-----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, J8NJL4nB8E4G+kC9VC8VHn4beW68m+wLFCBfn2i5f/M/Wv7y2R1MYppg//3NAoGt FdByc+MCtaMcRKhdgwSMDg== 0000950150-98-001789.txt : 19981118 0000950150-98-001789.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950150-98-001789 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPATIALIZER AUDIO LABORATORIES INC CENTRAL INDEX KEY: 0000890821 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 954484725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26460 FILM NUMBER: 98750139 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 134 STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD. #134 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 9/30/98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 10-Q -------------------------------- (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended: SEPTEMBER 30, 1998 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 33-90532 SPATIALIZER AUDIO LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4484725 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
20700 VENTURA BOULEVARD, SUITE 134 WOODLAND HILLS, CALIFORNIA 91364-2357 (Address of principal executive offices) TELEPHONE NUMBER: (818) 227-3370 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO ___ As of November 10, 1998 there were 24,165,286 shares of the Registrant's Common Stock outstanding. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ----------- ----------- (unaudited) Current Assets: Cash and Cash Equivalents $ 257,777 $ 577,413 Accounts Receivable, net 621,809 911,505 Employee Advances 18,966 59,086 Inventory 100,482 93,250 Prepaid Expenses and Deposits 222,174 135,702 Deferred Transaction Costs 217,586 146,529 ----------- ----------- Total Current Assets 1,438,794 1,923,485 Property and Equipment, net 486,821 586,961 Capitalized Patent and Technology Costs, net 831,653 654,668 ----------- ----------- Total Assets $ 2,757,268 $ 3,165,114 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank Line of Credit Payable $ 120,000 $ 400,000 Notes Payable 166,632 64,272 Accounts Payable 364,623 651,376 Accrued Liabilities 85,826 79,140 Accrued Wages and Benefits 155,941 332,713 Due to Related Parties 762,500 112,500 ----------- ----------- Total Current Liabilities 1,655,522 1,640,001 Shareholders' Equity: Series A, 7% Convertible Preferred shares, $.01 par value, 1,000,000 shares authorized, 57,400 and 0 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 574 - Common shares, $.01 par value, 50,000,000 shares authorized, 22,069,652 and 21,410,012 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 220,696 214,100 Additional Paid-In Capital 44,188,178 41,481,890 Accumulated Deficit (43,307,702) (40,170,877) ----------- ----------- Total Shareholders' Equity 1,101,746 1,525,113 ----------- ----------- $ 2,757,268 $ 3,165,114 =========== ===========
2 3 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FOR THE NINE MONTH PERIOD ENDED ------------------------------------ ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenues: License Revenues $ 55,000 $ 778,971 $ 955,322 $ 898,971 Royalty Revenues 336,120 26,911 566,127 716,453 Product Development Revenues - - 50,000 - Product Revenues (739) 27,000 16,918 312,788 ------------ ---------- ------------ ------------ 390,381 832,882 1,588,367 1,928,212 Cost of Revenues 5,556 36,261 35,846 223,502 ------------ ---------- ------------ ------------ Gross Profit 384,825 796,621 1,552,521 1,704,710 Operating Expenses: General and Administrative 655,725 458,236 1,823,176 1,566,791 Research and Development 610,948 775,166 1,774,455 2,154,231 Sales and Marketing 213,342 211,519 1,026,841 831,403 ------------ ---------- ------------ ------------ 1,480,015 1,444,921 4,624,472 4,552,425 ------------ ---------- ------------ ------------ Operating Loss (1,095,190) (648,300) (3,071,951) (2,847,715) Interest and Other Income 10,283 11,645 25,418 43,337 Interest and Other Expense (31,317) (6,028) (61,856) (15,647) ------------ ---------- ------------ ------------ (21,034) 5,617 (36,438) 27,690 ------------ ---------- ------------ ------------ Loss Before Income Taxes (1,116,224) (642,683) (3,108,389) (2,820,025) Income Taxes (8,056) (18,752) (28,436) (39,252) ------------ ---------- ------------ ------------ Net Loss $ (1,124,280) $ (661,435) $ (3,136,825) $ (2,859,277) ============ ========== ============ ============ Basic and Diluted Loss Per Share $ (0.05) $ (0.03) $ (0.14) $ (0.14) ============ ========== ============ ============ Weighted Average Shares Outstanding 22,069,652 20,807,516 22,056,157 20,406,282 ============ ========== ============ ============
3 4 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1998 1997 ------------ ------------ Cash flows from operating activities: Net Loss $ (3,136,825) $ (2,859,277) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization 129,789 211,625 Options Issued for Services 56,954 - Net change in Assets and Liabilities: Accounts Receivable and Employee Advances 329,816 (13,114) Inventory (7,232) 195,668 Prepaid Expenses and Deposits (86,472) 97,141 Deferred Transaction Costs (71,057) - Accounts Payable (166,753) (22,663) Other Assets - (1,821) Accrued Liabilities (170,086) (147,430) ------------ ------------ Net Cash Used In Operating Activities (3,121,866) (2,539,871) Cash Flows from Investing Activities: Purchase of Property and Equipment (29,649) (179,633) Increase in Capitalized Patent and Technology Costs (176,985) (147,837) ------------ ------------ Net Cash Used in Investing Activities (206,634) (327,470) ------------ ------------ Cash flows from Financing Activities: Issuance of Preferred Shares, Net 2,610,874 - Issuance of Common Shares, Net - 2,004,125 Exercise of Options 12,571 - Exercise of Warrants 33,060 - Issuance of Notes Payable 120,000 59,532 Issuance of Related Party Payable 650,000 - Repayment of Bank Line of Credit (400,000) - Repayment of Notes Payable (17,640) (13,508) ------------ ------------ Net Cash Provided by Financing Activities 3,008,865 2,050,149 ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents (319,635) (817,192) Cash and Cash Equivalents, Beginning of Period 577,413 1,587,395 ------------ ------------ Cash and Cash Equivalents, End of Period $ 257,778 $ 770,203 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 51,690 $ 15,647 Income Taxes 28,435 39,252 ------------ ------------
4 5 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SERIES A, 7% CONVERTIBLE PREFERRED SHARES COMMON SHARES ------------------------ ------------- NUMBER OF NUMBER OF ADDITIONAL SHARES PAR VALUE SHARES PAR VALUE PAID-IN-CAPITAL ----------- --------- ----------- --------- --------------- Balance, December 31, 1997 - $ - 21,410,012 $ 214,100 $41,481,890 Issuance of Preferred Shares, Net 60,000 600 - - 2,610,874 Options Exercised - - 13,333 133 12,571 Warrants Exercised - - 19,000 190 33,060 Options Issued for Services - - - - 56,030 Conversion of Preferred Shares, Net (2,600) (26) 627,307 6,273 (6,247) Net Loss - - - - - ------ ----- ---------- --------- ----------- Balance, September 30, 1998 57,400 $ 574 22,069,652 $ 220,696 $44,188,178 ====== ===== ========== ========= =========== TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY ------------- ------------- Balance, December 31, 1997 $ (40,170,877) 1,525,113 Issuance of Preferred Shares, Net - 2,611,474 Options Exercised - 12,704 Warrants Exercised - 33,250 Options Issued for Services - 56,030 Conversion of Preferred Shares, Net - - Net Loss (3,136,825) (3,136,825) ------------- ----------- Balance, September 30, 1998 $ (43,307,702) $ 1,101,746 ============= ===========
6 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) NATURE OF BUSINESS Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") are in the business of developing and licensing technology. The Company's wholly owned subsidiary Desper Products, Inc. ("DPI") is in the business of developing proprietary advanced audio signal processing technologies and products for consumer electronics, entertainment, and multimedia computing. The Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") is in the business of developing scaleable, modular compact disc ("CD") and digital versatile disc ("DVD") server technologies associated with a network based CD / DVD server for internet and intranet applications. MDT plans to either license its technology or engage in third party manufacturing arrangements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements of the Company are condensed and do not include some of the information necessary to obtain a complete understanding of the financial data. Management believes that all adjustments necessary for a fair presentation of results have been included in the unaudited consolidated Financial Statements for the interim periods presented. Accordingly, your attention is directed to footnote disclosures found in the December 31, 1997 Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. Basis of Consolidation The consolidated financial statements include the accounts of Spatializer Audio Laboratories, Inc. and its wholly owned subsidiaries, Desper Products, Inc. and MultiDisc Technologies, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company accrues foundry revenues based on licensee royalty reports, management estimates and reports from third parties. At March 31, 1998, the Company accrued $362,750 of royalty revenue from a major customer based on the results of a royalty audit, which was settled in June 1998 for $350,000. Research and Development Expenditures The Company expenses research and development expenditures as incurred. (3) LOSS PER SHARE Loss per share for the three and nine months ended September 30, 1998 includes the effect of approximately $262,000 of the beneficial conversion feature of the Series "A", 7% Convertible Preferred Stock as well as dividends in arrears of $96,250 related to the Series "A", 7% Convertible Preferred Stock. The following table presents options and warrants to purchase shares of common stock that were outstanding during the nine month periods ended September 30, 1998 and 1997 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
1998 1997 -------------- -------------- Options 2,008,300 2,051,403 Warrants 1,521,750 834,750 -------------- -------------- 3,530,050 2,886,153 ============== ==============
6 7 (4) COMPREHENSIVE INCOME The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 on January 1, 1998. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from non-owner sources. Other comprehensive income (loss) includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company did not have components of other comprehensive income (loss) during the three-month and nine month periods ended September 30, 1998 and 1997. As a result, comprehensive loss is the same as the net loss for the three-month and nine-month periods ended September 30, 1998 and 1997. (5) SEGMENT REPORTING The following table presents information about reported segment losses and segment assets as of and for the nine-month periods ended September 30, 1998 and 1997.
