-----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, F7hb/1hGNjM7+9WmBuPoa/GZGaKZSC/AeLA7/oNtHlHW0dFTXbHZ14HIpOd2fRYu zGNqpMhtQRymayd9CEbXAg== 0000950150-99-001215.txt : 19991115 0000950150-99-001215.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950150-99-001215 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99746763 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 134 STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD. #134 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 10-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q -------------------------- (MARK ONE) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended: SEPTEMBER 30, 1999 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 33-90532 SPATIALIZER AUDIO LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4484725 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20700 VENTURA BOULEVARD, SUITE 140 WOODLAND HILLS, CALIFORNIA 91364-2357 (Address of principal executive offices) TELEPHONE NUMBER: (818) 227-3370 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] As of November 2,1999 there were 40,249,402 shares of the Registrant's Common Stock outstanding. ================================================================================ 2 ITEM I. FINANCIAL STATEMENTS SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (unaudited) Current Assets: Cash and Cash Equivalents $ 102,150 $ 264,054 Accounts Receivable, net 384,960 134,633 Employee Advances 9,595 -- Inventory 12,993 7,993 Prepaid Expenses and Deposits 68,729 65,718 ------------ ------------ Total Current Assets 578,427 472,398 Property and Equipment, net 181,709 184,140 Capitalized Patent and Technology Costs, net 211,085 236,913 ------------ ------------ Total Assets $ 971,221 $ 893,451 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes Payable 324,149 14,795 Notes Payable to Related Parties 907,500 857,500 Accounts Payable 348,606 335,784 Accrued Wages and Benefits 43,861 84,423 Accrued Expenses 328,225 370,548 Deferred Income -- 250,000 Net Liabilities of Discontinued Operation 525,395 533,891 ------------ ------------ Total Current Liabilties 2,477,736 2,446,941 ------------ ------------ Shareholders' Equity: Series A, 7% Convertible Preferred shares, $.01 par value, 1,000,000 shares authorized, 28,140 and 52,900 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 281 529 Common shares, $.01 par value, 50,000,000 shares authorized, 36,091,184 and 25,841,867 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 360,912 258,418 Additional Paid-In Capital 44,048,255 44,150,501 Accumulated Deficit (45,915,963) (45,962,938) ------------ ------------ Total Shareholders' Equity (1,506,515) (1,553,490) ------------ ------------ $ 971,221 $ 893,451 ============ ============
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, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues: License Revenues $ -- $ 55,000 $ -- $ 955,322 Royalty Revenues 324,473 336,120 976,525 566,127 Product Development Revenues -- -- -- 50,000 Product Revenues -- (739) -- 16,918 ------------ ------------ ------------ ------------ 324,473 390,381 976,525 1,588,367 Cost of Revenues 20,000 5,556 28,619 35,846 ------------ ------------ ------------ ------------ Gross Profit 304,473 384,825 947,906 1,552,521 Operating Expenses: General and Administrative 98,785 655,725 310,662 1,823,176 Research and Development 73,469 610,948 323,929 1,774,455 Sales and Marketing 66,713 213,342 189,091 1,026,841 ------------ ------------ ------------ ------------ 238,967 1,480,015 823,682 4,624,472 ------------ ------------ ------------ ------------ Operating Income (Loss) 65,506 (1,095,190) 124,224 (3,071,951) Interest and Other Income 600 10,283 4,401 25,418 Interest and Other Expense (31,454) (31,317) (77,150) (61,856) ------------ ------------ ------------ ------------ (30,854) (21,034) (72,749) (36,438) ------------ ------------ ------------ ------------ Income (Loss) Before Income Taxes 34,652 (1,116,224) 51,475 (3,108,389) Income Taxes (1,500) (8,056) (4,500) (28,436) ------------ ------------ ------------ ------------ Net Income (Loss) $ 33,152 $ (1,124,280) $ 46,975 $ (3,136,825) ============ ============ ============ ============ Basic and Diluted Loss Per Share $ 0.00 $ (0.05) $ 0.00 $ (0.14) ============ ============ ============ ============ Weighted Average Shares Outstanding 35,322,153 22,069,652 31,423,618 22,056,157 ============ ============ ============ ============
