-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PIG813eRxIGJAztl/o+QaVlC8JPvtIYi/Lv2MrCQ9FF53OvRIQsiW2XkGJA0qqDm 59PXOJrZMfhLXZMFhObsCA== 0000950150-98-001407.txt : 19980817 0000950150-98-001407.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950150-98-001407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPATIALIZER AUDIO LABORATORIES INC CENTRAL INDEX KEY: 0000890821 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 954484725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26460 FILM NUMBER: 98690204 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 134 STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD. #134 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 10-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED: JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 33-90532 SPATIALIZER AUDIO LABORATORIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4484725 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20700 VENTURA BOULEVARD, SUITE 134 WOODLAND HILLS, CALIFORNIA 91364-2357 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER: (818) 227-3370 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [ ] As of August 14, 1998 there were 21,653,668 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) Current Assets: Cash and Cash Equivalents................................. $ 619,260 $ 577,413 Accounts Receivable, net.................................. 1,160,611 911,505 Employee Advances......................................... 29,312 59,086 Inventory................................................. 100,944 93,250 Prepaid Expenses and Deposits............................. 194,450 135,702 Deferred Transaction Costs................................ 185,701 146,529 ------------ ------------ Total Current Assets........................................ 2,290,278 1,923,485 Property and Equipment, net................................. 528,408 586,961 Capitalized Patent and Technology Costs, net................ 808,223 654,668 ------------ ------------ Total Assets................................................ $ 3,626,909 $ 3,165,114 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank Line of Credit Payable............................... $ -- $ 400,000 Notes Payable............................................. 52,639 64,272 Accounts Payable.......................................... 311,254 651,376 Accrued Liabilities....................................... 87,954 79,140 Accrued Wages and Benefits................................ 176,193 332,713 Due to Related Parties.................................... 762,500 112,500 ------------ ------------ Total Current Liabilities................................... 1,390,540 1,640,001 Shareholders' Equity: Series A, 7% Convertible Preferred shares, $.01 par value, 100,000 shares authorized, 60,000 and 0 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively........................................... 600 -- Common shares, $.01 par value, 50,000,000 shares authorized, 21,442,345 and 21,410,012 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively........................................... 214,423 214,100 Additional Paid-In Capital................................ 44,204,768 41,481,890 Accumulated Deficit....................................... (42,183,422) (40,170,877) ------------ ------------ Total Shareholders' Equity.................................. 2,236,369 1,525,113 ------------ ------------ $ 3,626,909 $ 3,165,114 ============ ============
2 3 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FOR THE SIX MONTH PERIOD ENDED --------------------------------- ------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 -------------- -------------- ------------- ------------- Revenues: License Revenues................... $ 605,000 $ 120,000 $ 605,000 $ 120,000 Royalty Revenues................... 8,938 291,828 525,282 689,542 Product Development Revenues....... 50,000 -- 50,000 -- Product Revenues................... 10,639 165,041 17,704 285,788 ----------- ----------- ----------- ----------- 674,577 576,869 1,197,986 1,095,330 Cost of Revenues..................... 9,931 122,986 30,290 187,242 ----------- ----------- ----------- ----------- Gross Profit......................... 664,646 453,883 1,167,696 908,088 Operating Expenses: General and Administrative......... 727,329 535,457 1,167,451 1,108,555 Research and Development........... 