1998 1997 --------------------------------------------------------------------------------------------- SEGMENT SEGMENT DPI MDT TOTAL DPI MDT TOTAL --------------------------------------------------------------------------------------------- Revenues from External Customers $ 1,538,367 $ 50,000 $ 1,588,367 $ 1,928,212 $ - $ 1,928,212 Segment Loss (764,218) (2,097,547) (2,861,765) (283,379) (1,964,491) (2,247,870) Segment Assets 1,259,685 877,654 2,137,339 1,524,832 724,965 2,249,797
The following is a reconciliation of reportable segment loss to the Company's consolidated totals.
LOSS: 1998 1997 -------------- -------------- Total Loss for Reportable Segments $ (2,861,765) $ (2,247,870) Other Corporate Expenses (275,060) (611,407) -------------- -------------- Consolidated Total $ (3,136,825) $ (2,859,277) ============== ==============
(6) MAJOR CUSTOMERS A substantial portion of the Company's licensing and royalty revenues are derived from three major customers. The following customers comprised greater than 10% of total revenues during the nine months ended June 30, 1998 and 1997:
1998 1997 ---------- ---------- Customer A 57% 31% Customer B 10% 16%
(7) CONTINGENCIES Legal On September 18, 1998, the U.S. Court of Appeals upheld U.S. District Court Judge William D. Keller's decision of August 29, 1996 in which the District Court had granted the Company's summary judgment motion in its entirety and denied the motion by QSound in the patent infringement litigation between the Company and QSound. The decision affirmed the District Court's ruling in all aspects and confirmed that Spatializer is entitled to distribute its products free of any infringement claim by QSound. The Company intends to maintain and continue to pursue its counterclaims for damages and for a decision that the QSound patent is invalid. In the District Court decision, which was upheld by the Court of Appeals, the District Court had found that the Company's IC (Integrated Circuit) does not infringe the QSound patent and had denied in QSound's motion with respect to infringement. The Company's claim that the QSound patent is invalid was not decided in the summary judgment and, since the issues which the District Court would have been required to consider on the patent invalidity claim are similar to certain issues considered in the infringement claim, QSound was granted the right to immediately appeal the denial of its motion and trial on the invalidity issue was deferred until after that appeal. In substance, the Court of Appeals decision further confirms the Company's position that there is no infringement by the Company's IC of any patent held by QSound and that the claims by QSound were without merit. 7 8 (8) SALE OF PREFERRED STOCK On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at September 30, 1998. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for $3 million. In connection with the April funding, the Company issued purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 450,000 were issued and 150,000 warrants were issued to placement agents. The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash fee for arranging $1 million of the $3 million investment. As of September 30, 1998, $1 million of the remaining $2 million of the funding was due but had not yet been received. Holders of the Series A Preferred Stock have a right to convert their shares, at their option on the earlier of (x) ninety (90) days after issuance or (y) on the effective date of a Form S-3 Registration Statement (the "Conversion Date") with such conversion to be based on a per share conversion price ("Conversion Price") equal to the lesser of a price that reflects a discount (the "Conversion Discount") to the average of any three (3) consecutive closing bid prices for the Company's Common Stock within twenty (20) trading days immediately prior to the conversion date (the "Floating Conversion Price") or a price which is equal to one hundred thirty percent (130%) of the closing bid prices of the Company's Common Stock for the ten (10) trading days immediately preceding the date of issuance (the "Fixed Conversion Price") provided that in determining the Conversion Price, the holder shall not count any day on which its sales account for greater than twenty percent (20%) of the volume of the Company's Common Stock and on which the holder has sales in the last hour of trading. The Conversion Discount shall be equal to fifteen percent (15%) if the Conversion Rights are exercised within one hundred twenty (120) days of first issuance of the Series A Preferred Stock and shall be equal to seventeen and one-half percent (17.5%) if the Conversion Rights are exercised after one hundred (120) days and prior to one hundred forty-nine (149) days of first issuance of the Series A Preferred Stock. The applicable Conversion Discount increases by five percent (5%) if the Company is de-listed on NASDAQ. In addition, the percentage of shares that can be converted at any one time is limited during such time periods and the holders cannot own more than 4.99% of the equity of the Company after the Conversion. The beneficial conversion feature of the Series A Preferred Stock will be recorded as a dividend using the most favorable conversion terms available to the shareholder to calculate the dividend in accordance with FASB (Emerging Issues Task Force) Topic D-60. Since the Company has an accumulated deficit and, under Delaware Law, must charge dividends against additional paid in capital, the net impact of recording the beneficial conversion feature is zero since both sides of the entry are recorded in additional paid in capital. At September 30, 1998, dividends in arrears were $96,250. 