-----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, LaPwxm7KSXCcyhtqkqNdlV9lJSvenXpaDjqA+Pf0Il2AzF82qEBAbiWteZu+eGt8 QzDPgaj7UO/f9wfdBkX8Jg== /in/edgar/work/0000950150-00-000876/0000950150-00-000876.txt : 20001108 0000950150-00-000876.hdr.sgml : 20001108 ACCESSION NUMBER: 0000950150-00-000876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPATIALIZER AUDIO LABORATORIES INC CENTRAL INDEX KEY: 0000890821 STANDARD INDUSTRIAL CLASSIFICATION: [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: 754654 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 10-Q 1 a66729e10-q.txt 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: SEPTEMBER 30, 2000 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 140 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 October 20, 2000 there were 46,752,971 shares of the Registrant's Common Stock outstanding. ============================================================================== 2 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ (unaudited) Current Assets: Cash and Cash Equivalents $ 1,518,781 $ 1,021,998 Accounts Receivable, net 580,000 687,595 Employee Advances 1,003 -- Inventory 12,993 12,993 Prepaid Expenses and Deposits 55,634 22,640 ------------ ------------ Total Current Assets 2,168,411 1,745,226 Property and Equipment, net 124,187 132,803 Capitalized Patent and Technology Costs, net 209,904 207,793 Other Assets 39,769 32,177 ------------ ------------ Total Assets $ 2,542,271 $ 2,117,999 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes Payable $ 14,149 $ 14,149 Notes Payable to Related Parties 337,742 337,742 Accounts Payable 28,463 234,117 Accrued Wages and Benefits 21,660 53,136 Accrued Expenses and Taxes 223,026 291,118 Net Liabilities of Discontinued Operation 297,386 419,600 ------------ ------------ Total Current Liabilities 922,426 1,349,862 Shareholders' Equity: Series B, 10% Redeemable Convertible Preferred shares, $.01 par value, 1,000,000 shares authorized, 102,967 and 102,967 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively 1,030 1,030 Common shares, $.01 par value, 65,000,000 shares authorized, 46,752,971 and 46,174,970 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively 467,530 461,750 Additional Paid-In Capital 46,373,042 45,913,503 Accumulated Deficit (45,221,757) (45,608,146) ------------ ------------ Total Shareholders' Equity 1,619,845 768,137 ------------ ------------ Total Liabilities and Shareholder's Equity $ 2,542,271 $ 2,117,999 ============ ============
2 3 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FOR THE NINE MONTH PERIOD ENDED ---------------------------------- -------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues: License Revenues $ -- $ -- $ -- $ -- Royalty Revenues 630,129 324,473 1,665,829 976,525 Product Development Revenues -- -- -- -- Product Revenues -- -- -- -- ------------ ------------ ------------ ------------ 630,129 324,473 1,665,829 976,525 Cost of Revenues 70,022 20,000 168,088 28,619 ------------ ------------ ------------ ------------ Gross Profit 560,107 304,473 1,497,741 947,906 Operating Expenses: General and Administrative 181,669 98,785 426,458 310,662 Research and Development 186,294 73,469 388,338 323,929 Sales and Marketing 90,172 66,713 276,858 189,091 ------------ ------------ ------------ ------------ 458,135 238,967 1,091,654 823,682 ------------ ------------ ------------ ------------ Operating Profit 101,972 65,506 406,087 124,224 Interest Income 19,624 600 50,526 4,401 Interest Expense (8,782) (31,454) (25,953) (77,150) ------------ ------------ ------------ ------------ 10,842 (30,854) 24,573 (72,749) ------------ ------------ ------------ ------------ Income Before Income Taxes 112,814 34,652 430,660 51,475 Income Taxes (9,000) (1,500) (44,271) (4,500) ------------ ------------ ------------ ------------ Net Income $ 103,814 $ 33,152 $ 386,389 $ 46,975 ============ ============ ============ ============ Basic/Diluted Earnings Per Share $ 0.00 $ 0.00 $ 0.01 $ 0.00 ============ ============ ============ ============ Weighted Average Shares Outstanding 46,706,986 35,322,153 46,622,002 31,423,618 ============ ============ ============ ============
3 4 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net Income $ 386,389 $ 46,975 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and Amortization 64,099 25,157 Stock Issued for Services 30,000 -- Net change in Assets and Liabilities: Accounts Receivable and Employee Advances 106,592 (259,922) Inventory -- (5,000) Prepaid Expenses and Deposits (40,586) (3,011) Accounts Payable (205,654) 12,822 Deferred Revenue -- (250,000) Changes in Discontinued Operation (122,214) (8,496) Accrued Liabilities (99,568) (82,885) ----------- ----------- Net Cash Provided (Used) In Operating Activities 119,058 (524,360) ----------- ----------- Cash Flows from Investing Activities: Purchase of Property and Equipment (42,497) (1,570) Increase in Capitalized Patent and Technology Costs (15,097) 4,672 ----------- ----------- Net Cash Provided (Used) in Investing Activities (57,594) 3,102 ----------- ----------- Cash flows from Financing Activities: Issuance of Preferred Shares, Net -- -- Exercise of Options 435,319 -- Exercise of Warrants -- -- Issuance of Notes Payable -- 360,000 Issuance of Related Party Payable -- -- Repayment of Notes Payable -- (646) ----------- ----------- Net Cash Provided by Financing Activities 435,319 359,354 ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents 496,783 (161,904) Cash and Cash Equivalents, Beginning of Period 1,021,998 264,054 ----------- ----------- Cash and Cash Equivalents, End of Period $ 1,518,781 $ 102,150 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 19,688 $ -- Income Taxes 1,500 -- =========== ===========
