UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(MARK ONE)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: JUNE 30, 1996
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 Identification No.)
incorporation or organization)
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 September 6, 1996 there were 18,898,429 shares of the Registrant's
Common Stock outstanding.
This Amendment to the Registrant's Quarterly Report on Form 10-Q is being
filed to reflect inadvertent typographical deletions in the text and changes
in presentation suggested by the Registrant's advisers reviews in connection
with a concurrent filing of a Registration Statement on Form S-3.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $2,834,443 $3,113,057
Accounts Receivable 536,802 412,010
Employee Advances (Note 5) 100,000 -
Subscriptions Receivable (Note 7) 1,245,106 -
Inventory 343,372 262,131
Prepaid Expenses and Deposits 197,136 94,068
---------- -----------
Total Current Assets 5,256,859 3,881,266
Fixed Assets, Net (Note 3) 553,356 294,803
Intangible Assets (Note 4) 446,740 243,532
---------- -----------
$6,256,955 $4,419,601
========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 350,175 $ 180,046
Accrued Liabilities 160,942 203,530
Unearned Revenues 1,750 -
Advances from Related Parties (Note 5) 127,896 325,061
Notes Payable 25,300 13,493
---------- ----------
Total Current Liabilities 666,063 722,130
Shareholders' Equity:
Preferred shares, $.01 par value,
1,000,000 shares authorized, no
shares issued or outstanding - -
Common shares, $.01 par value,
50,000,000 shares authorized,
18,212,731 and 17,457,531 shares
issued and outstanding at June 30,
1996 and December 31, 1995,
respectively 182,127 174,575
Common shares subscribed, 648,865 (Note 7) 6,489 -
Additional Paid-In Capital 17,987,062 13,578,782
Accumulated Deficit (12,584,019) (10,055,119)
Foreign Currency Translation Adjustment (767) (767)
------------ ------------
Total Shareholders' Equity 5,590,892 3,697,471
------------ ------------
$6,256,955 $4,419,601
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product Revenues $ 110,335 $ 25,838 $ 193,264 $ 42,330
Licensing Revenues 397,679 143,979 743,314 525,676
---------- ---------- ---------- ----------
Gross Revenues (Note 8) 508,014 169,817 936,578 568,006
Cost of Revenues 52,966 20,151 83,686 44,797
---------- ---------- ---------- ----------
Gross Profit 455,048 149,666 852,892 523,209
Operating Expenses:
Payroll and P/R Related 543,101 373,051 1,015,576 747,142
Professional and Outside
Service Fees 276,885 250,116 438,323 455,452
Sales and Marketing 188,328 121,465 403,928 248,733
Research and Development 21,782 18,775 46,013 45,402
In-Process Research and
Development (Note 9) 679,684 - 679,684 -
General Operating 278,220 189,653 580,565 320,701
--------- ---------- ---------- ----------
Total Operating Expenses 1,988,000 953,060 3,164,089 1,817,430
--------- ---------- ---------- ----------
Operating Loss (1,532,952) (803,394) (2,311,197) (1,294,221)
--------- ---------- ---------- ----------
Interest Income 22,047 12,495 64,318 35,207
Interest Expense (3,546) (10,120) (8,403) (25,785)
--------- ---------- ---------- ----------
18,501 2,375 55,915 9,422
Loss before income taxes (1,514,451) (801,019) (2,255,282) (1,284,799)
Income Taxes 260,055 - 273,618 -
Net Loss $(1,774,506) $(801,019) $(2,528,900) $(1,284,799)
============ ========== ============ ============
Net Loss Per Common Share $ (0.14) $ (0.09) $ (0.21) $ (0.14)
============ ========== ============ ============
Weighted Average Common
Shares Outstanding 12,290,777 9,220,449 12,039,532 9,217,958
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six-months
Ended June 30,
1996 1995
------------ ------------
(unaudited)
<C> <C>
Cash Flows from Operating Activities:
Net Loss $(2,528,900) $(1,284,799)
Depreciation 42,478 57,969
In Process R & D (Note 9) 679,684 -
Net Change in Assets and Liabilities:
Trade Receivables (124,792) (24,089)
Employee Advances (Note 5) (100,000) -
Prepaid Expenses and Deposits (103,068) (80,183)
Accounts Payable 170,129 22,684
Accrued Liabilities (42,588) (31,006)
Inventory (81,241) 22,365
----------- -----------
Net Cash Used in Operating Activities (2,088,298) (1,317,059)
Cash Flows from Financing Activities:
Issuance of Common Shares 1,773,321 270,786
Common Stock Subscribed 1,403,894 502,801
Unearned Revenue 1,750 -
Due to Related Parties (197,165) (69,634)
Issuance (Repayments) of Notes Payable 11,807 (905)
----------- -----------
Net Cash Provided by Financing
Activities 2,993,607 703,048
Cash Flows from Investing Activities:
Purchase of Fixed Assets (118,559) (27,839)
Increase in Intangible Assets (3,208) (90,785)
MDT Asset Acquisition (Note 9) (1,062,156) -
----------- -----------
Net Cash Used in Investing Activities (1,183,923) (118,624)
Foreign Exchange Adjustment - 3,003
----------- -----------
Decrease in Cash and Cash Equivalents (278,614) (729,632)
Cash and Cash Equivalents,
Beginning of Period 3,113,057 1,539,768
----------- ----------
Cash and Cash Equivalents,