563,970 810,237 1,163,507 1,379,064 Sales and Marketing................ 452,026 278,526 813,499 619,884 ----------- ----------- ----------- ----------- 1,743,325 1,624,220 3,144,457 3,107,503 ----------- ----------- ----------- ----------- Operating Loss....................... (1,078,679) (1,170,337) (1,976,761) (2,199,415) Interest Income...................... 14,056 22,233 15,135 31,692 Interest Expense..................... (18,482) (5,299) (30,539) (9,619) ----------- ----------- ----------- ----------- (4,426) 16,934 (15,404) 22,073 ----------- ----------- ----------- ----------- Loss Before Income Taxes............. (1,083,105) (1,153,403) (1,992,165) (2,177,342) Income Taxes......................... (9,228) (17,602) (20,380) (20,500) ----------- ----------- ----------- ----------- Net Loss............................. $(1,092,333) $(1,171,005) $(2,012,545) $(2,197,842) =========== =========== =========== =========== Basic and Diluted Loss Per Share..... $ (0.07) $ (0.06) $ (0.11) $ (0.11) =========== =========== =========== =========== Weighted Average Shares Outstanding........................ 21,439,422 20,806,429 21,428,850 20,202,341 =========== =========== =========== ===========
3 4 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net Loss.................................................. $(2,012,545) $(2,197,842) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization............................. 116,562 120,660 Options Issued for Services............................... 56,954 -- Net change in Assets and Liabilities: Accounts Receivable and Employee Advances................. (219,332) 81,973 Inventory................................................. (7,694) 166,787 Prepaid Expenses and Deposits............................. (58,748) 107,067 Deferred Transaction Costs................................ (39,172) -- Accounts Payable.......................................... (340,122) (146,318) Accrued Liabilities....................................... (147,706) (91,825) ----------- ----------- Net Cash Used In Operating Activities....................... (2,651,803) (1,959,498) ----------- ----------- Cash Flows from Investing Activities: Purchase of Property and Equipment........................ (39,399) (171,511) Increase in Capitalized Patent and Technology Costs....... (172,165) (69,062) ----------- ----------- Net Cash Used in Investing Activities....................... (211,564) (240,573) ----------- ----------- Cash flows from Financing Activities: Issuance of Preferred Shares, Net......................... 2,620,893 -- Issuance of Common Shares, Net............................ -- 1,966,144 Exercise of Options....................................... 12,704 20,741 Exercise of Warrants...................................... 33,250 -- Issuance of Notes Payable................................. -- 59,532 Issuance of Related Party Payable......................... 650,000 -- Repayment of Bank Line of Credit.......................... (400,000) -- Repayment of Notes Payable................................ (11,633) (8,216) ----------- ----------- Net Cash Provided by Financing Activities................... 2,905,214 2,038,201 ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents............ 41,847 (161,870) Cash and Cash Equivalents, Beginning of Period.............. 577,413 1,587,395 ----------- ----------- Cash and Cash Equivalents, End of Period.................... $ 619,260 $ 1,425,525 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest.................................................. $ 30,539 $ 9,619 Income Taxes.............................................. 20,380 20,500 =========== ===========
4 5 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES A, 7% CONVERTIBLE PREFERRED SHARES COMMON SHARES --------------------- ---------------------- TOTAL NUMBER OF NUMBER OF ADDITIONAL ACCUMULATED SHAREHOLDERS' SHARES PAR VALUE SHARES PAR VALUE PAID-IN-CAPITAL DEFICIT EQUITY --------- --------- ---------- --------- --------------- ------------ ------------- Balance, December 31, 1997..................... -- $ -- 21,410,012 $214,100 $41,481,890 $(40,170,877) 1,525,113 Issuance of Preferred Shares, Net.............. 60,000 600 -- -- 2,620,293 -- 2,620,893 Options Exercised.......... -- -- 13,333 133 12,571 -- 12,704 Warrants Exercised......... -- -- 19,000 190 33,060 -- 33,250 Options Issued for Services................. -- -- -- -- 56,954 -- 56,954 Net Loss................... -- -- -- -- -- (2,012,545) (2,012,545) ------ ---- ---------- -------- ----------- ------------ ----------- Balance, June 30, 1998..... 60,000 $600 21,442,345 $214,423 $44,204,768 $(42,183,422) $ 2,236,369 ------ ---- ---------- -------- ----------- ------------ -----------
