-----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, DAKR88mwrs5u8ecEwNA7srlSN55ZhZqrUApwrOxvlIMn1tZnvJH5HISwRdpnPP3a yU5LwmiDmJ4y6XILZWgJzg== 0000950150-01-000098.txt : 20010329 0000950150-01-000098.hdr.sgml : 20010329 ACCESSION NUMBER: 0000950150-01-000098 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 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-K405 SEC ACT: SEC FILE NUMBER: 000-26460 FILM NUMBER: 1581809 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-K405 1 a70769e10-k405.txt FORM 10-K405 FOR PERIOD ENDING 12/31/00 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED: DECEMBER 31, 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 (I.R.S. 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's 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. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant at March 8, 2001 was approximately $18,500,000. As of March 8, 2001, there were 47,401,939 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Overview Spatializer Audio Laboratories, Inc. ("The Company" or "we") is a leading developer, licensor and marketer of next generation technologies for the consumer electronics, personal computing, enterprise computing and entertainment industries. Our position as a leading developer of next generation technologies is based on our strong relationships with brand leaders, such as Apple, Toshiba and Hitachi. We conduct our audio business through our parent company and our wholly owned subsidiary, Desper Products, Inc. ("DPI"). DPI has developed a full complement of patented and proprietary 3-D or virtual audio signal processing technologies directed to the consumer electronics and multimedia PC markets. We continue to expand our product offerings to take advantage of the emerging digital audio marketplace specifically for consumer products like Digital Versatile Disc ("DVD") players, portable mp3 players, digital televisions and digital home, portable and auto entertainment devices. As of December 31, 2000, more than 25 million licensed units had been shipped covering all of these applications. DPI's virtual audio signal processing technologies are currently incorporated in products offered by global brand leaders including in consumer electronics, Toshiba, Panasonic, JVC, Hitachi, Mitsubishi, Samsung, Sanyo, LG Electronics, Zenith, Sharp and Proton, in the PC multimedia marketplace by Apple Computer, among others, and on the Internet through software plug-ins for the WinAmp and Linux-based XMMS mp3 players. We are focused on broadening recognition for the Spatializer brand name through association with these and other globally recognized consumer electronics and multimedia computer brand leaders, and on broadening our audio technology and software base to position ourselves for continued growth. We believe that with the accelerating growth in the digital audio/video marketplace, the market for virtual audio technologies, and therefore for our products, is entering a new phase of opportunity. Our other wholly owned subsidiary, MultiDisc Technologies, Inc., ("MDT") formed in June 1996 when we acquired development stage optical disc storage and robotics assets and technologies from Home Theater Products, International, Inc., a debtor in possession, is now inactive. In September 1998, we announced our plan to refocus our business on the exploitation of our core audio technologies, suspend research and development at MDT and to properly position the MultiDisc assets for sale. Therefore, MDT has been accounted for as a discontinued operation. Since 1998 we have been unsuccessful in identifying a purchaser for this technology. This repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond our current capacity. We believe this strategy provides a better opportunity to further solidify our position as a leading provider of virtual audio solutions, based on available capital resources. In December 1999, we completed the placement of $1 million of Common Stock, at no discount from market, the conversion of $1 million of short-term debt to new Series B Redeemable Convertible Preferred Stock and the restatement of $225,000 of existing secured debt to secured long-term debt (the "December Transactions"). The December Transactions significantly strengthened our balance sheet and restored working capital and shareholder's equity. The resulting liquidity allowed us to emerge from turnaround mode and to pursue growth and operating stability in 2000. Our executive offices are located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, Telephone (818) 227-3370. We maintain a Website at www.spatializer.com. We were incorporated in the State of Delaware in February, 1994. DESPER PRODUCTS, INC. -- VIRTUAL AUDIO SIGNAL PROCESSING TECHNOLOGIES DPI has developed a suite of proprietary advanced audio signal processing technologies for the entire spectrum of applications falling under the general category of virtual audio. The objective in each product category is to create or simulate the effect of a multi-speaker sonic environment using two ordinary speakers (or headphones) for playback. The market for virtual audio is segmented into five broad categories of technology as identified in the listing below. Each of these technologies utilizes different underlying scientific principles in accomplishing its design objectives and is targeted to a specific class of consumer electronics or multimedia computer depending on the intended product use and functional capability of the product. DPI currently has other audio signal processing technologies under development which will serve to expand its market scope and partner product capabilities. 2 3
- ---------------------------------------------------------------------------------------------------------- CATEGORY OF TECHNOLOGY PRODUCT CATEGORIES VIRTUAL AUDIO ENHANCEMENT - ---------------------------------------------------------------------------------------------------------- 3-D Stereo Consumer electronics products Surround Sound enhancement from an (Spatializer(R) 3-D Stereo) providing stereo playback -- DVD ordinary stereo signal Players, Stereo TV's, VCR's, Stereo Components and Systems, Car Audio, Laptop and Desktop Multimedia Computers, Set-top Boxes - ---------------------------------------------------------------------------------------------------------- Two-Speaker Virtualization Products incorporating Creation of spatially accurate (Spatializer N-2-2(TM)) multi-channel audio sources like multi- speaker cinematic audio Digital Virtual Surround Dolby Digital(R) (AC-3), Dolby experience from two speakers, and ProLogic(R) or MPEG-2. Home headphones utilizing discrete Theater, DVD-Video, Multimedia multi-channel audio information. Computers utilizing DVD/MPEG and decoding. - ---------------------------------------------------------------------------------------------------------- Bass Enhancement Consumer electronics products Simulation of lower frequency (Vi.B.E.(TM)) providing stereo playback -- DVD response from speakers with Players, Stereo TV's, VCR's, relatively high low frequency Stereo Components and Systems, Car capability Audio, Laptop and Desktop Multimedia Computers and Speakers - ---------------------------------------------------------------------------------------------------------- Internet Audio Enhancement Laptop and Desktop Multimedia Surround Sound and bass (Spatializer(R) Computers and portable music enhancement to playback of StreamFX(TM)) devices running MP3 media player ordinary MP3 files Software - ---------------------------------------------------------------------------------------------------------- Headphone Virtualization Products incorporating Creation of spatially accurate (Spatializer Natural multi-channel audio sources like multi- speaker cinematic audio Headphone(TM)) Dolby Digital(R) (AC-3), Dolby experience from headphones Digital Virtual Surround ProLogic(R), MPEG-2 or stereo. utilizing discrete multi-channel Home Theater, DVD-Video, audio information. Multimedia Computers utilizing DVD/MPEG Decoding or stereo. - ----------------------------------------------------------------------------------------------------------
LICENSED PRODUCTS Our current technology product applications are directed to (1) two-speaker and headphone virtualization of multi-channel audio for DVD players and home theater applications, (2) stereo and bass enhancement in consumer electronics products and multimedia PCs, and (3) downloadable software, purchased directly by consumers, delivering audio enhancement applications for PCs . 1. SPATIALIZER(R) 3D STEREO. Based upon proprietary and patented methods of stereo signal processing, the Company's Spatializer(R) 3-D Stereo technology is designed to create a vivid and expansive three- dimensional surround sound listening experience from any stereo source input using only two ordinary speakers. Along with professional audio quality and coherent stable sonic imaging, the technology includes the Company's unique DDP(TM) (Double Detect and Protect(TM)) algorithm. DDP(TM) continuously monitors the underlying stereo signal and dynamically optimizes spatial processing, avoiding deleterious sonic artifacts common in other systems and provides "set and forget" ease of use for consumers. First introduced in July 1994 by DPI, in the form of a 20 pin analog integrated circuit (IC) from Matsushita Electronics Corporation ("MEC"), the technology is now incorporated into low-cost, standard process ICs by four chip foundries (Matsushita, ESS Technologies, Inc., OnChip Systems and Luxsonor) for easy and inexpensive implementation in any consumer electronics or computer products utilizing stereo audio. The technology is currently available in both analog and digital formats. Matsushita introduced a new Spatializer IC design in 1999, offering the Spatializer 3-D Stereo effect in a simplified, lower cost package. 2. SPATIALIZER(R) N-2-2(TM) DIGITAL VIRTUAL SURROUND. In September 1996, DPI introduced Spatializer N-2-2, which the Company considers a "core", and "enabling" technology for DVD based home theater products and personal computers. Through outstanding performance and continuous enhancement, Spatializer N-2-2 has emerged as the "de facto standard" for virtual surround sound as measured by most brand adoptions and market share of such brands in the DVD player market. DVD is considered by many to be the single most important and fastest adopted consumer audio/computer technology ever introduced. The audio standards for DVD (based upon geographic region) are multi-channel audio formats (Dolby Digital(R) (AC-3) and MPEG-2) which carry six (or more) discrete (independent) channels of audio -- the front left and right channels, a center channel (for vocal tracks), two rear surround channels and a Low Frequency Effects (LFE or "sub-woofer") channel for sound 3 4 effects. The Spatializer N-2-2 software- based algorithms permit spatially accurate reproduction of this multi-channel audio over any ordinary stereo system using two rather than the five or six speakers normally required in traditional home theater setups. Spatializer N-2-2 runs in real-time on general purpose Digital Signal Processing ("DSP") hardware platforms like those offered by C-Cube, Acer Labs, Inc., Motorola, VM Labs and Zoran; may be integrated with host based software-only MPEG-2 or DVD decoders (like WinDVD and DVDExpress, offered by Intervideo and Mediamatics, respectively, for the Intel(R) Pentium(R) microprocessors); and can be ported to any of the principal audio codecs or media processor/accelerator platforms performing Dolby Digital (AC-3) or MPEG-2 audio decoding. Spatializer N-2-2 has been approved by Dolby Laboratories and qualifies Spatializer licensees to use the newly created Dolby Digital VIRTUAL(TM) trademark on products incorporating the technology. We believe our Spatializer N-2-2 process will serve to widen and accelerate the market for DVD acceptance, because it delivers the full cinematic audio experience to ordinary consumers without the additional expense and complication of multi-speaker home theater playback systems. 