<PAGE> 1
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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: MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-90532
------------------------
SPATIALIZER AUDIO LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4484725
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 May 1, 1998 there were 21,442,345 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 151,043 $ 577,413
Accounts Receivable, net.................................. 672,736 911,505
Employee Advances......................................... 52,274 59,086
Inventory................................................. 91,300 93,250
Prepaid Expenses and Deposits............................. 195,874 135,702
Deferred Transaction Costs................................ 182,294 146,529
------------ ------------
1,345,521 1,923,485
Property and Equipment, net................................. 550,668 586,961
Intangibles, Net............................................ 719,347 654,668
------------ ------------
Total Assets...................................... $ 2,615,536 $ 3,165,114
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit Payable............................... $ -- $ 400,000
Notes Payable............................................. 58,544 64,272
Accounts Payable.......................................... 747,151 651,376
Accrued Liabilities....................................... 44,445 79,140
Accrued Wages and Benefits................................ 350,980 332,713
Due to Related Parties.................................... 762,500 112,500
------------ ------------
Total Current Liabilities......................... 1,963,620 1,640,001
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, 21,423,345 and 21,410,012 shares issued and
outstanding at
March 31, 1998 and December 31, 1997, respectively..... 214,233 214,100
Additional Paid-In Capital................................ 41,528,772 41,481,890
Accumulated Deficit....................................... (41,091,089) (40,170,877)
------------ ------------
Total Shareholders' Equity........................ 651,916 1,525,113
------------ ------------
$ 2,615,536 $ 3,165,114
============ ============
</TABLE>
1
<PAGE> 3
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED MARCH 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Royalty Revenues.......................................... $ 516,344 $ 397,715
Product Revenues.......................................... 7,065 120,747
----------- -----------
523,409 518,462
Cost of Revenues............................................ 20,359 64,255
----------- -----------
Gross Profit................................................ 503,050 454,206
Operating Expenses:
General and Administrative................................ 440,122 573,098
Research and Development.................................. 599,537 568,829
Sales and Marketing....................................... 361,473 341,358
----------- -----------
1,401,132 1,483,285
----------- -----------
Operating Loss.............................................. (898,082) (1,029,079)
Interest Income............................................. 1,079 17,624
Interest Expense............................................ (12,057) (4,320)
Other Expense, net.......................................... -- (8,166)
----------- -----------
(10,978) 5,138
----------- -----------
Loss Before Income Taxes.................................... (909,060) (1,023,940)
Income Taxes................................................ (11,152) (2,898)
----------- -----------
Net Loss.................................................... $ (920,212) $(1,026,839)
=========== ===========
Basic and Diluted Loss Per Share............................ $ (0.04) $ (0.05)
=========== ===========
Weighted Average Shares Outstanding......................... 21,418,160 19,591,540
=========== ===========
</TABLE>
2
<PAGE> 4
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
MARCH 31,
------------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss.................................................. $(920,212) $(1,026,839)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and Amortization............................. 58,074 56,857
Options Issued for Services............................... 34,311 --
Net change in Assets and Liabilities:
Accounts Receivable and Employee Advances................. 245,581 9,836
Inventory................................................. 1,950 56,685
Prepaid Expenses and Deposits............................. (60,172) 87,542
Other Assets.............................................. (35,765) --
Accounts Payable.......................................... 95,775 (147,488)
Accrued Liabilities....................................... (16,428) (86,246)
--------- -----------
Net Cash Used In Operating Activities....................... (596,886) (1,049,653)
--------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment........................ (12,880) (86,000)
Increase in Intangible Assets............................. (73,580) (47,258)
--------- -----------
Net Cash Used in Investing Activities....................... (86,460) (133,258)
--------- -----------
Cash Flows from Financing Activities:
Issuance of Common Shares, net............................ -- 1,966,144
Exercise of Options....................................... 12,704 20,741
Issuance of Related Party Note Payable.................... 650,000 --
Repayment of Bank Line of Credit.......................... (400,000) --
Repayment of Notes Payable................................ (5,728) (2,336)
--------- -----------
Net Cash Provided by Financing Activities................... 256,976 1,984,549
--------- -----------
Increase (Decrease) in Cash and Cash Equivalents............ (426,370) 801,638
Cash and Cash Equivalents, Beginning of Period.............. 577,413 1,587,395
--------- -----------
Cash and Cash Equivalents, End of Period.................... $ 151,043 $ 2,389,033
========= ===========
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Capital Expenditures Financed by Lease Obligations and
Notes Payable.......................................... $ -- $ 59,000
========= ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest.................................................. $ 12,057 $ 4,320
Income Taxes.............................................. 11,152 2,898
========= ===========
</TABLE>
3
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES
---------------------- TOTAL
NUMBER OF ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES PAR VALUE PAID-IN-CAPITAL DEFICIT EQUITY
---------- --------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997............ 21,410,012 $214,100 $41,481,890 $(40,170,877) $1,525,113
Options Exercised..................... 13,333 133 12,571 -- 12,704
Options Issued for Services........... -- -- 34,311 -- 34,311
Net Loss.............................. -- -- -- (920,212) (920,212)
---------- -------- ----------- ------------ ----------
Balance, March 31, 1998............... 21,423,345 $214,233 $41,528,772 $(41,091,089) $ 651,916
========== ======== =========== ============ ==========
</TABLE>
4
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") is in
the business of developing and licensing technology.