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. 8 9 Item 2. Management's discussion and analysis of financial condition and results of operations RESULTS OF OPERATIONS This form 10-Q contains forward-looking statements, within the meaning of the Private Securities Reform Act of 1995, which are subject to a variety of risks and uncertainties. The Company's actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. REVENUES Revenue decreased to $390,000 in the three months ended September 30, 1998 from $833,000 in the comparable period last year, a decrease of 53%. Revenue in the nine-months ended September 30, 1998 decreased to $1,588,000 from $1,928,000 in the comparable period last year, a decrease of 18%. Revenues include licensing and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs, product development and evaluation fees at MultiDisc Technologies, Inc. and sales of professional recording systems and consumer products. The decrease in revenue results primarily from decreases in recurring royalties for the licensing of the Spatializer technologies and on chip foundry sales incorporating the usage of Spatializer(R) advanced audio solutions by the Company's licensees, reflecting weakness in the Asian Market, as well as the signing, in the third quarter of 1997, of a multi-year, multi-technology license agreement for which there was no comparable license agreement in the current quarter. Desper Products, Inc.'s licensing and royalty revenues decreased to $390,000 and $1,538,000 in the three and nine months ended September 30, 1998, from $833,000 and $1,928,000 in the comparable periods last year, decreases of 53% and 20%, respectively. In addition, there were negligible product sales in the three and nine months ended September 30, 1998 as compared with the same periods in 1997. The Company made the decision in late 1997 to discontinue sales of hardware products in order to focus its efforts on licensing and software-only products. Product sales for the three months ended September 30, 1998 were ($1,000) as compared to $27,000 for the comparable period last year. Product sales for the nine months ended September 30, 1998 were $17,000 as compared to $313,000 for the comparable period last year. GROSS PROFIT Gross profit decreased to $385,000 (99% of revenue) in the three months ended September 30, 1998 from $797,000 (96% of revenue) in the comparable period last year, a decrease of 52%. Gross profit for the nine-months ended September 30, 1998 decreased to $1,553,000 (98% of revenue) from $1,705,000 (88% of revenue) in the comparable period last year, a decrease of 9%. Gross profit decreased due to the decrease in revenue. Gross margin increased due to the shift in product mix to licensing revenues, which provide a higher margin than product revenues. OPERATING EXPENSES Operating expenses increased to $1,480,000 (379% of revenue) in the three months ended September 30, 1998 from $1,445,000 (173% of revenue) in the comparable period last year, an increase of 2%. Operating expenses in the nine-months ended September 30, 1998 increased to $4,624,000 (291% of revenue) from $4,552,000 (236% of revenue) in the comparable period last year, an increase of 2%. The increase in operating expenses for the three months ended September 30, 1998 results primarily from increased general and administrative and sales and marketing expenses partially offset by lower research and development expenses. The increase in operating expenses as a percentage of sales in the three and nine months ended September 30, 1998 result from the decline in revenue. General and Administrative General and administrative expenses increased to $655,000 (168% of revenue) in the three months ended September 30, 1998 from $458,000 (55% of revenue) in the comparable period last year, an increase of 43%. General and administrative expenses increased to $1,822,000 (115% of revenue) in the nine-months ended September 30, 1998 from $1,567,000 (81% of revenue) in the comparable period last year, an increase of 16%. The increase in general and administrative expense result from staffing of key executive positions and related expenses in 1998 that were vacant in the prior comparable period. 