3 4 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 ----------- ----------- Cash flows from operating activities: Net Income (Loss) $ 46,975 $(3,136,825) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and Amortization 25,157 129,789 Options Issued for Services -- 56,954 Net change in Assets and Liabilities: Accounts Receivable and Employee Advances (259,922) 329,816 Inventory (5,000) (7,232) Prepaid Expenses and Deposits (3,011) (86,472) Deferred Transaction Costs -- (71,057) Accounts Payable 12,822 (166,753) Deferred Revenue (250,000) Change in Discontinued Operation (8,496) -- Accrued Liabilities (82,885) (170,086) ----------- ----------- Net Cash Used In Operating Activities (524,360) (3,121,866) ----------- ----------- Cash Flows from Investing Activities: Purchase of Property and Equipment (1,570) (29,649) Increase in Capitalized Patent and Technology Costs 4,672 (176,985) ----------- ----------- Net Cash Used in Investing Activities 3,102 (206,634) ----------- ----------- Cash flows from Financing Activities: Issuance of Preferred Shares, Net -- 2,610,874 Exercise of Options -- 12,571 Exercise of Warrants -- 33,060 Issuance of Notes Payable 360,000 120,000 Issuance of Related Party Payable -- 650,000 Repayment of Bank Line of Credit -- (400,000) Repayment of Notes Payable (646) (17,640) ----------- ----------- Net Cash Provided by Financing Activities 359,354 3,008,865 ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents (161,904) (319,635) Cash and Cash Equivalents, Beginning of Period 264,054 577,413 ----------- ----------- Cash and Cash Equivalents, End of Period $ 102,150 $ 257,778 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ -- $ 51,690 Income Taxes -- 28,435 =========== ===========
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 SHARES PAR VALUE SHARES PAR VALUE ------------ ------------ ------------ ------------ Balance, December 31, 1998 52,900 $ 529 25,841,867 $ 258,418 Issuance of Preferred Shares, Net -- 0 -- -- Options Exercised -- -- -- -- Warrants Exercised -- -- -- -- Options Issued for Services -- -- -- -- Conversion of Preferred Shares, Net (24,760) (248) 10,249,317 102,494 Net Income (Loss) -- -- -- -- ------------ ------------ ------------ ------------ Balance, September 30, 1999 28,140 281 36,091,184 360,912 ------------ ------------ ------------ ------------
TOTAL ADDITIONAL ACCUMULATED SHAREHOLDERS' PAID-IN-CAPITAL DEFICIT EQUITY ------------ ------------ ------------ Balance, December 31, 1998 $ 44,150,501 $(45,962,938) (1,553,490) Issuance of Preferred Shares, Net -- -- -- Options Exercised -- -- -- Warrants Exercised -- -- -- Options Issued for Services -- -- -- Conversion of Preferred Shares, Net (102,246) -- -- Net Income (Loss) -- 46,975 46,975 ------------ ------------ ------------ Balance, September 30, 1999 44,048,255 (45,915,963) (1,506,515) ------------ ------------ ------------
5 6 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) NATURE OF BUSINESS Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") are in the business of developing and licensing technology. The Company's wholly owned subsidiary Desper Products, Inc. ("DPI") is in the business of developing proprietary advanced audio signal processing technologies and products for consumer electronics, entertainment, and multimedia computing. The Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") was in the business of developing scaleable, 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 are being marketed for sale (see Note 9) Although the Company has generated net income of $46,975 in the nine months ended September 30, 1999 and has been profitable in each of the three consecutive quarters of fiscal 1999, the first such profitability in the Company's history, the Company has nevertheless experienced significant operating losses for the three years ended December 31, 1998. In addition, the Company has negative working capital of $1,899,309 and shareholder's deficit of $1,506,515 at September 30, 1999. The financial statements have been prepared assuming the Company will continue to operate as a going concern which contemplates the realization of assets and the settlement of liabilities in the normal course of business. No adjustment has been made to the recorded amount of assets or the recorded amount or classification of liabilities which would be required if the Company were unable to continue its operations. (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, 1998 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 subsidiary, Desper Products, Inc. MultiDisc Technologies, Inc. has been presented as a discontinued operation. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company accrues foundry revenues based on licensee royalty reports, management estimates and reports from third parties. While management endeavors to minimize the use of estimates, any deviation from estimates utilized are adjusted in the subsequent quarter. Royalty income reported is based on the shipment of product incorporating the related technology by the original equipment manufacturer or foundries. Research and Development Expenditures The Company expenses research and development expenditures as incurred. 6 7 (3) LOSS PER SHARE On December 31, 1997, the Company retroactively adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128") which replaces the presentation of primary and fully diluted earnings (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. Loss per share for the three and nine months ended September 30, 1999 includes the effect of dividends in arrears of approximately $150,000 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, 1999 and 1998 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