The Company's wholly owned subsidiary Desper Products, Inc. ("DPI") is in
the business of developing proprietary advanced audio signal processing
technologies and products for consumer electronics, entertainment, and
multimedia computing.
The Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT")
is in the business of developing scaleable, modular compact disc ("CD") and
digital versatile disc ("DVD") server technologies associated with a network
based ("CD")/DVD server for internet and intranet applications. MDT plans to
both license its technology or engage in third party manufacturing arrangements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim consolidated financial statements of the Company are condensed
and do not include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all adjustments
necessary for a fair statement of results have been included in the unaudited
consolidated Financial Statements for the interim periods presented.
Accordingly, your attention is directed to footnote disclosures found in the
December 31, 1997 Annual Report and particularly to Note 1 which includes a
summary of significant accounting policies.
Basis of Consolidation
The consolidated financial statements include the accounts of Spatializer
Audio Laboratories, Inc. and its wholly owned subsidiaries, Desper Products,
Inc. and MultiDisc Technologies, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
The Company accrues foundry revenues based on licensee royalty reports,
management estimates and reports from third parties. Under the terms of its
license agreements, the Company has the right to conduct periodic royalty
audits. During the quarter ended March 31, 1998, the Company exercised this
right with regard to a major customer. Since this licensee has not yet submitted
a royalty report for the quarter ended March 31, 1998, the Company accrued
royalty revenue of $362,750 from this licensee, based on the audit results. In
addition, the audit findings identified potential underpayments by this licensee
relating to 1997, which the Company has not accrued. The Company is in
negotiation with the licensee to resolve the amounts owed for both the
three-month period ended March 31, 1998 and for the prior year. While the
Company believes the likelihood of collecting the amount accrued is probable,
there can be no assurance as to the final outcome.
Research and Development Expenditures
The Company expenses research and development expenditures as incurred.
5
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOSS PER SHARE
The following table presents options and warrants to purchase shares of
common stock that were outstanding during the three month periods ended March
31, 1998 and 1997 which were not included in the computation of diluted loss per
share because the impact would have been antidilutive:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Options............................... 2,010,070 1,070,070
Warrants.............................. 959,750 834,750
--------- ---------
2,968,820 1,904,820
========= =========
</TABLE>
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 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
nonowner 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 periods
ended March 31, 1998 and 1997. As a result, comprehensive loss is the same as
the net loss for the three-month periods ended March 31, 1998 and 1997.
5. SEGMENT REPORTING
The following table presents information about reported segment losses and
segment assets as of and for the three month periods ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
SEGMENT SEGMENT
DPI MDT TOTAL DPI MDT TOTAL
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from External
Customers............. $ 523,409 $ -- $ 523,409 $ 518,462 $ -- $ 518,462
Segment Loss............ (215,259) (673,882) (889,141) (461,568) (505,785) (967,353)
Segment Assets.......... 1,321,375 854,885 2,176,260 1,698,660 607,850 2,306,510
</TABLE>
The following is a reconciliation of reportable segment loss to the
Company's consolidated totals.
<TABLE>
<CAPTION>
1998 1997
--------- -----------
<S> <C> <C>
LOSS:
Total Loss for Reportable Segments................. $(889,141) $ (967,353)
Other Corporate Expenses........................... (31,071) (59,486)
--------- -----------
Consolidated Total................................. $(920,212) $(1,026,839)
========= ===========
</TABLE>
6
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MAJOR CUSTOMERS
A substantial portion of the Company's licensing revenues are derived
primarily from running royalties based on usage and include revenues from three
major customers. The following customers comprised greater than 10% of total
revenues during the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer A..................................... 63% 26%
Customer B..................................... 16% 16%
Customer C..................................... 5% 18%
Customer D..................................... 2% 12%
</TABLE>
7. CONTINGENCIES
Legal
In the Fall of 1994, QSound Labs, Inc. ("QSound") advised MEC that, in its
view, the Spatializer(R) technology infringed certain U.S. patents held by
QSound. Based on its belief that its technology does not infringe QSound's
patents, in October 1994 DPI initiated Desper Products, Inc. and Spatializer
Audio Laboratories, Inc. v. QSound Labs, Inc., Case No. 94-7276WDK(Bx).