3. SPATIALIZER(R) VI.B.E(TM). In early 1999, DPI introduced Spatializer Vi.B.E., a virtual bass enhancement technology. Spatializer Vi.B.E. produces a dynamic bass response from even the lowest-end speakers or headphones. This is particularly important in enhancing the audio of all forms of portable digital audio devices. Spatializer Vi.B.E. uses proprietary technology to generate the perception of realistic bass frequencies that are unaffected by actual speaker system frequency response capability. 4. SPATIALIZER(R) STREAMFX(TM). First introduced by DPI in 1999, Spatializer StreamFX creates a dramatic and enveloping sound experience out of any pair of regular speakers or headphones when playing MP3 music files. Spatializer StreamFX utilizes Spatializer 3-D Stereo and is a long-time favorite of both movie and sound studios in addition to numerous audio product manufacturers. Combined with Vi.B.E., this product widens and deepens the soundfield to surround the listener with rich and ambient enhanced audio. A headphone option generates the same equally immersive experience over headphones creating a dramatic audio experience. 5. SPATIALIZER(R) NATURAL HEADPHONE(TM). Spatializer Natural Headphone, introduced by DPI in March 2001, renders spatially accurate multiple speaker positions simulating the typical home theater or stereo arrangement through a headphone. The headphone algorithm delivers a high performance simulated surround sound experience, using a reasonable amount of processing power at a reasonable cost. Thus, this solution is equally practical and effective for both low-power portable devices and home theater applications. Unlike typical virtual surround sound headphone solutions, which rely heavily on reverberation which can sound unnatural, Spatializer Natural Headphone utilizes a combination of techniques to provide an expanded, yet natural sound field. In addition to these technologies, we offer a series of products introduced by DPI under the Spatializer DigitalFX(TM) brand, first introduced in early 2000. The Spatializer DigitalFX series is a comprehensive audio enhancement software solution based on the Company's Spatializer N-2-2 virtual surround sound technology and Spatializer Vi.B.E., the Company's virtual bass enhancement technology, combined with additional audio effects tailored and optimized for specific product applications. This powerful combination of technologies in a single product targeted for specific product applications provides a highly efficient and cost effective solution for the television, portable MP3, PDA, AV Receiver, PC and car audio markets. Spatializer Digital TVFX(TM) is a customized application of Spatializer technology optimized for digital and analog televisions with an on board digital signal processor. Spatializer integrates its original, patented 3D Stereo and N-2-2 technologies with speaker-compensation and Vi.B.E. bass enhancement algorithms. The digital processing of the stereo signal provides a striking and immersive audio experience while the virtual bass enhancement creates apparently deeper bass response from the small speakers utilized by most televisions. Optional reverb and equalizer features further enhance the audio experience. The result is a dramatic improvement to the overall audio soundfield provided by the television. Spatializer Digital TVFX is 100% digital, and applicable to any TV system with an embedded DSP. Spatializer Digital OntheGoFX(TM) is targeted specifically for portable MP3 player devices, including Personal Data Assistants (PDAs). According to industry analysts, the portable MP3 player market is expected to grow to 32 million units sold by 2003. Spatializer Digital OntheGoFX shares the same core 3D stereo technology as other members of the Spatializer DigitalFX series, but includes a highly effective headphone algorithm which produces an expanded headphone audio experience.. In addition, the included Vi.B.E technology is particularly effective in improving the limited bass response of inexpensive lightweight stereo headphones often incorporated into these devices. The algorithms are highly efficient, utilizing a minimal amount of MIPS any standard embedded DSP. 4 5 Spatializer Digital PCFX(TM) combines the entire suite of respected Spatializer audio technologies into a single, comprehensive and cost effective software audio solution for the Wintel platform. Since the product runs on the host CPU, with minimal CPU utilization, no discrete chip is required. Spatializer Digital PCFX provides Spatializer 3-D stereo, Spatializer N-2-2 virtual surround sound for DVD playback, Vi.B.E virtual bass enhancement and enCompass(TM), Spatializer's positional audio technology for computer games utilizing the Microsoft DirectXTM API. Spatializer technology has been utilized by Apple Computer across their product platforms since October 1999. Spatializer Digital AVFX(TM) is tailored for AV Receivers equipped with a Dolby Digital decoder.. Spatializer Digital AVFX provides Spatializer 3-D stereo, Spatializer N-2-2 virtual surround sound for DVD audio or video playback, Vi.B.E virtual bass enhancement and in the future, extensive room modeling and customized effects. Spatializer Digital AutoFX(TM) enhances the audio performance of DSP-based car stereo systems by delivering Spatializer's acclaimed 3-D stereo, bass enhancement, equalizer and reverb technology in a single solution. Optional positional audio voice cues for on board GPS and navigation systems, virtual surround sound for on board DVD player systems and space modeling will be offered as per customer requirements. LICENSING ACTIVITIES We have traditionally licensed our technologies through semiconductor manufacturing and distribution licenses ("Foundry Licenses") with semiconductor foundries ("Foundries"). In turn, these Foundries manufacture and distribute integrated circuits ("ICs") or digital signal processors ("DSPs") incorporating Spatializer technology to manufacturers of consumer electronics and multimedia computer products ("OEMs"). The terms of many of the Foundry Licenses are negotiated on an individual basis requiring the payment of a per unit running royalty according to sliding scales based upon cumulative volume. Some of the licenses call for the payment of an up-front license issuance fee either in lieu of, or in addition to the running royalty. Other agreements require the OEM customer, rather than the foundry, to pay the royalty. Per unit royalties are payable in the quarter following shipment from the Foundry to the OEM. OEMs who desire to incorporate these ICs into their products are required to enter into a license ("OEM Licenses") with us before they may purchase the ICs in quantity. Foundry Licenses generally have limited the sale of Spatializer ICs to OEMs who have entered into an OEM License with us. OEM licenses generally provide for the payment of a further per unit royalty by the OEM for OEM products incorporating a Spatializer IC ("Licensed Products") payable in the quarter following shipment by the OEM of its Licensed Products. In mid-1996, we modified our licensing program to ease the licensing process and accelerate cash flow by offering Foundries an alternative "Bundled Royalty" arrangement which permits the IC foundry to make a traditional component IC sale to an OEM without requiring the OEM to negotiate a separate royalty license agreement with the Company. In these situations, the IC Foundry is authorized to sell Spatializer ICs to OEMs, which enter into a simplified Logo Usage Agreement ("LUA"), or to be authorized customers in consideration for a higher ("bundled") per unit royalty from the IC Foundry. This license structure has relieved much of the licensing burden from the IC foundries and has resulted in an increase in License signings. In 2000, we began offering IC and DSP foundries the option of entering into a non-royalty bearing distribution agreement with us. Under this business model, the foundry offers Spatializer technology as an optional feature, promotes our technology in their sales materials and cooperates with the Spatializer sales force in closing license agreements for Spatializer technology with the OEM customer. This business model provides the foundry with an additional selling feature at no additional cost to the foundry. The OEM can obtain use of the technology directly from Spatializer without any additional mark-up from the foundry. In early 2001, we agreed with C-Cube Semiconductor II to unbundle the royalty on their DSPs in order to facilitate the licensing of multiple technologies to OEM manufacturers and to help ensure that their products remained highly competitive in the market. As such, on April 1, 2001, C-Cube's customers using Spatializer technology will enter into direct licenses with us. These agreements, with Samsung Electronics and LG Electronics have been closed. Because the Spatializer N-2-2 technology may be fully implemented in software to run in host based (Intel Pentium(R)) or general purpose DSP environments, no IC Foundry may be involved, as is the licensing arrangement with Apple Computer, Inc. In these 5 6 situations, we will enter into royalty bearing licenses directly with the OEM. However, we may still pursue bundled agreements with DSP providers, if appropriate. We are currently negotiating new IC/DSP Foundry and OEM licenses for Spatializer N-2-2, Spatializer Vi.B.E., Spatializer 3-D stereo and combinations and optimizations of these technologies under the Spatializer DigitalFX series. IC/DSP Foundry Licenses In 2000 and early 2001, VM Labs, Inc., MIPS Technologies, New Japan Radio Corporation ("NJRC"), Tvia, Inc. and Link Up Systems. entered into Foundry License or Distibution Agreements for Spatializer N-2-2 and or DigitalFX. All but the NJRC agreements were non-royalty bearing distribution agreements, with per unit royalties to be paid by the OEM customer. As of December 31, 2000, we have entered into eleven non-exclusive Foundry Licenses for its Virtual Audio Signal Processing technologies with Matsushita Electronics Corporation ("MEC"), ESS Technology, Inc. ("ESS"), OnChip Systems, Inc. ("OnChip"), C-Cube Technologies, Inc. ("C-Cube"), Acer Labs, Inc. ("Ali"), Luxsonor, VM Labs, Inc., MIPS Technologies, NJRC, Tvia, Inc. and Link Up Systems. Many Foundry Licenses generally require the payment of per unit running royalties based upon a sliding scale computed on the number of Spatializer ICs or DSPs sold. As of December 31, 2000, more than 25 million ICs and DSPs incorporating Spatializer 3-D audio signal processing and N-2-2 digital virtual surround sound technology had been manufactured and sold. OEM Licensees and Customers As of December 31, 2000, our technology has been incorporated in products offered by over 90 separate OEM Licensees and customers on various economic and business terms. Some of these OEM Licenses required a license issuance fee and/or a separate per unit royalty, while others were licensed under the LUA or were authorized customers under bundled royalty licenses with the IC foundries. The OEM licensees and customers offer a wide range of products, which include DVDs, car stereo systems, direct view TVs, wide screen and projection TVs, VCRs, powered speakers, portable audio systems ("Boomboxes"), HiFi stereo systems and components, computer sound cards and graphics accelerator cards, multimedia desktop personal computers, notebook computers, LCD projectors, multimedia computer monitors, and arcade pinball and video games. The following table is a partial list of the OEM Licensees and authorized customers as of December 31, 2000:
- --------------------------------------------- --------------------------------------------- PARTIAL LIST OF OEM LICENSEES OR CUSTOMERS LISTING -- CONTINUED - --------------------------------------------- --------------------------------------------- Apple Computer Inc. NEC Compaq Computer Corp. Panasonic TV & VCR (Matsushita Kotobuki Dell Computer Corp. Electronics Industries, Ltd.) Digital Technology Systems Of California, Panasonic Car Audio (Matsushita Inc. Communications Industrial Co., Ltd.) Emerson Proton Electronic Industrial Co., Ltd. Fujitsu Computer Corp. Samsung Hewlett Packard Seiko Epson Corp. Hitachi, Ltd. Sanyo Corp. Iiyama Electric Co., Ltd. Sharp Corp. Gateway Computer Corp. Toshiba DVD Golden Regent Toshiba TV LG Electronics Taisei Electric, Inc. JVC Taiyo Electric Company, Ltd. Labtec Enterprises, Inc. Texas Instruments Mag Monitors Theta Digital Marantz VM Labs, Inc. Micron Computer Corp Zenith Mitsubishi Image and Information Works - --------------------------------------------- ---------------------------------------------
6 7 HARDWARE PRODUCTS Sales of our professional and consumer hardware products to date have not generated significant revenues and we do not plan to manufacture these products in the future. Instead, we are focusing our attention on licensing these product designs to third parties and concentrating on software-only products and "plug-ins" for use with MP3 players for PC platforms and portable audio devices. MultiDisc Technologies, Inc. -- Network Based Modular, Scalable Compact Disc/DVD Servers As its first effort to broaden our technology portfolio and capitalize on our strong relationships with manufacturers of consumer electronics and personal computer peripheral products, we acquired certain developmental stage technologies and assets from Home Theatre Products ("HTP"), for approximately $1,062,000 in June 1996 and formed a subsidiary, MDT. The MultiDisc transaction, which was implemented through a court-approved sale in the HTP bankruptcy proceeding, included an array of compact disc server robotics and software technologies in various stages of completion. The MultiDisc transaction was intended to position us for long term growth in a significant new market. Our intention was to license this technology or enter into third party manufacturing arrangements for sale of MDT CD/DVD changer products to OEMs. The MultiDisc transaction brought a unique combination of proprietary electromechanical designs, robotics, operating software, firmware, intellectual property, and engineering know-how and five patent applications acquired in the asset acquisition. MDT added an additional forty-seven patent applications filed with the United States Patent & Trademark Office ("USPTO") to bring the total to fifty-two patent applications filed. On September 25, 1998, we announced our plan to refocus our business on the exploitation of its core audio technologies and to properly position the MultiDisc assets for sale. The repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond the Company's capacity. As a result, all operations, including research and development activities, were suspended and the Company has accounted for MDT as a discontinued operation. The Company has explored the sale of the business or the patent portfolio with interested parties, but to date, no transaction has been consummated. Revenues and Expenses We generate revenues in its audio business from royalties pursuant to its Foundry, OEM, and other licenses, and from non-recurring engineering fees to port our technologies to specific licensees' applications. The Company's revenues, which totaled $2,201,812 in 2000, were derived almost entirely from Foundry and OEM license fees and royalties. We seek to maximize return on our intellectual property base by concentrating our efforts in very high margin licensing and software products and have eliminated our hardware product operations. Licensing operations have been managed internally by our personnel and through use of an international sales rep force. We had three major customers, C-Cube Technologies, Inc., Apple Computer, Inc. and Toshiba Corporation in 2000, each of whom accounted for greater than 10% of our total 2000 revenues. One OEM accounted for 36%, another accounted for 35% and one accounted for 14% of our royalty revenues during 2000. Two other accounts comprised 9% and 7% of total 2000 revenues. All other OEM's accounted for less than 1% of royalty revenues individually. In September, 1998, the U.S. Court of Appeals for the Federal Court upheld the U.S District Court's ruling of August 1996, in which we prevailed in a 22-month legal battle over its 3-D Stereo intellectual property when the U.S. District Court granted the Company's motion for summary judgment against a competitor's assertions of patent infringement.. (See ITEM 3 -- LEGAL PROCEEDINGS, Page 8, for further detail). The uncertainties caused by the patent litigation had hindered our corporate results, particularly since licensing revenue depends upon OEM unit shipments, which follow three to four quarter production cycles. The resolution of this litigation contributed to the Company's ability to attract new licensing and financing arrangements and to reposition the Company for positive growth in profitability. In September 1998, we implemented cost cutting measures in conjunction with the suspension of our research and development activities at MDT and to further rationalize the overhead of DPI and the overall corporate structure in response to lower levels of operating performance. The result of these initiatives was to reduce 1999 operating costs from 1998 levels, which enabled the Company to achieve profitable operating results in 1999 and to remain profitable in 2000. 7 8 Competition VIRTUAL AUDIO SIGNAL PROCESSING MARKETPLACE We compete with a number of entities that produce various audio enhancement processes, technologies and products, some utilizing traditional two-speaker playback, others utilizing multiple speakers, and others restricted to headphone listening. These include the consumer versions of multiple speakers, matrix and discrete digital technologies developed for theatrical motion picture exhibition (like Dolby Digital(R), Dolby ProLogic(R), and DTS(R)), as well as other technologies designed to create an enhanced stereo image from two or more speakers. Our principal competitors in the field of virtual audio are QSound Labs, Inc. ("QSound") and SRS Labs, Inc In addition, some DSP foundries and OEMs have proprietary virtual audio technologies. In the future, our products and technologies also may compete with audio technologies and product applications developed by other companies including entities that have business relationships with the Company. We believe that we will favorably compete in this market because we offer a single source, complete suite of patented and proprietary 3D Stereo, interactive positional, and speaker virtualization technologies. By virtue of our specialized engineering and OEM support, we can offer a "turn-key" audio solution to OEMs who do not possess this expertise internally. In addition, the strength of our IC Foundry and OEM relationships and the Spatializer brand name recognition in the industry are other key differentiators between both our branded and unbranded competition. Patents, Trademarks and Copyrights Our core signal processing technology is covered by our U.S. patent 5,412,731, issued May 2, 1995. On July 15, 1997, the Company filed a patent in the U.S. Patent office on our N-2-2(TM) intellectual property with the U.S. Patent Office. On March 20, 1998, we filed a patent on our enCompass V 2.0 technology with the U.S. Patent Office covering the Company's enCompass 2.0 positional audio gaming technology. In June 2000, we filed an additional patent application for our reduced cost/higher performance 3-D Stereo circuit design. Much of our intellectual property consists of trade secrets. We possess copyright protection for its principal software applications and has U.S. and foreign trademark protection for its key product names and logo marks. The MultiDisc transaction brought a unique combination of proprietary electromechanical designs, robotics, operating software, firmware, intellectual property, and engineering know-how and five patent applications acquired in the asset acquisition. MDT added an additional forty-seven patent applications filed with the United States Patent & Trademark Office ("USPTO") to bring the total to fifty-two patent applications filed. However, due to the absence of working capital and suspension of all operating activities of MDT, MDT cannot pursue these applications and some applications have lapsed. The core MDT data storage technology is covered by U.S. patents 5,774,431, 5,822,283, 5,886,960 and 5,886,974. MDT have either obtained or applied for U.S. trademark protection for its principal product names and logo marks. On September 25, 1998, we announced our plan to refocus our business on the exploitation of our core audio technologies and to properly position the MultiDisc assets for sale. The repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond our capacity. As a result, operations, including all research and development activities were suspended and we have accounted for MDT as a discontinued operation. Employees We began 2000 with five full-time and six part-time employees and sales representatives and increased our staff to six full time and twelve part-time employees, consultants and sales representatives by December 31, 2000. At year-end, there were three full-time employees and two consultants engaged in research and development. We employ the services of outside professional consultants, particularly in the engineering area, due to the tight labor market for such professionals in Silicon Valley as well as the need for specialized expertise in the course of our business. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We consider our relations with our employees and consultants to be satisfactory. 8 9 PART II ITEM 2. PROPERTIES Our executive office is located in Woodland Hills, California where we occupy approximately 900 square feet with an annual rent of approximately $32,000. The lease term on this space is month to month. During 2000, we also had leased facilities in Santa Clara, CA. Our operations office in Santa Clara, CA, is the primary location for our audio technology division, ("DPI"). We occupy approximately 2,700 square feet with an annual rent on a full service basis of approximately $75,000. The lease expires on November 30, 2002. We lease an apartment in Santa Clara, CA for use by the chief executive officer when away from the executive office. The annual rent on this apartment is approximately $18,000. The lease expires on June 30, 2001. We lease our space at rental rates and on terms which management believes are consistent with those available for similar space in the applicable local area. Our properties are well maintained, considered adequate and are being utilized for their intended purposes. ITEM 3. LEGAL PROCEEDINGS 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 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, or a cash payment of $50,000 if the warrants remained unexercised. In January 2001, the cash payment was made and no further liabilities or contingencies exist. 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. In that action, the claimants filed a motion to strike the MDT complaint under the California "anti-Slapp" legislation. The Court rejected that motion and the litigation is in the discovery stages. 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. 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 fourth quarter of the fiscal year ended December 31, 2000. 9 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock trades on the OTC Bulletin Board under the symbol "SPAZ". The following table sets forth the high and low sales price of our Common Stock on its principal market for fiscal years 1999 and 2000:
PERIOD: HIGH (U.S. $) LOW (U.S. $) - ------- ------------- ------------ 1999 First Quarter..................................... $0.44 $0.08 Second Quarter.................................... $0.36 $0.08 Third Quarter..................................... $0.90 $0.20 Fourth Quarter.................................... $0.96 $0.26 2000 First Quarter..................................... $2.56 $0.94 Second Quarter.................................... $1.56 $0.44 Third Quarter..................................... $1.06 $0.50 Fourth Quarter.................................... $0.69 $0.19
On March 8, 2001, the closing price reported by the OTC Bulletin Board was U.S. $0.39. Stockholders are urged to obtain current market prices for our Common Stock. Since April 1, 1997, Computershare Investor Services, through its purchase of the transfer agent business in 2000 of Harris Trust Company of California, has been our transfer agent. RECORD HOLDERS To our knowledge there were approximately 125 holders of record of the stock of the Company as of March 8, 2001. However, our transfer agent has indicated that beneficial ownership is in excess of 3,300 shareholders. DIVIDENDS We have not paid any cash dividends on its Common Stock and have no present intention of paying any dividends. Our current policy is to retain earnings, if any, for use in operations and in the development of its business. Our future dividend policy will be determined from time to time by the Board of Directors. 10 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in Item 7. The selected data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" as of and for the years ended December 31, 1997 and 1996 are derived from the consolidated financial statements of Spatializer Audio Laboratories, Inc. and subsidiaries, which consolidated balance sheets have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected financial data for the years ended December 31, 2000, 1999 and 1998 are derived from the Company's consolidated financial statements which have been audited by Farber & Hass LLP, independent certified public accountants. The consolidated statements of operation and cashflows for the year ended December 31, 2000 and the report thereon are included elsewhere in this Report.
FISCAL YEAR ENDED -------------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues..................... $ 2,024 $ 2,781 $ 1,680 $ 1,660 $ 2,202 Cost Of Revenues............. (186) (230) (134) (49) (248) ----------- ----------- ----------- ----------- ----------- Gross Profit................. 1,838 2,551 1,546 1,611 1,954 Total Operating Expenses..... (27,042)(3) (7,238) (3,490) (1,156) (1,596) Other Income (Expense), Net........................ 119 27 (108) (94) 34 Loss from Discontinued Operations................. (3,702) Income taxes................. (310) (60) (38) (6) (10) ----------- ----------- ----------- ----------- ----------- Net Income (Loss)............ $ (25,395)(4) $ (4,720) $ (5,792) $ 355 $ 382 ----------- ----------- ----------- ----------- ----------- Basic Income (Loss) Per Share(5)................... $ (2.01) $ (0.23) $ (0.29) $ 0.01 $ 0.01 =========== =========== =========== =========== =========== Diluted Income (Loss) Per Share(5)................... $ (2.01) $ (0.23) $ (0.29) $ 0.01 $ 0.01 =========== =========== =========== =========== =========== Weighted Average Common Shares..................... 12,644,751 20,604,095 22,180,180 33,805,512 46,736,224 =========== =========== =========== =========== =========== CONSOLIDATED BALANCE SHEET DATA: Cash and Cash Equivalents.... $ 1,587 $ 577 $ 264 $ 1,022 $ 1,468 Working Capital (Deficit).... 2,092 83 (1,975) 395 1,195 Total Assets................. 4,141 3,165 893 2,118 2,457 Advances From Related Parties.................... 113 113 857 337 337 Total Shareholders' Equity (Deficit).................. $ 3,268 $ 1,525 $ (1,553) $ 768 $ 1,651
- --------------- (1) Not used. (2) Not used. (3) Includes two one-time significant changes. Compensation Expense of $20,218,450 was recorded associated with the transfer of the Company's performance shares from Canadian Escrow into a new escrow arrangement which will provide for the release of the performance shares over the next six years. Based on the revised escrow arrangement, which primarily converts the escrow shares release from performance criteria to time-based criteria, the Company recorded compensation expense on the date the new escrow arrangement terms were accepted by the Company. Additionally, In-Process Research & Development ("IPR&D") expense of $679,684 related to the allocation of costs was incurred as a result of the MultiDisc Technologies, Inc. ("MDT") asset acquisition in June 1996. (4) The Company incurred and paid Canadian income taxes in the amount of $249,000 during the year associated with the liquidation of Spatializer-Yukon, the Company's Canadian predecessor. (5) Loss per share has been calculated based on the weighted average number of common shares outstanding including escrowed performance shares, which are factored into the calculation as of December 30, 1996, the date on which the British Columbia Securities Commission ("BCSC") issued its consent to the Company's revised escrow arrangement. 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to the financial condition and results of operations of Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") for the year ended December 31, 2000 compared to the year ended December 31, 1999, and the year ended December 31, 1999, compared with the year ended December 31, 1998. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000, COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 REVENUES Revenues increased to $2,202,000 for the year ended December 31, 2000 compared to $1,660,000 for the year ended December 31, 1999, an increase of 33%. Revenues include license issuance fees and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs and non-recurring engineering fees. The increase in revenues is attributed primarily to the inclusion of four quarters of royalties from a major account for which there was only one quarter of royalty and a non-recurring engineering fee in the prior year and increases in Spatializer N-2-2 running royalties from OEM DVD player sales. This increase in revenues was partially offset by decreases in per unit Spatializer N-2-2 royalties due to a volume-based sliding scale pricing structure with DSP foundries agreed to in prior years when the original agreements were made. By the beginning of the third quarter of 2000, pricing levels at the maximum volume levels were substantially achieved, resulting in a stabilization of the per unit royalty rate. Gross profit increased to $1,954,000 for the year ended December 3, 2000 compared to $1,612,000 in the comparable period last year. Gross margin decreased to 89% of revenue in the year ended December 31, 2000 compared with 97% of revenue for the comparable period last year. The increase in gross profit results from higher revenues in the current year, partially offset by lower gross margin. This decrease in the gross margin percentage reflects the restoration of Japan sales support which were reduced significantly in 1999 during the period of constrained liquidity. The Company maintains a high margin as the majority of revenues are from licensing and royalty activities, which have little or no associated direct costs. OPERATING EXPENSES Operating expenses for the year ended December 31, 2000 increased to $1,595,000 (72% of sales) from $1,156,000 (70% of sales) for the year ended December 31, 1999, an increase of 38%. The increase in operating expenses result from expansion of the Company's research and development and sales and marketing efforts, which were curtailed in most of 1999 to minimal levels as a result of the period of constrained liquidity. With liquidity restored as a result of the December 1999 financing, the Company expanded its staff to more normalized levels and the increase was limited to 200 basis points of sales. GENERAL AND ADMINISTRATIVE General and administrative costs increased to $599,000 for the year ended December 31, 2000 from $516,000 for the year ended December 31, 1999, an increase of 16%. The increase is primarily due to the retention of an investor relations firm and a local business tax settlement. General operating costs include rent, telephone, office supplies and stationery, postage, depreciation and similar costs. RESEARCH AND DEVELOPMENT Research and Development costs increased to $540,000 for the year ended December 31, 2000, compared to $383,000 for the year ended December 31,1999, an increase of 41%. The increase in research and development expense was due additions to headcount throughout the year, search fees paid for certain engineers hired and expanded use of engineering consultants for specialized projects. In addition, the Company continued efforts to identify, validate, and develop new product ideas at DPI. Specific engineering efforts were directed toward a new version of Spatializer N-2-2(TM), optimization of technologies for the DigitalFX(TM) series and development of a new series of headphone algorithms. 12 13 SALES AND MARKETING Sales and marketing costs increased to $456,000 for the year ended December 31, 2000, compared to $257,000 for the year ended December 31, 1999, an increase of 77%. The increase results from the appointment of a public relations firm, formal trade show participation, increased customer visits and prospecting, support staff expansion and revision of marketing collateral materials. NET INCOME Net Income increased to $382,000 for the year ended December 31, 2000, compared to net income of $355,000 for the year ended December 31, 1999, an increase of 8%. The improvement for the period is primarily the result of higher interest income and lower interest expense, partially offset by lower operating profit driven by lower gross margin and slightly higher overhead expenses as a percentage of sales. FOR THE YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 REVENUES Revenues declined to $1,660,000 for the year ended December 31, 1999 compared to $1,680,000 for the year ended December 31, 1998, a decline of 1%. Revenues include license issuance fees and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs and non-recurring engineering fees. The decrease in revenues is attributed primarily to the settlement in early 1998 of royalty claims from a licensee for which there was no comparable license settlement in the current fiscal year, competitive market pricing pressure and decreases in recurring royalties for the licensing of Spatializer audio technology reflecting weakness in the Japanese 3-D audio market. This was substantially offset by increases in royalties derived from DSP foundries and OEMs for the Company's N-2-2 technology and royalty and engineering fees from a new licensee in 1999. Gross profit increased to 97% in the year ended December 31, 1999 compared with 92% for the comparable period last year. This increase reflects the impact of the discontinuation of lower margin consumer products sales, and inventory write-downs on the remaining consumer products inventory to market in 1998, for which there was no comparable adjustment in 1999. The Company maintains a high margin as the majority of revenues are from licensing and royalty activities, which have little or no associated direct costs. OPERATING EXPENSES Operating expenses for the year ended December 31, 1999 decreased to $1,156,000 from $3,490,000 for the year ended December 31, 1998, a decrease of 67%. The decrease in operating expenses result from the rationalization of overhead, particularly with regard to the corporate office, implemented in late September 1998, as part of the Company's strategic repositioning to focus exclusively on its core audio business. Based on this strategic refocusing, MultiDisc Technologies, Inc. is being treated as a discontinued operation for accounting purposes. Operating expenditures in 1999 were minimal and were accrued in the year ending December 31, 1998. Operating and wind down expenses of MultiDisc Technologies, Inc totaling $3,000,000 were excluded from 1998 operating expenses and presented separately as a discontinued operation. Total operating expenses of MultiDisc Technologies, Inc. for the year ended December 31, 1997 were $3,791,000. GENERAL AND ADMINISTRATIVE General and administrative costs decreased to $516,000 for the year ended December 31, 1999 from $1,732,000 for the year ended December 31, 1998, a decrease of 70%. The decrease is primarily due to decreased payroll and payroll-related costs primarily related to the downsizing of the corporate office as a result of overhead rationalizations implemented beginning in September 1998. General operating costs include rent, telephone, office supplies and stationery, postage, depreciation and similar costs. 