1999 1998 --------- --------- Options 2,122,300 2,008,300 Warrants 1,017,000 1,521,750 --------- --------- 3,139,300 3,530,050 ========= =========
(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, 1999 and 1998. As a result, comprehensive loss is the same as the net loss for the three-month and nine-month periods ended September 30, 1999 and 1998. (5) SEGMENT REPORTING The Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), in June 1997. SFAS No.131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the "industry segment" concept of SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, with a "management approach" concept as to basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company adopted SFAS 131 in December 1997. At September 30, 1999, the Company has only one operating segment, DPI, the Company's Audio Signal Processing business. 7 8 (6) MAJOR CUSTOMERS A substantial portion of the Company's licensing and royalty revenues are derived from three major customers. The following customers comprised greater than 10% of total revenues during the nine months ended September 30, 1999 and 1998:
1999 1998 ---- ---- Customer A 26% 0% Customer B 0% 57% Customer C 36% 0%
(7) CONTINGENCIES Legal In the Fall of 1994, QSound Labs, Inc. ("QSound") advised MEC that, in its view, the Spatializer technology infringed certain U.S. patents held by QSound. In October 1994 the Company and DPI initiated a proceeding against QSound seeking a determination that the technology did not infringe on Qsound's patents and other relief. On August 29, 1996 the Court granted the Company's summary judgment motion of non-infringement in its entirety and denied the motion by QSound in the pending patent infringement litigation between the Company and QSound. In September, 1998, the U.S. Court of Appeals for the Federal Court upheld the U.S District Court's ruling of August 1996, finding in favor of DPI and the Company on all aspects of the appeal. In granting the Company's summary judgment motion, the Court found that the Company's IC (Integrated Circuit) does not infringe the QSound patent and denied QSound's motion with respect to infringement. The Company's claim that the QSound patent is invalid was not decided and, since the issues which the Court would need to consider on the patent invalidity claim are similar to certain issues considered in the infringement claim, QSound was granted the right to immediately appeal the denial of its motion and trial on the invalidity issue was deferred until after that appeal. In substance, the Court's finding confirms the Company's position that there is no infringement by the Company's IC of any patent held by QSound and that the claims by QSound were without merit. Qsound has not appealed and the Company is not pursuing its other claims at the present time. In December 1998, a complaint was filed in the United States District Court for the Northern District of New York, by Alexander, Wescott & Co., Inc., against the Company alleging breach of contract and seeking fees from the Company based on its claim that the amounts were due for arranging a financing. The action also sought attorneys' fees, interest and the costs of suit. The Company filed a motion to dismiss the action. On July 20, 1999, the Court found in favor of the Company and dismissed the complaint. In February 1999, a complaint was filed in the Superior Court of Los Angeles County, Northwest District, by I.N. Associates, Inc., against the Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach of contract and fraud, and claiming $499,953.94 in damages, attorneys fees, interest and the costs of suit. MDT has answered and denied the claims. In October, 1999, a complaint was filed in the Superior Court of Orange County, California, by Bentall U.S. LLC, a former landlord, against the Company seeking $18,630.73 in damages, attorneys fees, interest and costs. The Company by agreement has not responded as of this date. Settlement discussions are pending. In connection with the downsizing of the Company, a number of employees have been terminated and have filed various employment and compensation related claims with the various State labor authorities and certain courts which claims have either been settled or are pending resolution and funding if Company resources allow. The Company also anticipates that, from time to time, it may be named as a party to other legal proceedings that may 8 9 arise in the ordinary course of its business. (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. The Company does not expect any additional investment above the initial $3 million to be received under this placement. 