5 6 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") are in the business of developing and licensing technology. The Company's wholly owned subsidiary Desper Products, Inc. ("DPI") is in the business of developing proprietary advanced audio signal processing technologies and products for consumer electronics, entertainment, and multimedia computing. The Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") is in the business of developing scaleable, modular compact disc ("CD") and digital versatile disc ("DVD") server technologies associated with a network based CD / DVD server for internet and intranet applications. MDT plans to either license its technology or engage in third party manufacturing arrangements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements of the Company are condensed and do not include some of the information necessary to obtain a complete understanding of the financial data. Management believes that all adjustments necessary for a fair presentation of results have been included in the unaudited consolidated Financial Statements for the interim periods presented. Accordingly, your attention is directed to footnote disclosures found in the December 31, 1997 Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. Basis of Consolidation The consolidated financial statements include the accounts of Spatializer Audio Laboratories, Inc. and its wholly owned subsidiaries, Desper Products, Inc. and MultiDisc Technologies, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company accrues foundry revenues based on licensee royalty reports, management estimates and reports from third parties. At March 31, 1998, the Company accrued $362,750 of royalty revenue from a major customer based on the results of a royalty audit, which was settled in June 1998 for $350,000. Research and Development Expenditures The Company expenses research and development expenditures as incurred. (3) LOSS PER SHARE Loss per share for the three and six months ended June 30, 1998 includes the effect of approximately $262,000 of the beneficial conversion feature of the Series "A", 7% Convertible Preferred Stock as well as dividends in arrears of $43,750 related to the Series "A", 7% Convertible Preferred Stock. 6 7 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents options and warrants to purchase shares of common stock that were outstanding during the six month periods ended June 30, 1998 and 1997 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
1998 1997 --------- --------- Options....................................... 1,958,300 1,986,403 Warrants...................................... 1,521,750 834,750 --------- --------- 3,480,050 2,821,153 ========= =========
(4) COMPREHENSIVE INCOME The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 on January 1, 1998. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from non-owner sources. Other comprehensive income (loss) includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company did not have components of other comprehensive income (loss) during the three and six-month periods ended June 30, 1998 and 1997. As a result, comprehensive loss is the same as the net loss for the three and six-month periods ended June 30, 1998 and 1997. (5) SEGMENT REPORTING The following table presents information about reported segment losses and segment assets as of and for the six-month periods ended June 30, 1998 and 1997.
1998 1997 -------------------------------------- -------------------------------------- SEGMENT SEGMENT DPI MDT TOTAL DPI MDT TOTAL ---------- ----------- ----------- ---------- ----------- ----------- Revenues from External Customers........... $1,147,986 $ 50,000 $ 1,197,986 $1,095,330 $ -- $ 1,095,330 Segment Loss........ (460,869) (1,368,488) (1,849,357) (537,025) (1,233,406) (1,770,431) Segment Assets...... 1,826,008 856,152 2,682,160 1,409,008 732,531 2,141,539
The following is a reconciliation of reportable segment loss to the Company's consolidated totals.