13 14 RESEARCH AND DEVELOPMENT Research and Development costs decreased to $383,000 for the year ended December 31, 1999, compared to $756,000 for the year ended December 31,1998, a decrease of 49%. The decrease in research and development expense was due to headcount attrition and a delay in efforts to fill open positions until additional working capital became available through the December Transactions. In addition, the Company continued efforts to identify, validate, and develop new product ideas at DPI. Specific engineering efforts were directed toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to current and potential licensees during the year and toward development of StreamFX, an Internet audio enhancement product and Vi.B.E., a virtual bass enhancement technology. SALES AND MARKETING Sales and marketing costs decreased to $257,000 for the year ended December 31, 1999, compared to $1,002,000 for the year ended December 31, 1998, a decrease of 74%. The decrease results from headcount reductions effected in September 1998 and suspension of public relations, formal trade show participation and advertising efforts until the additional working capital became available through the December Transactions. LOSS ON DISCONTINUED OPERATION There was no loss on discontinued operation in the year ended December 31, 1999, compared to a loss on discontinued operation of $3,702,000 for the year ended December 31, 1998. Expenditures for MDT were minimal in fiscal 1999 and were accrued in the year ended December 31, 1998. Loss on discontinued operation was comprised of the reclassification of $2,847,000 of the net MDT expenses and valuation adjustments of $855,000. The net expense primarily represented general and administrative, sales and marketing and research and development expenses for the period January 1 through September 30,1998. The Board of Directors announced the discontinued operation of MDT on September 25, 1998 and had preliminary indications from its banker and potential buyers that the sale of MDT's assets would not result in a loss to the Company. However, since no transaction had been consummated for the MDT assets as of the date on which the Company filed its annual report Form 10-K in April 1999, the Company elected to reserve for the contingency. NET INCOME (LOSS) Net Income increased to $355,000 for the year ended December 31, 1999, compared to a net loss of $5,792,000 for the year ended December 31, 1998, an increase of 106%. The improvement for the period is primarily the result of overhead rationalization and corporate refocusing which began its implementation in September 1998 and the wind down costs of MDT in 1998, for which there were no such expenses in the current fiscal year. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, we had $1,468,000 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 warrants and options. We had working capital of $1,195,000 at December 31, 2000 as compared with a 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 from possible common stock issuances including warrant and option exercises. At December 31, 2000 we had eleven Foundry licensees, as compared with six Foundry licensees 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, convertible into Common Stock at our or Lender's option. The obligation matures in June 2001. The Company owed $337,500 to related parties as of December 31, 2000 and at 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, 14 15 450,000 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. No additional investment above the initial $3 million was 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. On September 25, 1998, we announced that our Board of Directors was refocusing our business on the exploitation of our 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 our continued listing on October 29, 1998 at which time we outlined our 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. 15 16 Net Operating Loss Carry forwards At December 31, 2000, the Company had net operating loss carry forwards for Federal income tax purposes. These net operating loss carry forwards are subject to an annual limitation of approximately $26,000,000 which are available to offset future Federal taxable income, if any, through 2013. Approximately $21,700,000 of these net operating loss carry forwards are subject to an annual limitation of approximately $1,000,000. Inflation We believe that the moderate inflation rate of the last several years has not impacted our operations. The Asian Economic Crisis Approximately 60% of our revenues for the year ended December 31, 2000 were derived from foundries or OEM's based in Japan and other Asian countries. While the level of the Company's Asian business is material, the concentration of this Asian business with large, well capitalized entities such as Matsushita Electronics Corporation, Toshiba Corporation, Samsung and LG Electronics may tend to minimize any real or potential risk of concentration in this market. Comprehensive Income The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997. FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. FAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted FAS No. 130 in the first quarter of fiscal year ended December 31, 1998. 16 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Spatializer Audio Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Spatializer Audio Laboratories, Inc. and subsidiaries (The "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years ended December 31, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ FARBER & HASS LLP Oxnard, California March 20, 2001 17 18 ITEM 8. FINANCIAL STATEMENTS SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Current Assets: Cash and Cash Equivalents................................. $ 1,467,988 $ 1,021,998 Accounts Receivable....................................... 506,558 687,595 Prepaid Expenses and Deposits............................. 26,458 22,640 ------------ ------------ Total Current Assets.............................. 2,001,004 1,732,233 Property and Equipment, Net................................. 108,061 132,803 Intangible Assets, Net...................................... 302,789 207,793 Other Assets................................................ 45,170 45,170 ------------ ------------ $ 2,457,024 $ 2,117,999 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable............................................. $ 0 $ 14,149 Notes Payable to Related Party............................ 337,742 337,742 Accounts Payable.......................................... 51,782 234,118 Accrued Wages and Benefits................................ 61,390 53,136 Accrued Expenses.......................................... 99,595 291,117 Net Liabilities of Discontinued Operation................. 255,840 419,600 ------------ ------------ Total Current Liabilities......................... 806,349 1,349,862 ------------ ------------ Commitments and Contingencies Stockholders' Equity (Deficit): 10% Series B Convertible Redeemable Preferred shares, $0.01 par value; 1,000,000 shares authorized; 102,967 shares issued and outstanding at December 31, 2000 and 1999, respectively..................................... 1,030 1,030 Common shares, $0.01 par value; 65,000,000 shares authorized; 47,087,971 and 46,174,970 shares issued and outstanding at December 31, 2000 and 1999, respectively........................................... 470,880 461,750 Additional Paid-In Capital................................ 46,404,892 45,913,503 Accumulated Deficit....................................... (45,226,127) (45,608,146) ------------ ------------ Total Shareholders' Equity........................ 1,650,675 768,137 ------------ ------------ $ 2,457,024 $ 2,117,999 ============ ============
See accompanying notes to consolidated financial statements 18 19 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Revenues: Product Revenues, Net............................. $ 39,496 Licensing Revenues................................ 663,522 Royalty Revenues.................................. $ 2,201,812 $ 1,660,371 976,697 ----------- ----------- ----------- 2,201,812 1,660,371 1,679,715 Cost of Revenues............................... 248,217 48,780 134,190 ----------- ----------- ----------- 1,953,595 1,611,591 1,545,525 ----------- ----------- ----------- Operating Expenses: General and Administrative........................ 599,291 515,843 1,732,097 Research and Development.......................... 540,269 383,176 755,899 Sales and Marketing............................... 455,901 257,017 1,001,747 ----------- ----------- ----------- 1,595,461 1,156,036 3,489,743 ----------- ----------- ----------- Operating Income (Loss)........................ 358,134 455,555 (1,944,218) ----------- ----------- ----------- Interest Income..................................... 64,857 3,401 27,672 Interest Expense.................................... (34,112) (102,468) (84,723) Other Income (Expense), Net......................... 3,140 4,804 (50,955) ----------- ----------- ----------- 33,885 (94,263) (108,006) ----------- ----------- ----------- Income (Loss) from Continuing Operations..... 392,019 361,292 (2,052,224) Loss from Discontinued Operations............ (3,701,599) ----------- ----------- ----------- Income (Loss) Before Income Taxes.............. 392,019 361,292 (5,753,823) Income Taxes................................... (10,000) (6,500) (38,238) ----------- ----------- ----------- Net Income (Loss).............................. $ 382,019 $ 354,792 $(5,792,061) =========== =========== =========== Basic and Diluted Income (Loss) per Share: Continued Operations......................... $ .01 $ .01 $ (.12) Discontinued Operations...................... (.17) ----------- ----------- ----------- $ .01 $ .01 $ (.29) =========== =========== =========== Weighted-Average Shares Outstanding.......... 46,736,224 33,805,512 22,180,180 =========== =========== ===========