9 10 Research and Development Research and Development expenses decreased to $610,000 (156% of revenue) in the three months ended September 30, 1998 from $775,000 (93% of revenue) in the comparable period last year, a decrease of 21%. Research and Development expenses decreased to $1,774,000 (112% of revenue) in the nine-months ended September 30, 1998 from $2,154,000 (112% of revenue) in the comparable period last year, a decrease of 18%. The decrease in research and development in the three and nine month periods result from lower research and development expenditures for prototypes of the MultiDisc eXpandable Network Server and XNS technology required in the current period compared to the prior year as well as efficiencies in research and development activities at Desper Products Inc. Sales and Marketing Sales and marketing expenses increased to $215,000 (55% of revenue) in the three months ended September 30, 1998 from $212,000 (25% of revenue) in the comparable period last year, an increase of 1%. Sales and marketing expenses increased to $1,028,000 (65% of revenue) in the nine-months ended September 30, 1998 from $831,000 (43% of revenue) in the comparable period last year, an increase of 24%. The increase is attributed to the hiring of additional sales executives at Desper Products Inc., and the initiation of marketing activity at MultiDisc Technologies, Inc. as it enters its next phase of development. NET LOSS Net loss increased to $1,124,000 (288% of revenues) in the three months ended September 30, 1998 from $661,000 (79% of revenues) in the comparable period last year, an increase of 70%. Net loss increased to $3,137,000 (198% of revenue) in the nine-months ended September 30, 1998 from $2,859,000 (148% of revenue) in the comparable period last year, an increase of 10%. The increased net loss for the three and nine month period is primarily a result of the decrease in revenue and gross profit. The increase in loss per share resulted from the beneficial conversion discount on the issuance of the Preferred Stock. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had $258,000 in cash and cash equivalents as compared to $577,000 at December 31, 1997. The decrease in cash and cash equivalents is attributed to: (i) cash used for research and development at MDT on the Modular Scalable Storage Library, (ii) the repayment of $400,000 of borrowings on a bank line of credit and (iii) cash used in other operating activities. This was partially offset by net proceeds of $2,620,893 from the sale of preferred stock on April 14, 1998 and proceeds from a $650,000 related party note payable. The Company had negative working capital of $217,000 at September 30, 1998 as compared with working capital of $283,000 at December 31, 1997. The Company's future cash flows are expected to come primarily from audio signal processing licensing, Foundry and Original Equipment Manufacturers' ("OEM") royalties, common and/or preferred stock issuances including warrant and option exercises, through venture and/or strategic investors or product development revenues of MDT. At September 30, 1998 the Company had six Foundry licensees, seventy-two OEM Licensees and eight authorized customers for its audio signal processing business as compared with five Foundry licensees and sixty-two OEM Licensees and fourteen authorized customers at December 31, 1997. The Company is actively engaged in negotiations for additional audio signal processing licensing arrangements and equity capital, which should generate additional cash flow without imposing any substantial costs on the Company. The Company continues to have no material long-term obligations and has no present commitments or agreements that would require any long-term debt or obligations to be incurred. The Company owed $762,500 to related parties as of September 30, 1998 and $112,500 at December 31, 1997. On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at September 30, 1998. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for $3 million. In connection with the April funding, the Company issued purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 450,000 were issued and 150,000 warrants were issued to placement agents. The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% were paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash 10 11 fee for arranging $1 million of the $3 million investment. As of September 30, 1998, $1 million of the remaining $2 million of the funding was due but had not yet been received. Holders of the Series A Preferred Stock have a right to convert their shares, at their option on the earlier of (x) ninety (90) days after issuance or (y) on the effective date of this Registration (the "Conversion Date") with such conversion to be based on a per share conversion price ("Conversion Price") equal to the lesser of a price that reflects a discount (the "Conversion Discount") to the average of any three (3) consecutive closing bid prices for the Company's Common Stock within twenty (20) trading days immediately prior to the conversion date (the "Floating Conversion Price") or a price which is equal to one hundred thirty percent (130%) of the closing bid prices of the Company's Common Stock for the ten (10) trading days immediately preceding the date of issuance (the "Fixed Conversion Price") provided that in determining the Conversion Price, the holder shall not count any day on which its sales account for greater than twenty percent (20%) of the volume of the Company's Common Stock and on which the holder has sales in the last hour of trading. The Conversion Discount shall be equal to fifteen percent (15%) if the Conversion Rights are exercised within one hundred twenty (120) days of first issuance of the Series A Preferred Stock, shall be equal to seventeen and one-half percent (17.5%) if the Conversion Rights are exercised after one hundred (120) days and prior to one hundred forty-nine (149) days of first issuance of the Series A Preferred Stock. The applicable Conversion Discount increases by five percent (5%) if the Company is de-listed on NASDAQ. In addition, the percentage of shares that can be converted at any one time is limited during such time periods and the holders cannot own more than 4.99% of the equity of the Company after the Conversion. The beneficial conversion feature of the Series A Preferred Stock will be recorded as a dividend using the most favorable conversion terms available to the shareholder to calculate the dividend in accordance with EITF Topic D-60. Since the Company has an accumulated deficit and, under Delaware Law, must charge dividends against additional paid in capital, the net impact of recording the beneficial conversion feature is zero since both sides of the entry are recorded in additional paid in capital. At September 30, 1998, dividends in arrears were $96,250. 