1998 1997 ----------- ----------- Loss: Total Loss for Reportable Segments...... $(1,849,357) $(1,770,431) Other Corporate Expenses................ (163,188) (427,411) ----------- ----------- Consolidated Total........................ $(2,012,545) $(2,197,842) =========== ===========
(6) MAJOR CUSTOMERS A substantial portion of the Company's licensing and royalty revenues are derived from three major customers. The following customers comprised greater than 10% of total revenues during the six months ended June 30, 1998 and 1997:
1998 1997 ---- ---- Customer A............................................. 76% 30%
7 8 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) CONTINGENCIES Legal On August 29, 1996, the Court granted the Company's summary judgment motion in its entirety and denied the motion by QSound in the pending patent infringement litigation between the Company and QSound. In granting the Company's summary judgment motion, the Court found that the Company's IC (Integrated Circuit) does not infringe the QSound patent and denied QSound's motion with respect to infringement. The Company's claim that the QSound patent is invalid was not decided and, since the issues which the Court would need to consider on the patent invalidity claim are similar to certain issues considered in the infringement claim, QSound was granted the right to immediately appeal the denial of its motion and trial on the invalidity issue was deferred until after that appeal. In substance, the Court's finding confirms the Company's position that there is no infringement by the Company's IC of any patent held by QSound and that the claims by QSound were without merit. The Court of Appeals for the Federal Circuit heard oral arguments on November 5, 1997. The parties are now waiting for the decision of the appellate court. If the appeal is denied and the Court's decision is confirmed on appeal, the Company intends to pursue the remaining claims for damages and for a decision that the QSound patent is invalid. If the appeal is granted and the Court's decision on the motion is overruled, a trial on the merits would follow at which time the Company will again assert its current position, which already was adopted in the grant of the Company's summary judgment motion, and will assert its remaining claims against QSound. QSound has appealed and the appeal is pending. (8) SALE OF PREFERRED STOCK On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at June 30, 1998. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for $3 million. In connection with the April funding, the Company issued purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 450,000 were issued to investors and 150,000 warrants were issued to placement agents. The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash fee for arranging $1 million of the $3 million investment. As of June 30, 1998, $1 million of the remaining $2 million of the funding was due but had not yet been received. Holders of the Series A Preferred Stock have a right to convert their shares, at their option on the earlier of (x) ninety (90) days after issuance or (y) on the effective date of a Form S-3 Registration Statement (the "Conversion Date") with such conversion to be based on a per share conversion price ("Conversion Price") equal to the lesser of a price that reflects a discount (the "Conversion Discount") to the average of any three (3) consecutive closing bid prices for the Company's Common Stock within twenty (20) trading days immediately prior to the conversion date (the "Floating Conversion Price") or a price which is equal to one hundred thirty percent (130%) of the closing bid prices of the Company's Common Stock for the ten (10) trading days immediately preceding the date of issuance (the "Fixed Conversion Price") provided that in determining the Conversion Price, the holder shall not count any day on which its sales account for greater than twenty percent (20%) of the volume of the Company's Common Stock and on which the holder has sales in the last hour of trading. The Conversion Discount shall be equal to fifteen percent (15%) if the Conversion Rights are exercised within one hundred twenty (120) days of first issuance of the Series A Preferred Stock and shall be equal to seventeen and one-half percent (17.5%) if the Conversion Rights are exercised after one hundred (120) days and prior to one hundred forty-nine (149) days of first issuance of the Series A Preferred 8 9 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock. The applicable Conversion Discount increases by five percent (5%) if the Company is de-listed on NASDAQ. In addition, the percentage of shares that can be converted at any one time is limited during such time periods and the holders cannot own more than 4.99% of the equity of the Company after the Conversion. The beneficial conversion feature of the Series A Preferred Stock will be recorded as a dividend using the most favorable conversion terms available to the shareholder to calculate the dividend in accordance with FASB (Emerging Issues Task Force) Topic D-60. Since the Company has an accumulated deficit and, under Delaware Law, must charge dividends against additional paid in capital, the net impact of recording the beneficial conversion feature is zero since both sides of the entry are recorded in additional paid in capital. At June 30, 1998, dividends in arrears were $43,750. In the private placement, the participants were granted certain rights to participate in the separate financing of approximately $6 million currently being pursued by the Company to fund the commercial introduction of its MultiDisc CD/DVD server technology. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS This form 10-Q contains forward-looking statements, within the meaning of the Private Securities Reform Act of 1995, which are subject to a variety of risks and uncertainties. The Company's actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. REVENUES Revenue increased to $675,000 in the three months ended June 30, 1998 from $577,000 in the comparable period last year, an increase of 17%. Revenue in the six-months ended June 30, 1998 increased to $1,198,000 from $1,095,000 in the comparable period last year, an increase of 9%. Revenues include licensing and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs, product development and evaluation fees at MultiDisc Technologies, Inc. and sales of professional recording systems and consumer products. The increase in revenue results primarily from the signing of new technology license agreements or extensions, partially offset by decreases in recurring royalties for the licensing of the Spatializer technologies and on chip foundry sales incorporating the usage of Spatializer(R) advanced audio solutions by the Company's licensees, reflecting weakness in the Asian Market. The Company recognized revenue of $50,000 in its MultiDisc Technologies, Inc. subsidiary in the three months ended June 30, 1998. This comprises product development revenue and represents the first ever revenue generated by MultiDisc Technologies, Inc. Desper Products, Inc.'s licensing and royalty revenues increased to $614,000 and $1,130,000 in the three and six months ended June 30, 1998, from $412,000 and $810,000 in the comparable periods last year, increases of 49% and 40%, respectively. In addition, there were negligible product sales in the three and six months ended June 30, 1998 as compared with the same periods in 1997. The Company made the decision in late 1997 to discontinue sales of hardware products in order to focus its efforts on licensing and software-only products. Product sales for the three months ended June 30, 1998 were $11,000 as compared to $165,000 for the comparable period last year. Product sales for the six months ended June 30, 1998 were $18,000 as compared to $286,000 for the comparable period last year. GROSS PROFIT Gross profit increased to $665,000 (99% of revenue) in the three months ended June 30, 1998 from $454,000 (79% of revenue) in the comparable period last year, an increase of 46%. Gross profit for the six-months ended June 30, 1998 increased to $1,168,000 (97% of revenue) from $908,000 (83% of revenue) in the comparable period last year, an increase of 29%. Gross profit increased due to the increase in revenue as well as the shift in product mix to licensing revenues, which provide a higher margin than product revenues. OPERATING EXPENSES Operating expenses increased to $1,743,000 (258% of revenue) in the three months ended June 30, 1998 from $1,624,000 (281% of revenue) in the comparable period last year, an increase of 7%. Operating expenses in the six-months ended June 30, 1998 increased to $3,144,000 (262% of revenue) from $3,108,000 (284% of revenue) in the comparable period last year, an increase of 1%. The increase in operating expenses for the three months ended June 30, 1998 results primarily from increased general and administrative and sales and marketing expenses partially offset by lower research and development expenses. The decrease in operating expenses as a percentage of sales in the three and six months ended June 30, 1998 result from revenue growth outpacing overhead growth. General and Administrative General and administrative expenses increased to $727,000 (108% of revenue) in the three months ended June 30, 1998 from $535,000 (93% of revenue) in the comparable period last year, an increase of 36%. 10 11 General and administrative expenses increased to $1,167,000 (97% of revenue) in the six-months ended June 30, 1998 from $1,109,000 (101% of revenue) in the comparable period last year, an increase of 5%. The increase in general and administrative expense result from staffing of key executive positions and related expenses in 1998 that were vacant in the prior comparable period. Research and Development Research and Development expenses decreased to $564,000 (84% of revenue) in the three months ended June 30, 1998 from $810,000 (140% of revenue) in the comparable period last year, a decrease of 30%. Research and Development expenses decreased to $1,164,000 (97% of revenue) in the six-months ended June 30, 1998 from $1,379,000 (126% of revenue) in the comparable period last year, a decrease of 16%. The decrease in research and development in the three and six month periods result from lower research and development expenditures for prototypes of the MultiDisc eXpandable Network Server and XNSTM technology required in the current period compared to the prior year as