End of Period $2,834,443 $ 810,136
=========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common shares Foreign
--------------------------------- Currency
Number of Par Additional Accumulated Translation Total
Shares Value Paid-in-Capital Deficit Adjustment Equity
---------- -------- ----------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995 17,457,531 $174,575 $13,578,782 $(10,055,119) $(767) $3,697,471
Options
Exercised
(Note 6) 136,700 1,367 137,583 - - 138,950
Warrants
Exercised
(Note 6) 618,500 6,185 1,628,186 - - 1,634,371
Common
Stock
Subscriptions
(Note 7) 648,865 6,489 2,642,511 - - 2,649,000
Net Loss - - - (2,528,900) - (2,528,900)
----------- -------- ----------- ------------ ----- -----------
Balance,
June 30,
1996 18,861,596 $188,616 $17,987,062 $(12,584,019) $(767) $5,590,892
=========== ======== =========== ============= ====== ===========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
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 technology licensing and bringing proprietary products to
the market. 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.
During the quarter ended June 30, 1996 the Company formed a new wholly owned
subsidiary, MultiDisc Technologies, Inc. ("MDT") concurrently with the
acquisition of certain assets of Home Theater Products, Inc. ("HTP"), a
debtor in possession based in Anaheim, California. The information related
to the acquisition of assets is incorporated by reference to the Company's
Form 8-K filing of July 11, 1996. This newly formed subsidiary is in the
business of developing proprietary compact disc server technologies for
licensing.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States.
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 material inter-company
transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. The Company recognizes revenue from licensing agreements when
earned, in accordance with the contractual arrangements.
Currency
The operations of the Company take place primarily in the United States
and all financial reporting is in U.S. Dollars.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less that are readily convertible to cash.
Inventory
Inventory, which is primarily comprised of finished goods, is stated at the
lower of cost (first-in, first-out) or market.
Research and Development Expenditures
The Company expenses research and development expenditures as incurred. In
connection with the MDT asset acquisition by the Company's new subsidiary,
MDT, a one-time expense of $679,684 was charged to In-Process Research and
Development in the period (Note 9).
<PAGE>
Fixed Assets
Fixed assets are carried at cost and are depreciated over five to seven
years using accelerated-depreciation methods, which approximates 150%
declining balance. Leasehold improvements are amortized over the shorter
of the useful life or lease term.
Loss per Share
Loss per share has been calculated based on the weighted average number of
common shares outstanding other than the escrowed shares, which are
excluded from the determination of loss per share as the conditions for
release have not yet been attained. Outstanding options and warrants to
purchase common stock have not been included in the calculation of primary
loss per share as the effect of including such securities would be
antidilutive.
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.
(3) FIXED ASSETS
Fixed assets, at cost, as of June 30, 1996 and December 31, 1995 consisted
of the following:
<TABLE>
June 30, December 31,
1996 1995
------------ -------------
(unaudited)
<S> <C> <C>
Office Computers, Equipment, and Furniture $447,313 $237,287
Test Equipment 94,143 60,895
Tooling Equipment 44,136 25,000
Trade Show Booth and Demonstration Equipment 168,842 144,369
Leasehold Improvements 29,429 23,916
---------- ------------
783,863 491,467
Less Accumulated Depreciation and Amortization 230,507 196,664
---------- ------------
$553,356 $294,803
========== ============
</TABLE>
(4) INTANGIBLE ASSETS
Capitalized patent and technology costs, net, totaling $446,740 and
$243,532 at June 30, 1996 and December 31, 1995, respectively, comprise
intangible assets, including $200,000 at June 30, 1996 in connection
with the MDT asset acquisition. Intangible assets are amortized, on a
straight line basis, over the lesser of 17 years or their estimated useful
life and begin amortizing in the period the patent is granted.
(5) ADVANCES FROM RELATED PARTIES
The Company was indebted to certain related parties for amounts totaling
$127,896 and $325,061 at June 30, 1996 and December 31, 1995, respectively,
which includes accrued interest. Amounts bearing interest are at rates
ranging from a fixed 10% annually to prime (8.75% at December 31, 1995) plus 2%
and are due on demand.
In addition, the Company had employee advances of $100,000 at June 30, 1996
compared to $0 in the same period of 1995. These advances are for two
employees and relate to the MDT asset acquisition and will be repaid over
the next twelve months or offset against future bonuses.