4 5 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES B, 10% REDEEM. CONV. 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, 1999 102,967 $1,030 46,174,970 $461,750 $45,913,503 $(45,608,146) $ 768,137 Issuance of Preferred Shares, Net -- -- -- -- -- -- -- Options Exercised -- -- 523,001 5,230 430,089 -- 435,319 Warrants Exercised -- -- -- -- -- -- -- Stock Issued for Services -- -- 55,000 550 29,450 -- 30,000 Conv. of Pref Shares, net -- -- -- -- -- -- -- Net Income -- -- -- -- 386,389 386,389 ------------ ------ ------------ -------- ----------- ------------ ---------- Balance, September 30, 2000 102,967 $1,030 46,752,971 $467,530 $46,373,042 $(45,221,757) $1,619,845 ------------ ------ ------------ -------- ----------- ------------ ----------
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", "our" and "we") are in the business of developing and licensing technology. Our 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. Our wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") was 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. Operations of MDT were discontinued in the fourth quarter of 1998. Our efforts to sell these assets, though continuing, have not been successful to date. (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. Operating results for the nine-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. Accordingly, your attention is directed to footnote disclosures found in the December 31, 1999 Annual Report and particularly to Note 2 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 subsidiary, Desper Products, Inc. MultiDisc Technologies, Inc. has been presented as a discontinued operation. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition We accrue revenues based on licensee royalty reports, management estimates and reports from third parties. While management endeavors to minimize the use of estimates, any deviation from estimates utilized are adjusted in the subsequent quarter. Royalty income reported is based on the shipment of product incorporating the related technology by the original equipment manufacturer or foundries. Research and Development Expenditures We expense research and development expenditures as incurred. (3) EARNINGS PER SHARE On December 31, 1997, the Company retroactively adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128") which replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings per share is computed similarly to fully diluted earnings per share pursuant to the Accounting Principles Board ("APB") Opinion No. 15. The following table presents contingently issuable shares, options and warrants to purchase shares of common stock that were outstanding 6 7 during the nine month periods ended September 30, 2000 and 1999 which were not included in the computation of diluted loss per share because the impact would have been anti-dilutive or insignificant:
2000 1999 --------- --------- Options 2,077,301 2,122,300 Warrants 2,830,000 1,017,000 --------- --------- 5,083,134 3,139,300 ========= =========
(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. We adopted SFAS No. 130 on January 1, 1998. Comprehensive income 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 includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. We did not have components of other comprehensive income during the nine-month periods ended September 30, 2000 and 1999. As a result, comprehensive income is the same as the net income for the nine-month periods ended September 30, 2000 and 1999. (5) SEGMENT REPORTING The Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), in June 1997. SFAS No.131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the "industry segment" concept of SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, with a "management approach" concept as to basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. We adopted SFAS 131 in December 1997. At September 30, 2000, we have only one operating segment, DPI, the Company's Audio Signal Processing business. (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 nine months ended September 30, 2000 and 1999:
2000 1999 --------- ---------- Customer A 39% 0% Customer B 38% 26% Customer C 13% 15%