well as efficiencies in research and development activities at Desper Products Inc. MultiDisc Technologies, Inc., which began operations on June 24, 1996, represented approximately 69% or $391,000 of the total research and development costs of $564,000 for the three-month period ended June 30, 1998. The balance was applied to the Company's continued efforts to identify, validate, and develop new products at Desper Products Inc. Specific engineering efforts were directed toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to current and potential licensees during the quarter and toward an advanced version of enCompass(TM), the Company's interactive, real-time 3-D audio positioning technology. Sales and Marketing Sales and marketing expenses increased to $452,000 (67% of revenue) in the three months ended June 30, 1998 from $279,000 (48% of revenue) in the comparable period last year, an increase of 62%. Sales and marketing expenses increased to $813,000 (68% of revenue) in the six-months ended June 30, 1998 from $620,000 (57% of revenue) in the comparable period last year, an increase of 31%. The increase is attributed to the hiring of additional sales executives at Desper Products Inc., and the initiation of marketing activity at MultiDisc Technologies, Inc. as it enters its next phase of development. NET LOSS Net loss declined to $1,092,000 (162% of revenues) in the three months ended June 30, 1998 from $1,171,000 (203% of revenues) in the comparable period last year, a decrease of 7%. Net loss decreased to $2,013,000 (168% of revenue) in the six-months ended June 30, 1998 from $2,198,000 (201% of revenue) in the comparable period last year, a decrease of 8%. The decreased net loss for the three and six month period, is primarily a result of the increase in gross profit, partially offset by increases in operating expenses. The increase in loss per share resulted from the beneficial conversion discount on the issuance of the Preferred Stock. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had $619,000 in cash and cash equivalents as compared to $577,000 at December 31, 1997. The increase in cash and cash equivalents is attributed to net proceeds of $2,620,893 from the sale of preferred stock on April 14, 1998 and proceeds from a $650,000 related party note payable partially offset by the repayment of $400,000 of borrowings on a bank line of credit and cash used for research and development at MDT on the Modular Scalable Storage Library and cash used in other operating activities. The Company had working capital of $900,000 at June 30, 1998 as compared with working capital of $283,000 at December 31, 1997. The Company's future cash flows are expected to come primarily from audio signal processing licensing, Foundry and Original Equipment Manufacturers' ("OEM") royalties, common and/or preferred stock issuances including warrant and option exercises, through venture and/or strategic investors or product development revenues of MDT. At June 30, 1998 the Company had six Foundry licensees, seventy- 11 12 two OEM Licensees and eight authorized customers for its audio signal processing business as compared with five Foundry licensees and sixty-two OEM Licensees and fourteen authorized customers at December 31, 1997. The Company is actively engaged in negotiations for additional audio signal processing licensing arrangements, which should generate additional cash flow without imposing any substantial costs on the Company. The Company continues to have no material long-term obligations and has no present commitments or agreements that would require any long-term debt or obligations to be incurred. The Company owed $762,500 to related parties as of June 30, 1998 and $112,500 at December 31, 1997. On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at June 30, 1998. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for $3 million. In connection with the April funding, the Company issued purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 450,000 were issued and 150,000 warrants were issued to placement agents. The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash fee for arranging $1 million of the $3 million investment. As of June 30, 1998, $1 million of the remaining $2 million of the funding was due but had not yet been received. Holders of the Series A Preferred Stock have a right to convert their shares, at their option on the earlier of (x) ninety (90) days after issuance or (y) on the effective date of this Registration (the "Conversion Date") with such conversion to be based on a per share conversion price ("Conversion Price") equal to the lesser of a price that reflects a discount (the "Conversion Discount") to the average of any three (3) consecutive closing bid prices for the Company's Common Stock within twenty (20) trading days immediately prior to the conversion date (the "Floating Conversion Price") or a price which is equal to one hundred thirty percent (130%) of the closing bid prices of the Company's Common Stock for the ten (10) trading days immediately preceding the date of issuance (the "Fixed Conversion Price") provided that in determining the Conversion Price, the holder shall not count any day on which its sales account for greater than twenty percent (20%) of