(6) OPTIONS AND WARRANTS
The Company has issued options to purchase common stock to certain
directors, officers and employees under various stock option plans. The
option and warrant exercise prices represent fair market values at the
date of grant.
<PAGE>
Transactions in the stock options under these plans are summarized as follows:
<TABLE>
Stock Options Shares Option Price
- ----------------------- -------- -------------------------------------
<S> <C> <C>
Cdn. $1.20 - Cdn. $5.84 (U.S. $.87 - U.S.
Options Outstanding at $4.30) per Share expiring on various
December 31, 1995 1,426,432 dates, July 1997 to November 2000
Cdn. $5.99 -Cdn. $6.46 (U. S. $4.40 -
Options Issued 8,333 U. S. $4.75 per share
Cdn. $1.20 - Cdn. $3.10 (U.S. $.87 -
Options Exercised (136,700) U.S. $2.27) per Share
----------
Cdn. $1.20 - Cdn. $6.46 (U.S. $.87 -
Options Outstanding at U.S. $4.75) per Share expiring on various
June 30, 1996 1,298,065 dates, July 1997 to May 2001
==========
</TABLE>
The number of outstanding options exercisable at June 30, 1996 was 988,901.
The following table summarizes the activity relating to warrants and common
shares issuable upon exercise of such warrants:
<TABLE>
Warrants Warrant Price
---------- ----------------------------------------
<S> <C> <C>
Cdn. $3.20 - Cdn. $4.15 (U.S. $2.33 - U.S.
Warrants Outstanding $3.05) per Share expiring on various
at December 31, 1995 780,000 dates, August 1996 to June 1997
Cdn. $6.46 - Cdn. $6.97 (U.S. $4.75 - U.S.
$5.12) per Share expiring on various
Warrants Issued 155,000 dates, May 1997 to June 1997
Cdn. $3.20 - Cdn. $4.15 (U.S. $2.33 -
Warrants Exercised (618,500) U.S. $3.05) per Share
----------
Cdn. $3.30 - Cdn. $6.97 (U.S. $2.40 - U.S.
Warrants Outstanding $5.12) per Share expiring on various
at June 30, 1996 316,500 dates, November 1996 to June 1997
==========
</TABLE>
The number of outstanding warrants exercisable at June 30, 1996 was 316,500.
<PAGE>
(7) PRIVATE PLACEMENTS
During the six months ended June 30, 1996, shares were issued as follows:
In May 1996, the Company completed a private placement of 200,000 units at a
price of $4.25 U.S. per unit, each unit comprised of one common share and
one-quarter of one non-transferable share purchase warrant. One warrant
entitles the holder to purchase one additional share at a price of $4.75 U.S.
on or before May 9, 1997. Regulatory approval was received in July 1996
from the Vancouver Stock Exchange ("VSE").
Also in May 1996, the Company completed a private placement of 280,000 units
at a price of $4.25 U.S. per unit, each unit comprised of one common share
and one-quarter of one non-transferable share purchase warrant. One warrant
entitles the holder to purchase one additional share at a price of $4.75 U.S.
on or before May 31, 1997. Regulatory approval was received in July 1996 from
the VSE.
In June 1996, the Company completed a private placement of 140,000 units at
a price of $4.35 U.S. per unit, each unit comprised of one common share and
one-quarter of one non-transferable share purchase warrant. One warrant
entitles the holder to purchase one additional share at a price of $5.12 U.S.
on or before June 24, 1997. Regulatory approval was received in August1996
from the VSE.
In relation to the private placements of the Company's stock during 1996,
finders fees for such placements were paid through the issuance of 28,865
shares of stock.
As of June 30, 1996, private placements totaling $2,649,000 remained subject
to regulatory approval from the VSE: $1,403,894 had been received by the
Company and included in cash and cash equivalents, and the balance of
$1,245,106 is reflected in subscriptions receivable.
As of August 9, 1996, all amounts related to these placements had been
received by the Company.
(8) MAJOR CUSTOMERS
The revenues for the six-month period ended June 30, 1996 include revenues
from three major customers each of whom represent 22%, 17%, and 11%,
respectively, of total revenues.
(9) ASSET ACQUISITION
In June 1996, the Company purchased certain assets from HTP for $1,062,156
including acquisition costs. Of the purchase price, $679,684 was allocated
to In-Process Research & Development ("IPR&D") and expensed at the closing.
IPR&D is defined as those research and development efforts that, as of the
acquisition date, June 24, 1996, have not yet generated commercializable
products and thus the revenue generating capability of the products is
uncertain. At the date of acquisition there were no existing products
acquired. IPR&D represents 64% of the total acquisition costs. The
remaining 36% was allocated as follows: approximately $200,000 to intangible
assets, primarily representing acquired patent applications and approximately
$182,000 to fixed assets, including computers, office equipment and
furniture.