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. However, to the extent that these conversions, combined with any other transactions in the Company's common stock result in a change in control pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the transaction could limit the Company's ability to offset prior years net operating losses against current income. At September 30, 1999, 31,860 shares of Series A Convertible Preferred Stock had been converted into a total of 14,648,839 shares of the Company's Common Stock, some of which are covered by Form S-3 and the balance of which were issued as restricted shares. 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, 1999, dividends in arrears were approximately $150,000. (9) DISCONTINUED OPERATIONS In September 1998, the Board of Directors approved a plan to refocus corporate activites 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. 9 10 (10) NOTES PAYABLE 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 $907,500 to related parties as of September 30, 1999 and $907,500 at December 31, 1998. Included in these amounts, at September 30, 1999, the Company was indebted to four of its directors and one of its executives for an amount totaling $795,000. This amount bears interest at a fixed rate of 10% annually. Of this amount, $650,000 was due on December 31, 1998, and is currently in default. The remaining $145,000 is due on November 30, 1999, or upon the sale of the MDT assets and is secured by such assets. The Company granted 145,000 warrants to purchase common stock at $0.20 per share in connection with the $145,000 of indebtedness. An unrelated investor advanced the Company $100,000 in the quarter ended June 30, 1999 on identical terms. In March 1999, one of the holders of the Company's Convertible Preferred Stock advanced the Company $75,000, and in the quarter ended June 30, 1999 advanced an additional $135,000 under the same terms as the $145,000 advanced by the directors and management due on November 30, 1999. The $210,000 advanced by one of the holders of the Convertible Preferred Stock is secured by the assets of the Company. No further advances were made in the quarter ended September 30, 1999. 10 11 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 $324,000 in the three months ended September 30, 1999 from $390,000 in the comparable period last year, a decrease of 17%. Revenue in the nine-months ended September 30, 1999 decreased to $977,000 from $1,588,000 in the comparable period last year, a decrease of 38%. 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 a flat fee royalty arrangement in the third quarter of fiscal 1998 for which there was no comparable license agreement in the current quarter, partially offset by increased running royalties on technology licensed for the DVD market. While unit sales of chips by third party foundries with N-2-2 enabled virtual surround sound increased approximately 50% over the prior quarter, per unit royalties declined based on volume pricing schedules, resulting in a slight increase in such revenue in the quarter. With volume targets now achieved, per unit royalties are anticipated to have stabilized and future revenue growth will be driven strictly by volume increases. The decrease in revenue for the nine months ended September 30, 1999 result from flat fee royalty buy-outs from two customers and a one-time technology evaluation fee for MultiDisc Technologies, Inc in the prior period for which there were no comparable revenue in the current period. GROSS PROFIT Gross profit decreased to $304,000 (94% of revenue) in the three months ended September 30, 1999 from $385,000 (99% of revenue) in the comparable period last year, a decrease of 21%. Gross profit for the nine-months ended September 30, 1999 decreased to $948,000 (97% of revenue) from $1,553,000 (98% of revenue) in the comparable period last year, a decrease of 39%. Gross profit decreased due to the decrease in revenue and provisions for foreign sales rep commissions. Gross margin increased due to provisions for foreign sales rep commissions. OPERATING EXPENSES Operating expenses decreased to $239,000 (74% of revenue) in the three months ended September 30, 1999 from $1,480,000 (379% of revenue) in the comparable period last year, a decrease of 84%. Operating expenses in the nine-months ended September 30, 1999 decreased to $824,000 (84% of revenue) from $4,624,000 (291% of revenue) in the comparable period last year, a decrease of 82%. The decrease