See accompanying notes to consolidated financial statements 19 20 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ---------- ---------- ----------- Cash Flows from Operating Activities: Net Income (Loss)................................... $ 382,019 $ 354,792 $(5,792,061) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization.................... 85,969 103,564 126,334 Discontinued Operations.......................... 962,060 Deferred Transaction Costs....................... 146,529 Loss on Disposal of Property and Equipment....... 50,308 Options and Warrants Issued for Services......... 30,000 56,030 Net Change in Assets and Liabilities: Accounts Receivable and Employee Advances........ 181,037 (558,583) 798,675 Inventory........................................ 7,993 85,257 Prepaid Expenses and Deposits.................... (3,818) 16,521 31,112 Other Assets..................................... (12,993) Accounts Payable................................. (182,335) (101,667) 102,737 Accrued Expenses and Other Liabilities........... (183,268) (360,718) 503,007 Discontinued Operations.......................... (163,760) (114,291) (66,796) ---------- ---------- ----------- Net Cash Provided (Used) by Operating Activities...... 145,844 (665,382) (2,996,808) ---------- ---------- ----------- Cash Flows from Investing Activities: Purchase of Property and Equipment............... (40,489) (16,365) (43,079) Proceeds from Disposal........................... 500 20,400 Intangible Assets................................ (116,235) (6,740) (34,350) Deferred Transaction Costs....................... Discontinued Operations.......................... (238,025) ---------- ---------- ----------- Net Cash Used by Investing Activities................. (156,224) (23,105) (295,054) ---------- ---------- ----------- Cash Flows from Financing Activities: Issuance of Common and Preferred Shares, Net........ 1,959,627 2,611,474 Exercise of Options and Warrants.................... 470,519 7,208 45,954 Notes and Amounts Due to (from) Related Parties..... (519,757) 745,000 Proceeds (Repayments) on Line of Credit............. (400,000) Discontinued Operations............................. (20,501) Repayments/Termination of Notes Payable............. (14,149) (647) (3,424) ---------- ---------- ----------- Net Cash Provided by Financing Activities............. 456,370 1,446,431 2,978,503 ---------- ---------- ----------- Increase (Decrease) in Cash and Cash Equivalents...... 445,990 757,944 (313,359) Cash and Cash Equivalents, Beginning of Year.......... 1,021,998 264,054 577,413 ---------- ---------- ----------- Cash and Cash Equivalents, End of Year................ $1,467,988 $1,021,998 $ 264,054 ========== ========== =========== Supplemental Disclosure of Cash Flow Information: Cash Paid During the Year for: Interest......................................... $ 11,250 $ 11,250 $ 26,370 Income Taxes..................................... $ 2,569 $ 6,500 $ 35,838
See accompanying notes to consolidated financial statements 20 21 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A, 7% CONVERTIBLE SERIES B, 10% CONVERTIBLE PREFERRED SHARES PREFERRED SHARES COMMON SHARES ------------------------- ------------------------- -------------------------------------------- NUMBER OF NUMBER OF NUMBER OF ADDITIONAL SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE PAID-IN-CAPITAL ----------- ----------- ----------- ----------- ---------- ------------- --------------- Balance, January 1, 1998................ 21,410,012 $214,100 41,181,890 Issuance of Preferred Shares, Net......... 60,000 $ 600 2,610,874 Issuance of Common Shares, Net......... 1,884,254 18,843 911,137 Options Issued for Services............ 13,333 133 12,571 Options Exercised..... 19,000 190 33,060 Conversion of Preferred Shares.... (7,100) (71) 4,399,522 43,995 (43,924) Net Income............ -- -- -- ------- ----- ------- ------ ---------- -------- ----------- Balance, December 31, 1998................ 52,900 $ 529 25,841,867 $258,418 44,150,501 Issuance of Preferred Shares, Net......... 102,967 $1,030 1,028,617 Issuance of Common Shares, Net......... 1,884,254 18,843 911,137 Options Exercised..... 59,998 600 6,608 Conversion of Preferred Shares.... (52,900) (529) 18,388,851 183,889 (183,360) Net Income............ -- -- -- ------- ----- ------- ------ ---------- -------- ----------- Balance, December 31, 1999................ 0 0 102,967 $1,030 46,174,970 $461,750 $45,913,503 Options Exercised..... 648,001 6,480 438,839 Warrants Exercised.... 210,000 2,100 23,100 Stock Issued for Services............ 55,000 550 29,450 Net Income............ Balance, December 31, 2000................ 0 0 102,967 $1,030 47,087,971 $470,880 $46,404,892 ======= ===== ======= ====== ========== ======== =========== TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY ------------ ------------- Balance, January 1, 1998................ (40,170,877) 1,525,113 Issuance of Preferred Shares, Net......... 2,611,474 Issuance of Common Shares, Net......... 929,980 Options Issued for Services............ 12,704 Options Exercised..... 33,250 Conversion of Preferred Shares.... Net Income............ (5,792,061) (5,792,061) ------------ ----------- Balance, December 31, 1998................ (45,962,938) (1,553,490) Issuance of Preferred Shares, Net......... 1,029,647 Issuance of Common Shares, Net......... 929,980 Options Exercised..... 7,208 Conversion of Preferred Shares.... Net Income............ 354,792 354,792 ------------ ----------- Balance, December 31, 1999................ $(45,608,146) $ 768,137 Options Exercised..... 445,319 Warrants Exercised.... 25,200 Stock Issued for Services............ 30,000 Net Income............ 382,019 382,019 ------------ ----------- Balance, December 31, 2000................ $(45,226,127) $ 1,650,675 ============ ===========
See accompanying notes to consolidated financial statements 21 22 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") is 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"), was in the business of developing scalable, modular compact disc and digital versatile disc ("DVD") server technologies associated with a network based compact disc/DVD server for internet and intranet applications. Operations of MDT were discontinued in the fourth quarter of 1998 and the assets have been marketed for sale (see Note 11). (2) 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 (see Note 11). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION -- The Company recognizes revenue from product sales upon shipment to the customer. License revenues are recognized when earned, in accordance with the contractual provisions. Royalty revenues are recognized upon shipment of products incorporating the related technology by the original equipment manufacturers (OEMs) and foundries. CONCENTRATION OF CREDIT RISK -- Financial instruments, which potentially subject the company to concentrations of credit risk, consist principally of cash, cash equivalents and trade accounts receivable. The Company places its temporary cash investments in certificates of deposit with high quality national financial institutions. At December 31, 2000 substantially all cash and cash equivalents were on deposit at two financial institutions. At December 31, 2000, three customers accounted for 36%, 35% and 14%, respectively, of the Company's trade receivables. The Company performs ongoing credit evaluations of its customers and normally does not require collateral to support accounts receivable. CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid investments with original maturities of three months or less. MAJOR CUSTOMERS -- During the year ended December 31, 2000, three customers accounted for 36%, 35% and 14%, respectively, of the Company's net sales. RESEARCH AND DEVELOPMENT COSTS -- The Company expenses research and development costs as incurred. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Property and equipment under capital leases are stated at the present value of minimum lease payments. Property and equipment are depreciated over three to five years using accelerated-depreciation methods, which approximates 150% declining balance. Leasehold improvements are amortized over the shorter of the useful life of the asset or lease term. INTANGIBLE ASSETS -- Intangible assets consist of patent costs which are amortized on a straight-line basis over the estimated useful lives of the patents which range from five to ten years. 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 22 23 earnings (loss) per share with a presentation of basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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 (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to the Accounting Principles Board ("APB") Opinion No. 15. The impact of Statement 128 on the calculation of earnings per share is as follows:
YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- BASIC: Net Income (Loss) Available to Common Shareholders.................................... $ 382,019 $ 354,792 Weighted Average Shares Outstanding............... 46,736,224 33,805,512 Basic Earnings per Share.......................... $ 0.01 $ 0.01 DILUTED: Net Income (Loss) Available to Common Shareholders.................................... $ 382,019 $ 354,792 Weighted Average Shares Outstanding............... 46,736,224 33,805,512 Net Effect of Dilutive Stock Options and Warrants Based on the Treasury Stock Method Using Average Market Price.................................... 544,586 1,859,519 Total Shares...................................... 47,280,810 35,665,031 Diluted Earnings per Share........................ $ 0.0100 $ 0.0100 Average Market Price of Common Stock.............. $ 0.9418 $ 0.4700 Ending Market Price of Common Stock............... $ 0.2344 $ 0.9375
The following table presents contingently issuable shares, options and warrants to purchase shares of common stock at 2000 and 1999 and those that were outstanding during 1998 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
2000 1999 1998 --------- --------- --------- Options................................... 2,212,299 2,859,467 1,972,300 Warrants.................................. 2,520,000 2,730,000 732,000 --------- --------- --------- Total..................................... 4,732,299 5,589,467 2,704,300 ========= ========= =========
The loss per share for the year ended December 31, 1998 includes the effect of approximately $371,000 of the beneficial conversion feature of the Series "A", 7% Convertible Preferred Stock as well as dividends in arrears of approximately $149,000 related to this Preferred Stock. STOCK OPTION PLAN -- Prior to January 1, 1996 the Company accounted for its stock option plan in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense using the fair-value-based method over the vesting period the fair value of all employee stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (Note 8). IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF -- The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets (see Notes 4). Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 23 24 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. The Company adopted SFAS 131 in December 1997. MDT is considered a discontinued operation as of September 1998. As of December 31, 2000, the Company has only one operating segment, DPI, the Company's 3-D Audio Signal Processing business. 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 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 years ended December 31, 2000, 1999 and 1998. As a result, comprehensive income (loss) is the same as the net income (loss) for the years ended December 31, 2000, 1999 and 1998. INCOME TAXES -- Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS -- The carrying values of cash equivalents, accounts receivable, accounts payable and accrued liabilities at December 31, 2000 and 1999 approximated fair value due to the short maturity of those investments. The fair value of the advances from related parties could not be estimated due to the nature of the borrowings. The fair values of notes payable at December 31, 2000 and 1999 are materially consistent with the related carrying values based on current rates offered to the Company for instruments with similar maturities. DISCONTINUED OPERATION -- In September 1998, the Board of Directors approved a plan to refocus corporate activities on the Company's core audio business, Desper Products, Inc. In conjunction to this strategic refocusing, the Company permanently suspended operations of MDT and placed the business and its related patent portfolio up for sale. The Company is accounting for the on-going operating and termination expenses of MDT as a discontinued operation (see Note 11). Certain 1999 amounts have been reclassified in order to conform to 2000 classification. 24 25 (3) PROPERTY AND EQUIPMENT Property and equipment, as of December 31, 2000 and 1999, consists of the following, net of a reserve for impairment loss in 1998 in accordance with application of SFAS 121:
2000 1999 -------- -------- Office Computers, Software, Equipment and Furniture.... $268,799 $242,272 Test Equipment......................................... 61,737 60,647 Tooling Equipment...................................... 49,514 44,136 Trade Show Booth and Demonstration Equipment........... 122,761 122,768 Automobiles............................................ 7,000 0 Leasehold Improvements................................. 22,122 22,122 -------- -------- Total Property and Equipment........................... 531,933 491,945 Less Accumulated Depreciation and Amortization......... 423,872 359,142 -------- -------- Property and Equipment, Net............................ $108,061 $132,803 ======== ========
(4) INTANGIBLE ASSETS Intangible assets, as of December 31, 2000 and 1999 consist of the following:
2000 1999 -------- -------- Capitalized Patent and Technology Costs................ $489,911 $373,677 Less Accumulated Amortization.......................... 187,122 165,884 -------- -------- Intangible Assets, Net................................. $302,789 $207,793 ======== ========
(5) NOTES PAYABLE TO RELATED PARTIES The Company was indebted to certain related parties for an amount totaling $337,742 at December 31, 2000. This amount bears interest at a fixed rate of 10% annually and is due on demand. It is convertible into shares of common stock based on the 10 day average closing bid price immediately prior to notice of conversion. At December 31, 1998, the Company was indebted to four of its directors and one of its executives for an amount totaling $745,000. This amount bore interest at a fixed rate of 10% annually. Of this amount, $650,000 was due on December 31, 1998. The remaining $95,000 was due on November 30, 1999, or upon the sale of the MDT assets. The Company granted 95,000 warrants to purchase common stock at $0.20 per share in connection with the $95,000 of indebtedness. This debt was converted into Series B preferred stock in December 1999 (see Note 6). (6) SHAREHOLDERS' EQUITY During the year ended December 31, 2000, shares were issued or converted as follows: In the third quarter of 2000, the Company issued 55,000 shares of common stock to its law firm for services rendered. No other issuances or conversions occurred during the year ended December 31, 2000. During the year ended December 31, 1999, shares were issued or converted as follows: In December 1999, the Company completed a set of financial transactions (the "December Transactions") with certain existing holders of the Company's 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 $0.55725 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 an earlier financing, the conversion of $1 million of short-term debt into a new Series B Convertible Redeemable Preferred Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured debt into secured long-term 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 $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 25 26 of $56 per share and a maximum of $1.12 per share. The Company has 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 the Company's assets. The debt, and accrued interest, is convertible at the Company's 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. Also, concurrently with the December Transactions, 55,000 shares were allocated to the Company's outside legal counsel in payment of a portion of its legal fees for this transaction. During the year ended December 31, 1998, shares were issued or converted as follows: On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at December 31, 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 the $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 December 31, 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 twenty (120) days and prior to one hundred forty-nine (149) days of first issuance of the Series A Preferred Stock. The applicable Conversion Discount increased by five percent (5%) when the Company was delisted 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. At December 31, 1998, 7,100 shares of the Convertible Preferred Series A Stock had been converted into a total of 4,399,522 shares of the Company's Common Stock. The beneficial conversion feature of the Series A Preferred Stock was 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 December 31, 1998, dividends in arrears were $131,148. 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. However, as reported by the Company on September 25, 1998, the Company has decided to refocus on the core audio technologies and to properly position the MultiDisc assets for sale. Therefore this financing is not currently being pursued actively. 26 27 (7) ESCROWED PERFORMANCE SHARES In December 1996, the Company accepted the terms outlined by the British Columbia Securities Commissions ("BCSC") for the release of the Company's 5,776,700 escrowed "Performance Shares" from Canadian Escrow into a new escrow arrangement with the Company. The overall modification was approved by the Company's shareholders in August 1996. Under the revised arrangement, the performance shares will be released automatically as follows: 20% on June 22, 2000; 30% on June 22, 2001; and 30% on June 22, 2002. In addition to the automatic releases, performance shares can be released based on the cash flow release criteria contained in the original June 22, 1992 escrow agreement although, to maintain a stable market in the Company's stock, in any year not more than 30% of the shares will be released, based on the cash flow criteria. Under the revised escrow arrangement, the performance shares will vest, provided the individual has not voluntarily terminated his/her relationship with the Company prior to applicable vesting dates. Based on the revised escrow arrangement, which primarily converts the escrow shares release from performance criteria to a time-based criteria, the Company recorded as compensation expense the excess of the fair market value of the 5,776,700 performance shares on the date the Company accepted the terms of the new escrow arrangement over the purchase price of such escrow shares. All of the performance shares are included in the issued and outstanding shares for the years ended December 31, 2000, 1999 and 1998. However, the shares were not reflected in the calculation of loss per common share until earned by and released to the holders on December 30, 1996, the date on which the Company and the BCSC accepted and entered into the terms of the current escrowed agreement as discussed above. (8) STOCK OPTIONS In 1995, the Company adopted a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to directors, officers and employees. The Plan authorizes grants of options to purchase authorized but unissued common stock up to 10% of total common shares outstanding at each calendar quarter, 4,708,797 as of December 31, 2000. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. Stock options have five-year terms and vest and become fully exercisable up to three years from the date of grant. At December 31, 2000, there were 2,527,894 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $0.19, $0.32, and $0.25, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2000 -- expected dividend yield 0%, risk free interest rate of 9%, expected volatility of 654% and expected life of 5 years. 1999 and 1998 -- expected dividend yield 0%, risk-free interest rate of 9.0%, expected volatility of 95% and an expected life of 3 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for the fair value of its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
2000 1999 1998 ------------ -------- ----------- NET INCOME (LOSS): As Reported................................... 382,019 $354,792 $(5,792,061) Pro Forma..................................... 292,169 $(49,978) $(5,792,061) BASIC AND DILUTED LOSS: As Reported................................... $ 0.01 $ 0.01 $ (.29) Pro Forma..................................... $ 0.01 $ (0.01) $ (.29)
Pro forma net loss reflects only options granted since December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. 27 28 Stock option activity during the periods indicated is as follows:
WEIGHTED-AVERAGE NUMBER EXERCISE PRICE --------- ---------------- Options outstanding at January 1, 1998........... 1,855,070 $1.897 Options granted.................................. 646,000 $0.728 Options exercised................................ (13,333) $0.953 Options forfeited................................ (515,437) $1.763 --------- Options outstanding at December 31, 1998......... 1,972,300 $1.515 Options granted.................................. 1,280,000 $0.316 Options exercised................................ (59,998) $1.242 Options forfeited................................ (332,835) $1.131 --------- Options outstanding at December 31, 1999......... 2,859,467 $1.271 ========= Options granted.................................. 400,000 $0.19 Options exercised................................ (648,001) $0.69 Options forfeited................................ (399,167) $1.92 --------- Options outstanding at December 31, 2000......... 2,212,299 $1.13 =========
At December 31, 2000, the number of options exercisable was 1,563,099 and the weighted-average exercise price of those options was $0.97. On October 30, 1998, the Compensation Committee of the Board of Directors re-priced qualified stock options to purchase 121,000 shares of common stock granted to various employees beginning in June 1995. The exercise price for these options was adjusted to $.01875 per share (the closing market price on October 30, 1998) reducing grant date exercise prices ranging from $0.72 to $2.34 per share. Also, on November 12, 1998, the compensation Committee of the Board of Directors re-priced qualified stock options to purchase 100,000 shares of common stock granted to an employee in March 1998. The exercise price for these options was adjusted to $0.125 per share (the closing market price on November 12, 1998) reducing the grant date exercise price from $1.18 per share. The vesting schedules and expiration dates for these options were not modified. (9) WARRANTS Warrant activity for the periods indicated below is as follows:
WARRANTS WARRANT PRICE --------- ------------- Warrants outstanding at January 1, 1998............. 934,750 $1.70 Warrants issued..................................... 720,000 $1.45 Warrants exercised.................................. (19,000) $1.75 Warrants expired.................................... (903,750) $1.70 --------- Warrants outstanding at December 31, 1998........... 732,000 $1.11 Warrants issued..................................... 2,410,000 $0.60 Warrants exercised.................................. 0 $0.00 Warrants expired.................................... (412,000) $1.26 --------- Warrants outstanding at December 31, 1999........... 2,730,000 $0.67 Warrants issued..................................... 0 $0.00 Warrants exercised.................................. (210,000) $0.12 Warrants expired.................................... 0 $0.00 --------- Warrants outstanding at December 31, 2000........... 2,520,000 $0.72 =========
All of the warrants granted in 1999 and 1998 were issued in connection with private placements except for the following: 25,000 warrants were granted in 1998 as consideration for consulting services rendered during 1998; and 95,000 warrants were granted in 1998 in connection with a debt financing with the Company's directors. For those warrants granted as consideration for consulting services, the fair value of the consulting services was included in research and development costs in the accompanying consolidated statement of operations for the year ended December 31, 1998. At December 31, 2000, the number of warrants exercisable was 2,520,000. (10) INCOME TAXES The Company files a consolidated return for U.S. income tax purposes. Income tax expense for the years ended December 31, 2000, 1999 and 1998 consisted of the following:
2000 1999 1998 ------- ------ ------- State franchise tax............................ $ 800 $ 800 $ 2,400 Federal taxes.................................. 9,200 5,700 35,838 ------- ------ ------- Total.......................................... $10,000 $6,500 $38,238 ======= ====== =======
28 29 Certain revenues received from customers in foreign countries are subject to withholding taxes that are deducted from outgoing funds at the time of payment. These taxes range from approximately 8.5% to 15% and are recorded as foreign tax expense when incurred. Income tax expense for the years ended December 31, 2000, 1999 and 1998 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to loss before income taxes primarily due to the generation of additional net operating loss carryforwards for which no tax benefit has been provided. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2000 is composed primarily of the net loss carryforwards. The net change in the total valuation allowance for the year ended December 31, 2000 was insignificant. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, management believes it is more likely than not the Company will not realize the benefits of these deductible differences and has established a valuation allowance to fully reserve the deferred tax assets at December 31, 2000. Additionally, the ultimate realizability of net operating losses may be limited by change of control provisions under Section 382 of the Internal Revenue Code. At December 31, 2000, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26,000,000 which are available to offset future Federal taxable income, if any, through 2013. Approximately $21,700,000 of these net operating loss carry forwards are subject to an annual limitation of approximately $1,000,000. (11) DISCONTINUED OPERATION On September 25, 1998, the Board of Directors determined that it would be unable to raise the necessary capital required to properly commercialize the MDT technology. Therefore, the Company ceased funding the operations of MDT and is actively seeking to sell the assets and technology. All employees of MDT have been terminated and the Company has vacated the MDT facilities. Based on this action, the Company is treating MDT as a discontinued operation. Accordingly, the balance sheet and statement of operations of MDT are not consolidated in the continuing operations of the Company, but rather are disclosed as Net Liabilities of Discontinued Operation and Loss from Discontinued Operation, respectively. The Net Liabilities of Discontinued Operation at December 31, 2000 are comprised of the following: Accounts payable......................................... $(220,691) Accrued expenses......................................... (9,597) Notes payable............................................ (25,552) --------- Net liabilities of discontinued operations............... $(255,840) =========
(12) COMMITMENTS AND CONTINGENCIES 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 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, or a cash payment of $50,000 if the warrants remained unexercised. In January 2001, the cash payment was made and no further liabilities or contingencies exist. 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. The Company 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 29 30 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. In that action, the claimants filed a motion to strike under the California "anti-Slapp" legislation. The court rejected that motion and the litigation is in the discovery stages. 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. Operating Lease Commitments The Company is obligated for future minimum rental payments for all operating leases of approximately $93,000 per year through November 2002. Rent expense amounted to approximately $ 115,000, $140,000 and $251,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 30 31 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required for this item incorporated by reference to the Definitive Proxy filed on or before April 30, 2001. ITEM 11. EXECUTIVE COMPENSATION Information required for this item incorporated by reference to the Definitive Proxy filed on or before April 30, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required for this item incorporated by reference to the Definitive Proxy filed on or before April 30, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required for this item incorporated by reference to the Definitive Proxy filed on or before April 30, 2001. PART IV ITEM 14. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1* Desper-Spatializer Reorganization Agreement dated January 29, 1992. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 2.2* Arrangement Agreement dated as of March 4, 1994 among Spatializer-Yukon, DPI and Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.1* Certificate of Incorporation of Spatializer-Delaware as filed February 28, 1994. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.2* Amended and Restated Bylaws of Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.3* Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock of the Company as filed December 27, 1999. 3.4* Certificate of Amendment of Certificate of Incorporation of the Company as filed on February 25, 2000. 4.1* Form of Subscription Agreement for August 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.2* Form of Subscription Agreement for November 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.3* Form of Spatializer-Yukon Incentive Stock Option Agreement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.4* Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.5* Performance Share Escrow Agreements dated June 22, 1992 among Montreal Trust Company of Canada, Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048 common shares of Spatializer-Yukon. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.)
31 32
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.6* Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company's Proxy Statement dated June 25, 1996 and previously filed with the Commission.) 4.7* Form of Subscription Agreement for 1995 Private Placements. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.8* Form of Subscription Agreement and Warrant Agreement for March 7, 1997 Private Placement. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) 4.9* Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to the Company's Definitive Proxy Statement dated June 28, 1996 and previously filed with the Commission.) 4.10* Subscription Agreement for April 1998 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-3, Registrations No. 333-52863, filed May 15, 1998.) 4.11* Common Stock Purchase Agreement dated as of December 29, 1999 among the Company, CPR (USA) Inc., LibertyView Funds, L.P., LibertyView Fund, LLC. 4.12* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.13* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.14* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Fund, LLC. 4.15* Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.16* Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.17* Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.18* Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Fund LLC. 4.19* Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.20* Agreement Regarding Cancellation of Warrants, dated as of December 29, 1999 among CPR (USA), Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.21* Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.22* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Lufeng Investments (as assignee of Arab Commerce Bank). 4.23* Registration Rights Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.24* Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.25* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Bank Insinger de Beaufort. 4.26* Registration Rights Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.27* Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.28* Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Romofin, A.G. 4.29* Registration Rights Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.30* 10% Convertible Preferred Stock Subscription Agreement dated as of December 29, 1999 between the Company and Clarion Finanz, A.G. Carlo Civelli, Henry R. Mandell, James D. Pace, Jerold H. Rubinstein, Gilbert N. Segel, Aton Select Fund Ltd. and Romofin A.G. 10.1** License Agreement dated June 29, 1994 between DPI and MEC. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.)
32 33
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2** License Agreement dated November 11, 1994 between DPI and ESS. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.3* License Agreement dated June 10, 1994 between Joel Cohen and DPI. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.4* Agreement Regarding Indebtedness dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.5* Security Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.6* Finder's Fee Agreement dated as of December 27, 1999 between the Company and Bristol Capital, L.L.C. 21.1 Schedule of Subsidiaries of the Company.
- --------------- * Previously filed. ** Previously filed and portions subject to request for confidential treatment. The confidential portions omitted have been filed separately with the Commission. 33 34 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. Dated: March 28, 2001 SPATIALIZER AUDIO LABORATORIES, INC. (Registrant) /s/ HENRY R. MANDELL -------------------------------------- Henry R. Mandell Chief Executive Officer & Chief Financial 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CARLO CIVELLI Director March 28, 2001 - --------------------------------------------- Carlo Civelli /s/ STEPHEN W. DESPER Director March 28, 2001 - --------------------------------------------- Stephen W. Desper /s/ JAMES D. PACE Director March 28, 2001 - --------------------------------------------- James D. Pace /s/ GILBERT N. SEGEL Director March 28, 2001 - --------------------------------------------- Gilbert N. Segel
34 EX-21.1 2 a70769ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 SCHEDULE OF SUBSIDIARIES Spatializer Audio Laboratories, Inc. (Delaware) Desper Products, Inc. (California Corporation) -----END PRIVACY-ENHANCED MESSAGE-----