<PAGE>
ITEM 2. 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 six-month and three-month periods
ended June 30, 1996, compared with the six-month and three-month periods
ended June 30, 1995.
RESULTS OF OPERATIONS
For The Six-month and Three-Month Periods Ended June 30, 1996, Compared
To The Same Periods Ended June 30, 1995
Revenues
The Company reported increased revenues of 65% or $368,572, reaching
$936,578 for the six-month period ended June 30, 1996, compared to $568,006
for the six-month period ended June 30, 1995. The Company reported increased
revenues of 199% or $338,197, reaching $508,014 for the three-month period
ended June 30, 1996, compared to $169,817 for the three-month period ended
June 30, 1995. Revenues include sales of professional recording systems,
consumer products, license issuance fees and royalties pertaining to the
analog IC.
The increased revenues in both periods reflects the Company's transition to
a steady and ongoing licensing revenue stream. In both periods in 1995 the
majority of the Company's licensing revenues were derived from one-time,
up-front license issuance fees. In contrast, a substantial portion of the
licensing revenues for the 1996 periods are derived primarily from running
royalties based on usage and include revenues from three major customers
representing 22%, 17%, and 11%, respectively. The increase in
these recurring royalties reflects expansion and growth in the usage of the
Spatializer chip. In addition, the Company increased product sales through
initial sales, late in first quarter 1996, of its first consumer product, the
HTMS-2510. Product sales for the six-month periods ended June 30, represent
approximately 21% of 1996 revenues compared with only 7% for the same period in
1995.
Gross profit for the six-month period ended June 30, was approximately 91%
in 1996 as compared with 92% for the same period in 1995, as the majority
of sales are associated with license and royalty revenues which have little
or no direct costs associated with them.
Operating Expenses
The Operating expenses for the six-month and three-month periods ended
June 30, 1996 reflect a significant non-recurring item.
The significant item include approximately $680,000 of In-Process
Research & Development ("IPR&D") related to the allocation of costs
incurred as a result of the MDT asset acquisition. IPR&D is defined as
those research and development efforts that, as of the acquisition date,
June 24, 1996, have not yet generated commercializable products and thus
the revenue generating capability of the products is uncertain. At the
date of acquisition there were no existing products acquired and MDT's
technologies remain in the development stage. IPR&D represents 64% of the
total acquisition costs. The remaining 36% of the transaction was allocated
between intangible assets, primarily representing acquired patent
applications and fixed assets, including computers, office equipment and
furniture.
<PAGE>
After adjusting for the one-time time item listed above operating expenses
for the six-month period ended June 30, 1996, increased by approximately 38%
or $692,711, for a total of $2,510,141 compared to $1,817,430 for the same
six-month period in 1995. Also adjusted for the one-time item operating
expenses for the three-month period ended June 30, 1996 increased
by approximately 39% or $367,745, for a total of $1,320,805 as compared
with $953,060 for the same period in 1995. This increase can be attributed
primarily to the increased efforts of Sales and Marketing including the
launch of an aggressive advertising campaign for the HTMS-2510 as well as
the effects of a full quarter of fully staffed operations of DPI. A small
percentage of the increase for the six-month period ended June 30, 1996,
3%, is attributed to the additional personnel hired by the Company's new
subsidiary, MDT.
Payroll and Payroll Related
Payroll and payroll related costs increased approximately 36% or $268,434,
to $1,015,576 for the six-month period ended June 30, 1996 as compared
with $747,142 for the same period in 1995. Payroll and payroll related costs
also increased approximately 46% or $170,050, to $543,101 for the three-month
period ended June 30, 1996 as compared with $373,051 for the same period in
1995. The primary increase in payroll expenses relates to the Sales and
Marketing department with smaller increases in the two other departments,
Research and Development, and General and Administrative. Staff counts
increased from twenty-two at June 30, 1995 to thirty-two at June 30, 1996.
Sales and Marketing Department
Payroll and payroll related costs for the Sales and Marketing
Department increased approximately 110% or $194,344, to $370,845
for the six-month period ended June 30, 1996 as compared with
$176,501 for the same period in 1995. Payroll and payroll related
costs also increased approximately 123% or $118,507, to $215,055 for
the three-month period ended June 30, 1996 as compared with
$96,548 for the same period in 1995. The increase can be attributed
to the increase in staff from seven in 1995 to eleven in 1996.
Research and Development Department
Payroll and payroll related costs for the Research and Development
Department increased approximately 17% or $41,780, to $294,925 for
the six-month period ended June 30, 1996 as compared with $253,145
for the same period in 1995. Payroll and payroll related costs also
increased approximately 32% or $39,027, to $161,736 for the
three-month period ended June 30, 1996 as compared with $122,709 for
the same period in 1995. The increase can be attributed to the
increase in staff from eight in 1995 to eleven in 1996. These staff
counts do not include five additional staff hired at June 24, 1996
by MDT, as the costs for the six days of operations since the
acquisition is considered minimal.