in operating expenses for the three and nine months ended September 30, 1999 results primarily from the impact of the restructuring initiatives implemented in the fourth quarter of 1998 and the discontinued operation of MultiDisc Technologies, Inc. General and Administrative General and administrative expenses decreased to $99,000 (30% of revenue) in the three months ended September 30, 1999 from $656,000 (168% of revenue) in the comparable period last year, a decrease of 85%. General and administrative expenses decreased to $311,000 (32% of revenue) in the nine-months ended September 30, 1999 from $1,823,000 (115% of revenue) in the comparable period last year, a decrease of 83%. The decrease in general and administrative expense result from the elimination of two executive positions and corporate office staff, the closure of the Newbury Park and Huntington Beach facilities and the suspension of activities at MultiDisc Technologies, Inc. 11 12 Research and Development Research and Development expenses decreased to $73,000 (23% of revenue) in the three months ended September 30, 1999 from $611,000 (157% of revenue) in the comparable period last year, a decrease of 88%. Research and Development expenses decreased to $324,000 (33% of revenue) in the nine-months ended September 30, 1999 from $1,774,000 (112% of revenue) in the comparable period last year, a decrease of 82%. The decrease in research and development in the three and nine month periods result from the suspension of activities at MultiDisc Technologies, Inc. and staff reductions in research and development activities at Desper Products Inc. Sales and Marketing Sales and marketing expenses decreased to $67,000 (21% of revenue) in the three months ended September 30, 1999 from $213,000 (55% of revenue) in the comparable period last year, a decrease of 69%. Sales and marketing expenses increased to $189,000 (19% of revenue) in the nine-months ended September 30, 1999 from $1,027,000 (65% of revenue) in the comparable period last year, a decrease of 82%. The decrease in both the three and nine month periods is attributed to the suspension of activities at MultiDisc Technologies, Inc. and the elimination of four marketing positions at Desper Products Inc. primarily in the fourth quarter of 1998 to adjust expenditures to projected operating levels. NET INCOME (LOSS) Net Income increased to $33,000 (10% of revenues), $0.00 per share, in the three months ended September 30, 1999 from a net loss of $1,124,000 (288% of revenues), ($0.05) per share in the comparable period last year, an increase of 101%. Net Income increased to $47,000 (5% of revenue), $0.00 per share, in the nine-months ended September 30, 1999 from a net loss of $3,137,000 (198% of revenue), ($0.14) per share in the comparable period last year, an increase of 101%. The increased net income for the three and nine month periods is primarily a result of the decrease in operating expenses, partially offset by the decrease in gross profit. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had $102,000 in cash and cash equivalents as compared to $264,000 at December 31, 1998. The decrease in cash and cash equivalents is attributed to cash used in general operating activities. This was partially offset by proceeds from $360,000 in notes payable. The Company had working capital deficit of $1,899,000 at September 30, 1999 as compared with a working capital deficit of $1,975,000 at December 31, 1998. The Company's future cash flows are expected to come primarily from audio signal processing licensing, Foundry and Original Equipment Manufacturers' ("OEM") royalties, debt issuances, common and/or preferred stock issuances including warrant and option exercises or through venture and/or strategic investors. At September 30, 1999, the Company had six Foundry licensees, seventy-eight OEM Licensees and nine authorized customers for its audio signal processing business, an increase of five OEM Licensees and one authorized customer compared to December 31, 1998. The Company is actively engaged in discussions or negotiations for additional audio signal processing licensing arrangements and debt or equity financing, which, if consummated, 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 $907,500 to related parties as of September 30, 1999 and $907,500 at December 31, 1998. Included in these amounts, at September 30, 1999, the Company was indebted to four of its directors and one of its executives for an amount totaling $795,000. This amount bears interest at a fixed rate of 10% annually. Of this amount, $650,000 was due on December 31, 1998, and is currently in default. The remaining $145,000 is due on November 30, 1999, or upon the sale of the MDT assets and is secured by such assets. The Company granted 145,000 warrants to purchase common stock at $0.20 per share in connection with the $145,000 of indebtedness. An unrelated investor advanced the Company $100,000 in the quarter ended June 30, 1999 on identical terms. In March 1999, one of the holders of the Company's Convertible Preferred Stock advanced the Company $75,000, and in the quarter ended June 30, 1999 advanced an additional $135,000 under the same terms as the $145,000 advanced by the directors and management due on November 30, 1999. The $210,000 advanced by one of the holders of the Convertible Preferred Stock is secured by the assets of the Company. No further advances were made in the quarter ended September 30, 1999. 