs, Inc. Amended and Restated Change in Control Protection Plan
approved August 3, 2009, previously filed with the SEC as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q filed
with the SEC on August 6, 2009, which is incorporated herein by
reference.
|
49
Table of Contents
Exhibit
Number
|
|
Description
|
10.12
|
|
Form of Participation
Agreement under the SRS Labs, Inc. Amended and Restated Change in
Control Protection Plan for Selected Executive Officers (Current participants
under this plan include the following officers: Thomas C.K. Yuen, Ulrich E.
Gottschling, Sarah Yang, Jeff Klaas and Alan D. Kraemer) previously filed
with the SEC as Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q filed with the SEC on August 6, 2009, which is
incorporated herein by reference.
|
|
|
|
10.13
|
|
SRS
Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan, as
amended, approved April 27, 2005, previously filed with the SEC as Exhibit 10.5
to the Form 8-K filed with the SEC on May 3, 2005, which is
incorporated herein by reference.
|
|
|
|
10.14
|
|
Offer
Letter dated April 22, 2008 by and between the Company and Jeff Klaas,
previously filed with the SEC as Exhibit 10.15 to the Companys Annual
Report on Form 10-K for the fiscal period ended December 31, 2008,
filed with the SEC on February 24, 2009 which is incorporated herein by
reference.
|
|
|
|
10.15
|
|
Employment
Letter Agreement dated December 21, 2005 by and between the Company and
Ulrich E. Gottschling, previously filed with the SEC as Exhibit 99.1 to
the Companys Current Report on Form 8-K filed with the SEC on
December 29, 2005, which is incorporated herein by reference.
|
|
|
|
10.16
|
|
Form of
Nonqualified Stock Option Agreement under the SRS Labs, Inc. 1996
Amended and Restated Long-Term Incentive Plan, as amended, previously filed
with the SEC as Exhibit 99.8 to the Companys Current Report on
Form 8-K filed with the SEC on January 18, 2006, which is
incorporated herein by reference.
|
|
|
|
10.17
|
|
SRS
Labs, Inc. Profit Sharing and Bonus Plan, as amended on June 20,
2007, previously filed with the SEC as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on June 25, 2007,
which is incorporated herein by reference.
|
|
|
|
10.18
|
|
SRS
Labs, Inc. 2006 Stock Incentive Plan, as amended on December 17,
2007, previously filed with the SEC as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on December 21, 2007,
which is incorporated herein by reference.
|
|
|
|
10.19
|
|
Form of Stock Option
Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC as Exhibit 10.9 to the Companys Quarterly
Report on Form 10-Q, Amendment No. 1, filed with the SEC on September 22,
2006, which is incorporated herein by reference.
|
|
|
|
10.20
|
|
Form of
Restricted Share Award Agreement under the SRS Labs, Inc. 2006 Stock
Incentive Plan, previously filed with the SEC as Exhibit 10.10 to the
Companys Quarterly Report on Form 10-Q, Amendment No. 1, filed
with the SEC on September 22, 2006, which is incorporated herein by
reference.
|
|
|
|
10.21
|
|
Form of
Restricted Share Unit Award Agreement under the SRS Labs, Inc. 2006
Stock Incentive Plan, previously filed with the SEC as Exhibit 10.11 to
the Companys Quarterly Report on Form 10-Q, Amendment No. 1, filed
with the SEC on September 22, 2006, which is incorporated herein by
reference.
|
|
|
|
10.22
|
|
Form of
SAR Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC as Exhibit 10.12 to Amendment No. 1
to the Companys Quarterly Report on Form 10-Q, Amendment No. 1,
filed with the SEC on September 22, 2006, which is incorporated herein
by reference.
|
|
|
|
10.23
|
|
SRS
Labs, Inc. Patent Reward Program, previously filed as Exhibit 10.2
to the Companys Form 8-K filed with the SEC on June 28, 2006,
which is incorporated herein by reference.
|
|
|
|
|
|
Other Material Contracts
|
|
|
|
10.24
|
|
Industrial
Real Estate Lease dated May 27, 2008, between the Company and Daimler
Commerce Partners, L.P., previously filed with the SEC as
Exhibit 10.25 to the Companys Annual Report on Form 10-K for the
fiscal period ended December 31, 2008, filed with the SEC on
February 24, 2009 which is incorporated herein by reference.
|
|
|
|
10.25
|
|
Stock
Divestment Agreement dated July 1, 1996, between the Company, Thomas
C.K. Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed
with the SEC as Exhibit 10.17 to the Companys Registration Statement on
Form SB-2, specifically included in Amendment No. 2 to such
Registration Statement file with the SEC on August 2, 1996 (File
No. 333-4974-LA), which is incorporated herein by reference.
|
50
Table of
Contents
Exhibit
Number
|
|
Description
|
|
|
|
|
|
Other Exhibits
|
|
|
|
21
|
|
Subsidiaries
of the Company.
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm, Squar, Milner, Peterson,
Miranda & Williamson, LLP, dated February 22, 2010.
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer of SRS Labs, Inc., pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer of SRS Labs, Inc., pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer of SRS Labs, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer of SRS Labs, Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
51
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