The Company's new subsidiary, MDT, which began operations on June 24,
1996, represented approximately 4% or $12,519 of the departments
payroll and payroll related costs for the six-month period ended
June 30, 1996. In addition, the MDT subsidiary represented
approximately 8% or $12,519 of the departments payroll and payroll
related for the three-month period ended June 30, 1996.
General and Administrative Department
Payroll and payroll related costs for the General and Administrative
Department increased approximately 10% or $32,310, to $349,806 for
the six-month period ended June 30, 1996 as compared with $317,496
for the same period in 1995. Payroll and Payroll Related also
increased approximately 8% or $12,516, to $166,310 for the three-
month period ended June 30, 1996 as compared with $153,794 for the
same period in 1995. The increase can be attributed to the increase
in staff from seven in 1995 to ten in 1996.
<PAGE>
Professional and Outside Service Fees
Professional and outside service fees consist of legal fees, external
accounting fees, consulting and temporary help. During the six-month period
ended June 30, 1996, outside and professional fees remained relatively flat
with a decrease of approximately 4% or $17,129, for a total of $438,323
compared with $455,452 for the same period in 1995. During the three-month
period ended June 30, 1996 there was an increase of approximately 11% or
$26,769, for a total of $276,885 compared with $250,116 for the same period
in 1995. The majority of the variance relates to an increase in external
accounting fees, and an increase in outside and professional services which
are both offset by a decrease in legal fees.
External Accounting Fees
External accounting fees increased approximately 7%, or $2,863,
for a total of $45,603 for the six-month period ended June 30,
1995, compared to $42,740 for the same six-month period in 1995.
These fees increased by approximately 97% or $12,578, for a total
of $25,573 during the three-month period ended June 30, 1996 as
compared with $12,995 for the same period in 1995. The increase
is primarily associated with one-time services provided in the
liquidation of Spatializer Audio Laboratories, Inc. (Yukon), the
Company's predecessor.
Consulting Fees and Temporary Help
Consulting fees, and temporary help increased 22%, or $35,562,
for a total of $197,681 for the six-month period ended June 30,
1996, compared to $162,119 for the same six-month period in
1995. For the three-month period ended June 30, 1996 there was
an approximate increase of 14% or $13,107, for a total of
$104,868 as compared with $91,761 for the same period in 1995.
The majority of these costs were incurred in connection with
researching various technologies for potential acquisition. In
addition, consulting fees were incurred in association with
expanded corporate finance activities, and payments to
consultants and other personnel working on a part-time or
special-project basis.
Legal Fees
Legal fees decreased approximately 22%, or $55,554, for a
total of $195,039 for the six-month period ended June 30,
1996, compared to $250,593 for the same six-month period
in 1995. Legal fees in 1995 were substantially higher as
the Company prepared and submitted an initial draft
registration statement with the SEC. Except for legal
fees associated with the liquidation of Spatializer Audio
Laboratories, Inc. - Yukon, legal fees in 1996 were
primarily of a recurring nature and are incurred in
connection with the following: the patent litigation filed
in October 1994, general corporate and securities
compliance matters, trademark research and licensing
negotiations. Legal fees remained flat for the three-month
period ended June 30, 1996 as compared with the same period
in 1995.
Sales and Marketing Costs
Sales and marketing costs increased approximately 62%, or $155,195, for a
total of $403,928 for the six-month period ended June 30, 1996, compared
to $248,733 for the same six-month period in 1995. During the three-month
period ended June 30, 1996 sales and marketing costs increased approximately
55% or $66,863, for a total of $188,328 as compared with $121,465 during the
same period in 1995. The increase is attributed to a larger trade show
presence, travel and travel related costs, and advertising costs related to
the development of an organized advertising and promotional campaign directed
at the consumer and computer marketplaces.
Trade show costs increased approximately 88%, or $60,356, for a total of
$128,921 for the six-month period ended June 30, 1996, compared to $68,565 for
the same six-month period in 1995. The increase is related primarily to a
larger presence at Winter CES '96 where the Company introduced its first
Spatializer brand consumer hardware product, the HTMS-2510. Trade show
expenses remained flat for the three-month period ended June 1996 as compared
with June 1995.
<PAGE>
Travel and travel related costs increased by approximately 47% or $31,087,
for a total of $97,597 for the six-month period ended June 30, 1996,
compared to $66,510 for the same six-month period in 1995. In addition,
there was an increase of approximately 25% or $12,671, for a total of
$63,149 for the three-month period ended June 30, 1996 compared to $50,478
for the same period in 1995. This increase is primarily attributed to sales
efforts directed at retailers to sell the HTMS-2510.
Advertising which includes publicity, public relations and press release
costs increased approximately 96%, or $60,121, for a total of $122,585 for
the six-month period ended June 30, 1996, compared to $62,464 for the same
six-month period in 1995. In addition, costs increased by $48,172, or 249%,
to $67,548 for the three-month period ended June 30, 1996 compared to
$19,376 for the same period in 1995. The increase is attributed to supporting
the introduction of the HTMS-2510 into the consumer market place as well as
continuing to establish brand name recognition.