(7) CONTINGENCIES Legal In February 1999, a complaint was filed in the Superior Court of Los Angeles County, Northwest District, by I.N. Associates, Inc., against the Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach of contract and fraud, and claiming $499,954 in damages, attorneys fees, interest and the costs of suit. MDT has answered and denied the claims. The matter was subject to a mediation preceding in March 2000, and has been 7 8 settled. The settlement specifies that I.N. will be entitled to a cashless exercise of warrants for the 125,000 shares originally issued to them in 1997 and 1998. In connection with the downsizing of the Company, a number of employees were terminated and have filed, on various dates since the downsizing in 1998, various employment and compensation related claims with the various State labor authorities, all but two of which claims have either been settled or have been paid as of the date of this report. In February, 2000, an appeal was heard in the Superior Court of Orange County, California, relating to a claim filed by a former employee of MDT for back vacation pay and penalties. In March 2000, both parties agreed to dismiss the action as part of a settlement, which was not material to the financial statements for the period ended March 31, 2000. In July 2000, the Labor Commission of the State of California awarded $122,000 to a claimant arising from a claim for commissions over a three-year period. We appealed the order to the Superior Court of California, Santa Clara County, since, under California law, the Labor Commission order will have no effect on the court's consideration of the matter. On October 27, 2000, the matter was settled by mutual release and payment in an amount which was not material to the financial statements of the Company for the period ended September 30, 2000. Two former officers and employees of MDT initiated proceedings before the Labor Commissioner in 2000 seeking amounts allegedly due under their employment agreements, which claims, if resolved in favor of the claimants, could be material to the financial statements of the Company. The Labor Commissioner has postponed those proceedings. Separately, MDT has initiated litigation in the Superior Court, Orange County seeking declaratory relief to bar the labor claims, as well as return of intellectual property and unspecified damages for breaches of the former officers' and employees' employment agreements. We also anticipate that, from time to time, we may be named as a party to other legal proceedings that may arise in the ordinary course of its business. (8) SALE OF PREFERRED STOCK On April 14, 1998, we entered into a private placement for up to $5 million of which $3 million was funded. 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, we 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 our common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party 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. We do not expect any additional investment above the initial $3 million to be received under this placement. At December 31, 1999, 60,000 shares of Series A Convertible Preferred Stock, representing the entire placement had been converted into a total of 30,517,943 shares of our Common Stock, which are covered by Form S-1. In the December 1999 transaction, $895,000 in short term loan advances from officers, directors and their affiliates and certain other securities holders, and accrued interest of $134,647, were restructured into the $1,000,000 in new Series B Preferred Stock. The Series B Preferred Stock, and any dividends therefrom not converted into cash, are convertible commencing in 2001 into restricted Common Stock at a 10% discount, based on the 10 day average closing bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We have a three year option to redeem any Series B Preferred Stock, not sooner converted, in whole or in part, in cash. (9) SALE OF COMMON STOCK In December 1999, we completed a set of financial transactions (the "December Transactions") with certain existing holders of our equity and debt and with new institutional investors. The December Transactions included the private placement of 1,884,254 additional shares of our Common Stock ($1.05 million in new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000 shares of Common Stock exercisable for three years at an exercise price of 8 9 $.67 per share), the cancellation of 500,000 warrants to acquire Common Stock issued in the April 1998 financing. The placement of common shares was at no discount to market. We have registered these shares and warrants for resale under Form S-1, as required by the placement documents. (10) DISCONTINUED OPERATIONS In September, 1998, the Board of Directors approved a plan to refocus corporate activities on our core audio business, Desper Products, Inc. In conjunction to this strategic refocusing, we permanently suspended operations of MDT and placed the business and its related patent portfolio up for sale. We are accounting for the on-going operating and termination expenses of MDT as a discontinued operation . 9 10 Item 2. Management's discussion and analysis of financial condition and results of operations 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. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. REVENUES Revenues for the three months ended September 30, 2000 were $630,000, compared to revenues of $324,000 in the comparable period last year, an increase of 94%. Revenues for the nine months ended September 30, 2000 were $1,666,000, compared with $977,000 in the comparable period last year, an increase of 71%. The increase in such revenues resulted primarily from running royalties earned in the third quarter, and in the nine month period of 2000 from a license agreement for which there were no comparable running royalties, from this account, in the comparable period last year. In addition, in both current year periods, we earned increased royalties from Spatializer N-2-2 on higher DVD player and digital signal processor (DSP) sales by our licensees. This increase was partially offset by lower royalty rates as compared to those earned in the comparable period last year. Some of our license agreements provide for royalty rate reductions as volume milestones are achieved. As such, the royalty rates earned in the comparable period last year when one licensee initially began shipping its DSP were significantly higher when cumulative volume levels were low. Virtually all volume milestones have been achieved at September 30, 2000, which should result in the stabilization of the royalty rate going forward. GROSS PROFIT Gross profit for the three months ended September 30, 2000 was $560,000 (89% of revenue) compared to gross profit of $304,000 (94% of revenue) in the comparable period last year, an increase of 84%. Gross profit for the nine-months ended September 30, 2000 were $1,498,000, compared with $948,000 in the comparable period last year, an increase of 58%. Gross profit primarily increased due to the increase in revenue. Gross margin decreased due to commissions paid to foreign sales reps in both current year periods due to a change in mix to higher foreign derived revenue, which is commission bearing. OPERATING EXPENSES Operating expenses in the three months ended September 30, 2000 were $458,000 (73% of revenue) compared to operating expenses of $239,000 (74% of revenue) in the comparable period last year, an increase of 92%. Operating expenses in the nine months ended September 30, 2000 were $1,092,000 (66% of revenue) compared to operating expenses of $824,000 (84% of revenue) in the comparable period last year, an increase of 33%. The increase in operating expenses for both the three and nine months ended September 30, 2000 resulted primarily from a significant expansion of the Company's research and development staff and effort, increased sales and marketing activity, legal expense and the ongoing investor relations program. General and Administrative General and administrative expenses in the three months ended September 30, 2000 were $182,000 (29% of revenue) compared to general and administrative expenses of $99,000 (31% of revenue) in the comparable period last year, an increase of 84%. General and administrative expenses in the nine months ended September 30, 2000 were $426,000 (26% of revenue) compared to general and administrative expenses of $311,000 (32% of revenue) in the comparable period last year, an increase of 37%. The increase in general and administrative expense in both current periods resulted from an increase in legal expenses relating to the corporate finance, transaction negotiations and settlements, normalized operating activities and the ongoing investor relations program. 10 11 Research and Development Research and development expenses in the three months ended September 30, 2000 were $186,000 (30% of revenue) compared to research and development expenses of $73,000 (23% of revenue) in the comparable period last year, an increase of 155%. Research and development expenses in the nine months ended September 30, 2000 were $388,000 (23% of revenue) compared to research and development expenses of $324,000 (33% of revenue) in the comparable period last year, an increase of 20%. The increase in such expenses in the three month period resulted primarily from significantly higher engineering headcount in the current period as compared with the comparable period last year. Current staffing levels are now approaching that which existed in early 1999, prior to significant attrition while we sought new financing. Sales and Marketing Sales and marketing expenses in the three months ended September 30, 2000 were $90,000 (14% of revenue) compared to sales and marketing expenses of $67,000 (21% of revenue) in the comparable period last year, an increase of 34%. Sales and marketing expenses in the nine months ended September 30, 2000 were $277,000 (17% of revenue) compared to sales and marketing expenses of $189,000 (19% of revenue) in the comparable period last year, an increase of 47%.The increase in sales and marketing expense in both periods resulted primarily from greater international travel in the current period and marketing support expense as compared with the comparable period last year. NET INCOME Net Income in the three months ended September 30, 2000 was $104,000 (16% of revenues), $0.00 per share, compared to net income of $33,000 (10% of revenue), $0.00 per share in the comparable period last year, an increase of 215%. Net Income in the nine months ended September 30, 2000 was $386,000 (23% of revenues), $0.01 per share, compared to net income of $47,000 (10% of revenue), $0.00 per share in the comparable period last year, an increase of 215%. The increase in net income was the result of the increase in revenues, partially offset by lower gross margin and the increase in operating expenses. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, we had $1,519,000 in cash and cash equivalents as compared to $1,022,000 at December 31, 1999. The increase in cash and cash equivalents is attributed to cash provided by the exercise of options to purchase shares of common stock and cash provided by other operating activities. We had working capital of $1,246,000 at September 30, 2000 as compared with working capital of $395,000 at December 31, 1999. Our future cash flow will come primarily from the audio signal processing licensing business' Foundry and Original Equipment Manufacturers' ("OEM") royalties and common stock issuances including warrant and option exercises. At September 30, 2000 we had six Foundry licensees, seventy-seven OEM Licensees and sixteen authorized customers for its audio signal processing business, an increase of three over that at December 31, 1999. We are actively engaged in negotiations for additional audio signal processing licensing arrangements which will generate additional cash flow without imposing any substantial costs on the Company. We have related party obligations of $225,000, which are convertible into Common Stock at our or Debtee's option. The obligation matures in June 2001. The Company owed a total of $337,700 to related parties as of September 30, 2000 and December 31, 1999. On April 14, 1998, we entered into a private placement for up to $5 million of which $3 million was funded. 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, we 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 our common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party 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. We do not expect any additional investment above the initial $3 million to be received under this placement. At December 31, 1999, 60,000 shares of 11 12 Series A Convertible Preferred Stock, representing the entire placement had been converted into a total of 30,517,943 shares of our Common Stock, which are covered by Form S-1. On September 25, 1998, we announced that our Board of Directors was refocusing our business on the exploitation of its audio technologies, and, as noted above, to properly position the MultiDisc assets for sale. Currently we are actively pursuing licensing opportunities, including possible strategic alliances and capital funding opportunities based on its core audio technologies. In reaching its decision of September 25, 1998, we indicated that while we recognized the prospects of MultiDisc, the capital investment required to properly commercialize the technology was beyond our capacity and, therefore, we made the decision to seek a sale transaction. Effective as of that date, Steven D. Gershick resigned as chief executive officer of the Company and as president of MultiDisc Technologies, Inc., but continued to serve as chairman of the board and director of the Company until February 10, 2000. Henry R. Mandell, who joined the Company in March, 1998 as senior vice president finance was designated as interim chief executive officer to oversee all of the corporate activities, reporting to the Board of Directors, and continues in that capacity. Michael Bolcerek resigned as president of Desper Products, Inc. Mr. Mandell was elected as a director by the stockholders on February 10, 2000 and also was designated chief executive officer and chairman of the board. We responded to inquiries from NASDAQ and attended a hearing with respect to its continued listing on October 29, 1998 at which time it outlined its strategy for continued listing. In November, 1998, NASDAQ provided us with an extension and conditional listing until December 31, 1998 to provide evidence of compliance with all requirements for continued listing. On December 31, 1998, we informed NASDAQ that we would be unable to comply with these requirements. On January 5, 1999, our common stock was delisted from the NASDAQ SmallCap Market and, on the same day, commenced trading on the NASD Bulletin Board under the symbol "SPAZ". In December 1999, we completed a set of financial transactions (the "December Transactions") with certain existing holders of our equity and debt and with new institutional investors. The December Transactions included the private placement of 1,884,254 additional shares of our Common Stock ($1.05 million in new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000 shares of Common Stock exercisable for three years at an exercise price of $.67 per share), the cancellation of 500,000 warrants to acquire Common Stock issued in that earlier financing, the conversion of $1 million of short term debt into a new Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured debt into secured convertible debt. In the December Transactions, $895,000 in short term loan advances from