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 the financing is not currently being pursued actively. On September 25, 1998, the Company announced that its Board of Directors was refocusing the Company's business on the exploitation of its audio technologies, and, as noted above, to properly position the MultiDisc assets for sale. In reaching this decision, the Board of Directors noted that the September 18, 1998 decision by the U.S. Court of Appeals confirming the District Court's grant of a Summary Judgment in favor of the Company and against Qsound was expected to eliminate the negative market perceptions faced by the Company over the last four years. Currently the Company is 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, the Company indicated that while it recognized the prospects of MultiDisc, the capital investments required to properly commercialize the technology was beyond its current capacity and, therefore, it had 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 continues to serve as chairman of the board of the Company. 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 with support from Kibel Green Issa, Inc. Michael Bolcerek resigned as president of Desper Products, Inc. Funds generated from the financing business activities and capital transactions described above, as well as cash generated from the Company's existing operations and the cost reductions being undertaken, are expected to be sufficient for the Company to meet its operation obligations during the next twelve months. However, if the refocus on the audio technologies strategy is not successful, if a strategic alliance including capital funding is not concluded, or if an appropriate transaction is not undertaken with respect to the MultiDisc activities, the ability of the Company to meet its operating needs will be materially adversely affected. As of September 30, 1998, the Company had a negative working capital of $217,000 and, absent continued and improved revenues and successful funding activities, the Company may not be in a position to resolve this deficit. The Company has responded to inquiries from NASDAQ and attended a hearing with respect to its continued listing on October 29, 1998 at which time it outlined its strategy for continued listing. A decision is pending. YEAR 2000 The Company is aware that many computer software programs may not currently be designed to properly handle the system date change after December 31, 1999. The Company is addressing this contingency with its computer consultants and is currently upgrading its software programs, the cost of which is expected to be no more than $15,000. 11 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On September 18, 1998 the U.S. Court of Appeals for the Federal Circuit issued its decision (97-1135) affirming the decision of the U.S. District Court for the Central District of California (No. CV 94-7276) in which the District Court had granted the Company's Motion for Summary Judgment in its entirety and had denied the Motion by QSound Labs, Inc. ("QSound") in the patent infringement litigation which had been pending between the Company and QSound since 1994. The Court of Appeals decision affirmed the District Court's ruling in all respects, with the effect that it confirmed that the Company is entitled to distribute its products free of any infringement claim by QSound. The Company intends to maintain and continue to pursue its counterclaims for damages and for a determination that the QSound patent is invalid. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders of the Company either through solicitation of proxies or otherwise in the third quarter of the fiscal year ending December 31, 1998. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -- None (b) Reports on Form 8-K: (i) Report on Form 8-K filed on October 2, 1998; date of events reported - September 25, 1998. (ii) Report on Form 8-K filed on October 27, 1998 to amend Report on Form 8-K filed on October 2, 1998 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 13, 1998 SPATIALIZER AUDIO LABORATORIES, INC. (REGISTRANT) /s/ HENRY R. MANDELL ----------------------------------- HENRY R. MANDELL Interim Chief Executive Officer Chief Financial Officer 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1998 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 257,777 0 621,809 0 100,482 1,438,794 1,162,343 675,522 2,757,268 1,655,522 0 0 574 220,696 0 2,757,268 1,588,367 1,588,367 35,846 4,624,472 0 0 61,856 (3,108,389) 28,436 (3,136,825) 0 0 0 (3,136,825) (0.14) (0.14)
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