Brochures and promotional literature also increased approximately 118%, or
$12,845, for a total of $23,720 for the six-month period ended June 30, 1996,
compared to $10,875 for the same six-month period in 1995. In addition, costs
increased by $4,346, or 79%, to $9,818 for the three-month period ended June
30, 1996 compared to $5,475 for the same period in 1995. The increase is
primarily attributed to supporting the introduction of the HTMS-2510 into
the consumer market place.
Research and Development Costs
The research and development activity grew substantially at the end of the
quarter with the establishment of the Company's new subsidiary, MDT, and the
concurrent acquisition of assets.
During the six-month period ended June 30, 1996 the Company continued efforts
to identify, validate, and develop new product ideas. All research and
development activities and related costs continue to be expensed in the
period incurred.
Research & development expenditures, other than payroll and payroll related
which are discussed above, remained flat for both the six-month and three-
month periods ended June 30, 1996 and 1995. DPI continued its technology
development in this quarter with the introduction of its new 3-D audio
positioning technology (code-named "WORF"). WORF, available as a
Windows '95 (TRADEMARK) driver, works in conjunction with existing
Spatializer 3-D Stereo solutions to enable precise positioning of sounds in
3-D space.
Future periods are expected to increase substantially in the area of research
and development as the Company's new subsidiary, MDT, reports operations for
a full period. The formation of the subsidiary took place on June 24, 1996
and only reflects six days of operations as of the June 30 reporting period.
General Operating Costs
General operating costs include investor relations, foreign taxes,
amortization, financial reporting costs and other operating costs.
General operating costs increased approximately 81% or $259,864, for a total
of $580,565 for the six-month period ended June 30, 1996 as compared with
$320,701 for the same period in 1995. There is an approximate increase of
47% or $88,567, for a total of $278,220 for the three-month period ended
June 30, 1996, as compared with $189,653 for the same period in 1995. The
increase is attributed primarily to operating costs related to the increase
in staff from twenty-two at June 30, 1995 to thirty-two at June 30, 1996 and
relates to almost every area of general and administrative.
Investor Relations Costs
Investor relations costs increased approximately 151%, or $51,279,
for a total of $85,213 for the six-month period ended June 30,
1996, compared to $33,934 for the same six-month period in 1995.
An increase of approximately 16% or $3,434, for a total of
$24,782 for the three-month period ended June 30, 1996 as compared
to $21,348 during the same period in 1995. The increased costs
were incurred to accommodate increased interest in the Company.
<PAGE>
Amortization
Amortization costs increased by approximately 278% or $14,196, for a total
of $19,294 for the six-month period ended June 30, 1996 as compared with
$5,098 for the same period in 1995. There was an approximate increase of 118%
or $4,592, for a total of $8,490 for the three-month period ended June 30,
1996, as compared with $3,898 for the same period in 1995. These increases
are due primarily to the issuance on May 2, 1995 of patent No. 5,412,731 which
triggered the start of the amortization.
Financial Reporting Costs
Financial reporting costs relate to regulatory filing
requirements of the SEC and NASDAQ as well as duplication
of such materials for investor relations, financial analysts,
and sales and marketing purposes. The costs increased to
$93,696 for the six-month period ended June 30,
1996, compared to $0 for the same six-month period in 1995.
The costs also increased to $40,935 for the three-month
period ended June 30, 1996 as compared to $0 during the same
period in 1995. The Company produced and mailed its first
Annual Report and Form 10-K and incurred related costs during
both periods ended June 30, 1996. In addition to expenses
incurred in 1995 for design and development of the Annual
Report and Form 10-K additional costs were incurred in 1996.
Also produced and mailed during the period ended June 30, 1996 was the
Company's March 31, 1996 Form 10-Q.
Other Operating Costs
Other operating costs including rents, telephone, stationary,
office supplies, postage, on-line services and similar general
operating costs increased by approximately 29% or $78,933, for
a total of $351,352 for the six-month period ended June 30,
1996 as compared with $272,419 for the same period in 1995.
There is an approximate increase of 20% or $33,501, for a
total of $197,906 for the three-month period ended June 30,
1996, as compared with $164,405 for the same period in 1995.
These costs reflect the increased costs of additional personnel,
new office space leased in Woodland Hills, CA during May 1995,
and new office space leased in Mountain View, CA during the
second quarter of 1996.
Interest - net
Interest income net increased $46,493 for the six-month period ended June 30,
1996, totaling $55,915, compared to $9,422 in the same six-month period in
1995. Interest income, net, also increased during the three-month period
ended June 30, 1996, by approximately 679% or $16,126, for a total of
$18,501, compared to $2,375 in the same three-month period in 1995. The
results are based on interest received on private placement proceeds coupled
with the elimination of interest expense through the pay off of related party
debt during the first quarter of 1996.