officers, directors and their affiliates and certain other securities holders, and accrued interest of $134,647, were restructured into the $1,000,000 in new Series B Preferred Stock. The Series B Preferred Stock, and any dividends therefrom not converted into cash, are convertible commencing in 2001 into restricted Common Stock at a 10% discount, based on the 10 day average closing bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We have a three year option to redeem any Series B Preferred Stock, not sooner converted, in whole or in part, in cash. In the December Transactions, $225,000 of secured debt, including accrued interest, was converted into secured long term convertible debt. The long term debt is held by existing institutional investors and is secured by essentially all of our assets. The debt, and accrued interest, is convertible at our or the holder's options into registered Common Stock at a conversion price equal to the average 10 day closing bid price prior to conversion but subject to the same minimum and maximum conversion prices set for the Series B Preferred Stock. Funds generated by these financing activities as well as cash generated from our existing operations is expected to be sufficient for us to meet our operating obligations and the anticipated additional research and development for its audio technology business. 12 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the Company's Form 10-K for the year ended December 31, 2000 with respect to the Company's litigation with QSound Labs, Inc. and others. In February 1999, a complaint was filed in the Superior Court of Los Angeles County, Northwest District, by I.N. Associates, Inc., against the Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach of contract and fraud, and claiming $499,953.94 in damages, attorneys fees, interest and the costs of suit. MDT has answered and denied the claims. The matter was subject to a mediation preceding in March 2000, and has been settled. The settlement specifies that I.N. will be entitled to a cashless exercise of warrants for the 125,000 shares originally issued to them in 1997 and 1998. In connection with the downsizing of the Company, a number of employees were terminated and have filed, on various dates since the downsizing in 1998, various employment and compensation related claims with the various State labor authorities, all but two of which claims have either been settled or have been paid as of the date of this report. In February, 2000, an appeal was heard in the Superior Court of Orange County, California, relating to a claim filed by a former employee of MDT for back vacation pay and penalties. In March 2000, both parties agreed to dismiss the action as part of a settlement, which was not material to the financial statements for the period ended March 31, 2000. In July 2000, the Labor Commission of the State of California awarded $122,000 to a claimant arising from a claim for commissions over a three-year period. We appealed the order to the Superior Court of California, Santa Clara County, since, under California law, the Labor Commission order will have no effect on the court's consideration of the matter. On October 27, 2000, the matter was settled by mutual release and payment in an amount which was not material to the financial statements of the Company for the period ended September 30, 2000. Two former officers and employees of MDT initiated proceedings before the Labor Commissioner in 2000 seeking amounts allegedly due under their employment agreements, which claims, if resolved in favor of the claimants, could be material to the financial statements of the Company. The Labor Commissioner has postponed those proceedings. Separately, MDT has initiated litigation in the Superior Court, Orange County seeking declaratory relief to bar the labor claims, as well as return of intellectual property and unspecified damages for breaches of the former officers' and employees' employment agreements. We also anticipate that, from time to time, we may be named as a party to other legal proceedings that may arise in the ordinary course of its business. No material developments in such litigation occurred during the three-month period ended September 30, 2000 ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION 13 14 None ITEM 6. EXHIBITS AND REPORTS ON FORM 8K None (b)21.1 Schedule of Subsidiaries of the Company: Desper Products, Inc., a California Corporation MultiDisc Technologies, Inc. (inactive), a Delaware Corporation 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: November 7, 2000 SPATIALIZER AUDIO LABORATORIES, INC. (REGISTRANT) /s/ HENRY R. MANDELL ------------------------------------------------ HENRY R. MANDELL CHAIRMAN OF THE BOARD Chief Executive Officer Chief Financial Officer EX-27 2 a66729ex27.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1,518,781 0 580,000 0 12,993 2,168,411 884,673 550,583 2,542,271 922,426 0 0 1,030 467,530 1,151,285 2,542,271 1,665,829 1,665,829 (168,088) (168,088) (1,091,654) 0 (25,953) 430,660 (44,271) 386,389 0 0 0 386,389 .01 .01
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