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 12 13 price for these options was adjusted to $0.1875 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. 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, 1999. 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. The Company does not expect any additional investment above the initial $3 million to be received under this placement. 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 increased by five percent (5%) when the Company was 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 has been 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, 1999, dividends in arrears were approximately $150,000. 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. 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. 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 investment 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, reporting to the Board of Directors, and continues in that capacity. Michael Bolcerek resigned as president of Desper Products, Inc. 13 14 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, may not be sufficient for the Company to meet its operating obligations during the next twelve months. In addition, if the refocus on the audio technologies strategy is not successful, or if a strategic alliance or additional investment is not concluded, or if an appropriate transaction is not undertaken with respect to the MultiDisc assets, the ability of the Company to meet its operating needs will be materially adversely affected. As of September 30, 1999, the company had a working capital deficit of $1,899,000 and, absent continued and improved revenues and successful funding activities, the company may not be in a position to resolve this deficit. The financial statements have been prepared assuming the Company will continue to operate as a going concern which contemplates the realization of assets and the settlement of liabilities in the normal course of business. No assurance can be provided that this will ultimately be the case. No adjustment has been made to the recorded amount of assets or the recorded amount or classification of liabilities which would be required if the Company were unable to continue its operations. 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. In November, 1998, NASDAQ provided the Company 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, the Company informed NASDAQ that it would be unable to comply with these requirements. On January 5, 1999, the Company's stock was delisted from the NASDAQ SmallCap Market and, on the same day, commenced trading on the NASD Bulletin Board under the symbol "SPAZ". 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 has addressed this contingency with its computer consultants and has upgraded its software programs, the cost of which was no more than $15,000. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the Company's Form 10-K for the year ended December 31, 1998 with respect to the Company's litigation with QSound Labs, Inc. On July 20, 1999, the Court found in favor of the Company and dismissed the complaint filed by Alexander Wescott and Company. No material developments in such litigation occurred during the three-month period ended September 30, 1999. 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, 1999. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 21.1 (a) Schedule of Subsidiaries of the Company (b) Reports on Form 8-K: None 15 16 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 12, 1999 SPATIALIZER AUDIO LABORATORIES, INC. (REGISTRANT) /s/ HENRY R. MANDELL ------------------------------------ HENRY R. MANDELL Interim Chief Executive Officer Chief Financial Officer 16 EX-21.1 2 SCHEDULE OF SUBSIDIARIES OF THE COMPANY 1 Exhibit 21.1 Schedule of Subsidiaries of the Company Desper Products, Inc. -- California, USA MultiDisc Technologies, Inc. -- Delaware, USA EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 102,150 0 384,960 0 12,9937 578,427 651,802 470,093 971,221 2,477,736 0 0 281 360,912 (1,857,708) 971,221 976,525 976,525 (28,619) (28,619) 823,682 0 (72,749) 51,475 (4,500) 46,975 0 0 0 46,975 0 0
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