<PAGE>
Net Loss
The net loss, after adjusting for the one-time item, for the six-month
period ended June 30, 1996, totaled $1,601,650 ($0.13) per share, compared
to a net loss of $1,284,799 or ($0.14) per share in the same six-month period
in 1995. The net loss, after adjusting for the two one-time items, for the
three-month period ended June 30, 1996, totaled $847,256 ($0.07) per share,
compared to a net loss of $801,019 or ($0.09) per share in the same
three-month period in 1995. The increased net loss is primarily a result of
increased efforts from Sales and Marketing to introduce the Company's first
consumer product, the HTMS-2510 and increase brand name recognition of
Spatializer as well as the effects of a full quarter of fully staffed
operations.
Liquidity and Capital Resources
At June 30, 1996, the Company had $2,834,443 in cash and cash equivalents as
compared to $3,113,057 at December 31, 1995. The decrease in cash and cash
equivalents can be attributed to cash used for the MDT acquisition of assets,
cash used in operating activities, the purchase of fixed assets and the
retirement of a portion of the related party advances offset by cash received
from common stock subscriptions and other common stock issuances. The
Company had working capital of $4,590,796 at June 30, 1996 as compared with
$3,159,136 at December 31, 1995. Three private placements were pending
approval as of June 30, 1996, regulatory approval was received on two of
the placements during July, 1996 and on the other placement in August.
The Company's future cash flow from operations will come primarily from
Foundry and OEM royalties. At June 30, 1996 the Company had three Foundry
Licensees and thirty-five OEM Licensees, as compared with three Foundry
Licensees and thirty-two OEM Licensees at March 31, 1996.
The Company continues to have no long-term debt and has no present commitments
or agreements which would require any long-term debt to be incurred. The
Company does, however, owe $127,896 as of June 30, 1996 as compared to
$325,061 to related parties at December 31, 1995. Substantial payments were
made during the first quarter of 1996 to retire Company debt.
Based on current operations, and the addition of MDT whose primary focus is
on research and development of new technologies, management believes that
existing cash balances along with operating revenues will be sufficient to
satisfy the Company's cash requirements for the next twelve months. However,
additional cash may be required for development of the MDT technology, for
the introduction of new technologies or products, and for the acquisition of
technologies or enterprises complementary to the Company's business.
Additional sources of financing including debt, equity or strategic
investments may be required to fund such capital expenditures, acquisitions,
research and development and marketing costs related to these activities.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the year ended December 31,
1995 with respect to the Company's litigation with QSound Labs, Inc. ("QSL").
The developments in the litigation for the six-month period ended June 30,
1996 are as follows:
The Special Master, who had been appointed by the Court to consider and make
recommendations regarding the cross-motions for partial summary judgment which
had been filed by each of the Company and QSL, issued his Recommended Ruling
and Report ("RRR") on August 12, 1996. In his RRR, the Special Master
recommended that;
(i) QSL's motion be denied in its entirety; and
(ii) The Company's motion be granted in part (i.e. that three out of
the four patent claims at issue in the case be held to be
non-infringing, and that the issue of whether the fourth
patent claim is infringing or not should be determined at a full
trial).
Both the Company and QSL have an opportunity to file with the Court objections
to the RRR, and the Court has the option of adopting all, a part, or none of
the RRR as its own. (Generally, courts appoint special masters with the hope
that the courts will be able to adopt all or most of the special masters'
recommendations.) A hearing by the Court in connection with this matter is
expected in September or October, 1996.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the security holders of the
Company through solicitation of proxies in the second quarter of the fiscal
year ending December 31, 1996.
(a) The Company's Annual Meeting was held on August 6, 1996 at 10:00
a.m., at the Warner Center Marriott located at 21850
Oxnard Street, Woodland Hills, CA 91364.
(b) The Annual Meeting included the election of directors as follows;
Carlo Civelli and David Foster were elected for terms
ending in 1999.
James D. Pace and Gilbert N. Segel were elected for terms
ending in 1998.
Stephen W. Desper, Steven D. Gershick, and Jerold H. Rubinstein
were elected for terms ending in 1997.
(c) In addition to the election of directors, the shareholders voted on
the following proposals;
(i) Approval of the Spatializer Audio Laboratories, Inc. 1996
Incentive Plan. The purpose of the plan is to enable the
Company to offer officers and key employees of the Company and
its subsidiaries and independent contractors providing consulting
or advisory services to the Company, performance-based incentives
and other equity interests in the Company, thereby attracting,
retaining and rewarding such employees and strengthening the
mutuality of interests between such employees and the
Company's stockholders.