the volume of the Company's Common Stock and on which the holder has sales in the last hour of trading. The Conversion Discount shall be equal to fifteen percent (15%) if the Conversion Rights are exercised within one hundred twenty (120) days of first issuance of the Series A Preferred Stock, shall be equal to seventeen and one-half percent (17.5%) if the Conversion Rights are exercised after one hundred (120) days and prior to one hundred forty-nine (149) days of first issuance of the Series A Preferred Stock. The applicable Conversion Discount increases by five percent (5%) if the Company is de-listed on NASDAQ. In addition, the percentage of shares that can be converted at any one time is limited during such time periods and the holders cannot own more than 4.99% of the equity of the Company after the Conversion. The beneficial conversion feature of the Series A Preferred Stock will be recorded as a dividend using the most favorable conversion terms available to the shareholder to calculate the dividend in accordance with EITF Topic D-60. Since the Company has an accumulated deficit and, under Delaware Law, must charge dividends against additional paid in capital, the net impact of recording the beneficial conversion feature is zero since both sides of the entry are recorded in additional paid in capital. At June 30, 1998, dividends in arrears were $43,750. In the private placement, the participants were granted certain rights to participate in the separate financing of approximately $6 million currently being pursued by the Company to fund the commercial introduction of its MultiDisc CD/DVD server technology. Funds generated by these financing activities as well as cash generated from the Company's existing operations is expected to be sufficient for the Company to meet its operating obligations and the anticipated additional research, development, and commercial prototype cost for the MultiDisc business during the next twelve months. However, there are currently no firm commitments from outside parties to provide any 12 13 additional debt or equity financing. If the remaining $2 million of the $5 million private placement and the separate MultiDisc funding requirement, set at a $4 - 6 million is not completed, the Company will require additional capital, and will need to identify other debt, equity or strategic investment sources to complete the research, development and commercial introduction of the MultiDisc CD/DVD server technology and for marketing costs related to such activities. If the Company is unsuccessful in completing these fundings, it will have to modify or delay the timing of the additional MultiDisc development and marketing activities and the ability of the Company to meet its immediate operating needs will be materially adversely impacted. The Company has responded to an inquiry from NASDAQ and confirmed that based on the April 14, 1998 financing and its option to request shareholder approval to effect a reverse stock split which has not been approved yet, the Company believes it can continue to meet the requirements for its continued listing on the NASDAQ Small Cap Market. YEAR 2000 The Company is aware that many computer software programs may not currently be designed to properly handle the system date change after December 31, 1999. The Company is addressing this contingency with its computer consultants and is currently upgrading its software programs, the cost of which is expected to be no more than $15,000. 13 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the Company's Form 10-K for the year ended December 31, 1997 with respect to the Company's litigation with QSound Labs, Inc. No material developments in such litigation occurred during the three-month period ended June 30, 1998. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders of the Company either through solicitation of proxies or otherwise in the first quarter of the fiscal year ending December 31, 1998. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) 3.3 Amended Certificate of Designation of Series A Preferred Stock (Incorporated by reference to the Company's Form S-3 (Registration Number 333-52863) filed with the Securities and Exchange Commission on May 15, 1998 (b) 21.1 Schedule of Subsidiaries of the Company 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 14, 1998 SPATIALIZER AUDIO LABORATORIES, INC. (Registrant) /s/ STEVEN D. GERSHICK -------------------------------------- Steven D. Gershick President & Chief Executive Officer /s/ HENRY R. MANDELL -------------------------------------- Henry R. Mandell Senior Vice President, Finance Chief Financial Officer 15 EX-21.1 2 SCHEDULE OF SUBSIDIARIES OF THE COMPANY 1 SPATIALIZER AUDIO LABORATORIES, INC. EXHIBIT 21.1 SCHEDULE OF SUBSIDIARIES OF THE COMPANY Desper Products, Inc. - California, USA MultiDisc Technologies, Inc. - Delaware, USA EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE JUNE 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 619,260 0 1,189,923 0 100,944 2,290,278 1,172,094 643,686 3,626,909 1,390,540 0 0 600 214,423 2,021,346 3,626,909 674,577 674,577 (9,931) (9,931) (1,743,325) 0 (4,426) (1,083,105) (9,228) (1,092,333) 0 0 0 (1,092,333) (0.07) (0.07)
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