Votes: 7,533,204 FOR 34,516 AGAINST 2,142,374 ABSTAIN, or NOT VOTED
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
(ii) Approval of the modification of the terms of the performance shares
escrow arrangements for certain founders, officers, and
directors. The Modification was proposed to create
incentives consistent with incentives in other U.S. public
companies, to establish definite dates upon which the
Escrowed Performance Shares would be fully vested and
available for sale or transfer by the holders, to provide
a stable market in the Company's stock and to accommodate
certain provisions of the U.S. personal and corporate income
tax and corporate financial accounting rules which impact
the holders of the Escrowed Performance Shares and the Company.
Votes: 7,548,170 FOR 19,550 AGAINST 2,142,374 ABSTAIN, or NOT VOTED
Included in this count is the following disinterested party vote:
1,614,101 FOR 19,550 AGAINST 2,142,374 ABSTAIN, or NOT VOTED
(iii) Approval to act upon other matters that may properly come before
the meeting.
No additional matters were presented at the Company's Annual Meeting.
(d) None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
11.1 Computation of loss per common share
21.1 Subsidiaries of the Registrant
(b) On July 11, 1996 the Company filed a Form 8-K related to the formation
of a new subsidiary, MDT, and the acquisition of certain
assets from HTP, a debtor in possession.
<PAGE>
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: September 9, 1996
SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)
/s/ STEVEN D. GERSHICK
- --------------------------
STEVEN D. GERSHICK
President & Chief Executive Officer
/s/ WENDY MARIE GUERRERO
- --------------------------
WENDY MARIE GUERRERO
Chief Financial Officer
/s/ KATHY PARTCH
- --------------------------
KATHY PARTCH
Director of Accounting
<PAGE>
EXHIBIT 11.1 Computation of Loss Per Common Share
<TABLE>
Six Month Fiscal Year Four months Fiscal Years Ended
Period Ended Ended Ended -----------------------------------
June 30, December 31 December 31, August 31, August 31, August 31,
1996 1995 1994 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Primary Earnings
Per Common Share:
Weighted Average
Common Shares 17,816,232 15,933,516 14,329,235 12,376,579 10,516,998 7,295,073
Weighted Average
Escrowed Performance
Shares (1) (5,776,700) (5,776,700) (5,776,700) (5,485,033) (4,776,700) (4,776,700)
Adjusted Weighted
Average Common
Shares 12,039,532 10,156,816 8,552,535 6,891,546 5,740,298 2,518,373
Net Loss
for Period (2,528,900) (3,241,285) (1,193,261) (1,808,387) (2,103,417) (1,068,294)
Primary Loss
Per Share (0.21) (0.32) (0.14) (0.26) (0.37) (0.42)
Fully Diluted
Earnings Per
Common Share:
Adjusted Weighted
Average Common
Shares 12,039,532 10,156,816 8,552,535 6,891,546 5,740,298 2,518,373
Weighted Average
Escrowed Performance
Shares (1) 5,776,700 5,776,700 5,776,700 5,485,033 4,776,700 4,776,700
Shares to be
issued on Option
Exercise (2) 769,696 806,066 621,486 648,838 444,565 431,667
Shares to be
issued on
Warrant Exercise (2) 83,629 312,704 23,143 0 71,395 233,333
Fully Diluted
Weighted Average
Common Shares 18,669,557 17,052,286 14,973,864 13,025,417 11,032,958 7,960,073
Net Loss for
Period (from above) (2,528,900) (3,241,285) (1,193,261) (1,808,387) (2,103,417)(1,068,294)
Fully Diluted
Loss Per Share (0.14) (0.19) (0.08) (0.14) (0.19) (0.13)
</TABLE>
(1) Escrowed performance shares have been excluded from the determination of
primary loss per share as the conditions for release have not yet been
attained.
(2) Outstanding options and warrants to purchase common shares have not been
included in the calculation of primary loss per share as the effect of
including such securities would be antidilutive. For purposes of
computing the fully diluted loss per share, the treasury stock method
has been used and the shares have been treated as outstanding for the
entire period.
<PAGE>
EXHIBIT 21.1 Schedule of Subsidiaries of the Company
Desper Products, Inc. - Delaware, USA
MultiDisc Technologies, Inc. - Delaware, USA
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the June 30, 1996 financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,834,443
<SECURITIES> 0
<RECEIVABLES> 1,881,908
<ALLOWANCES> 0
<INVENTORY> 343,372
<CURRENT-ASSETS> 5,256,859
<PP&E> 783,863
<DEPRECIATION> 230,507
<TOTAL-ASSETS> 6,256,955
<CURRENT-LIABILITIES> 666,063
<BONDS> 0
0
0
<COMMON> 182,127
<OTHER-SE> 6,489
<TOTAL-LIABILITY-AND-EQUITY> 6,256,955
<SALES> 936,578
<TOTAL-REVENUES> 936,578
<CGS> 83,686
<TOTAL-COSTS> 3,437,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (55,915)
<INCOME-PRETAX> (2,528,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,528,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,528,900)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