On August 29, 1996, the Court granted the Company's summary judgment motion
in its entirety and denied the motion by QSound in the pending patent
infringement litigation between the Company and QSound. 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. The Court of Appeals
for the Federal Circuit heard oral arguments on November 5, 1997. The parties
are not waiting for the decision of the appellate court. If the appeal is denied
and the Court's decision is confirmed on appeal, the Company intends to pursue
the remaining claims for damages and for a decision that the QSound patent is
invalid. If the appeal is granted and the Court's decision on the motion is
overruled, a trial on the merits would follow at which time the Company will
again assert its current position, which already was adopted in the grant of the
Company's summary judgment motion, and will assert its remaining claims against
QSound. QSound has appealed and the appeal is pending.
8. SUBSEQUENT EVENTS
On April 14, 1998, the Company entered into a $5 million private placement
of which $3 million has been funded. In connection with the private placement,
the Company authorized 100,000 shares of a new Series A, 7% Convertible
Preferred Stock at a stated price of $50 per share and issued 60,000 shares for
the $3 million investment. Of the balance of the $5 million, $1 million will be
funded within 45 days of the closing and $1 million will be funded between 60
and 120 days after the effective date of a registration statement covering the
common stock into which the Preferred Stock is convertible. In connection with
the private placement, the Company agreed to issue 1,000,000 common stock
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, 750,000 are being issued to investors (of which 450,000 were issued)
and 250,000 warrants are being issued to placement agents (of which 150,000 were
issued). 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
7
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock for the 10 days preceding the closing. In addition, cash placement
fees of 10% will be 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 current investment. The Company has responded to an
inquiry from NASDAQ and confirmed that based on the April 14, 1998 financing,
the Company meets the requirements for its continued listing on the NASDAQ Small
Cap Market. In addition to the private placement, during the first quarter of
1998 the Company received short term unsecured advances of $650,000 from a
related party, all of which are intended to be repaid with interest at 10% per
annum on or before December 31, 1998.
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.
The following is proforma information for certain consolidated balance
sheet line items presented as if the sale of the $3 million of convertible
preferred stock had occurred on March 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Assets:
Cash and Cash Equivalents................... $ 151,043 $ 2,851,043
Shareholder's Equity:
Convertible Preferred Stock, $.01 par
value.................................... -- 600
Additional Paid in Capital.................. 41,528,772 44,228,172
</TABLE>
8
<PAGE> 10
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 three-month period ended March 31, 1998,
compared with the three-month period ended March 31, 1997
RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998, COMPARED TO THE THREE-MONTH
PERIOD ENDED MARCH 31, 1997
Revenues
Revenues increased from $518,000 for the three-month period ended March 31,
1997 to $523,000 for the current period in 1998, an increase of 1%. Revenues
include royalties pertaining to the licensing of Spatializer(R) audio signal
processing designs and sales of professional recording systems and consumer
products.
The increase in revenues is attributed primarily to an increase in
recurring royalties for the licensing of the Spatializer technologies and on
chip foundry sales incorporating the usage of Spatializer(R) advanced audio
solutions by the Company's licensees.
Royalty revenue in the current quarter represented virtually all of the
Company's revenue while comparable period sales last year included $121,000 of
product sales, which have been virtually discontinued. The Company made the
decision late last year to discontinue sales of such products in order to focus
its efforts on licensing and software-only products.
Gross profit increased from $454,000 (88% of revenues) for the three-month
period ended March 31, 1997, to $503,000, (96% of revenues) in the current
period in 1998, an increase of 11%. Gross profit increased due to the increase
in revenue as well as the shift in product mix to royalty revenues, which
provide a higher margin than product revenues.
Operating Expenses
The operating expenses decreased from $1,483,000 (286% of revenues) for the
three-month period ended March 31, 1997 to $1,401,000 (268% of revenue) for the
current period in 1998, a decrease of 6%. The reduction in operating costs is a
direct result of continued cost controls implemented last year. The effects of
these costs controls can be seen primarily in the General and Administrative
departments due to lower payroll and legal expenses.
General and Administrative
General and administrative costs declined from $573,000 for the three-month
period ending March 31, 1997 to $440,000 for the current period in 1998, a
decrease of 23%. The reduction in operating costs is a direct result of
continued cost controls implemented last year as well as a reduction in legal
fees pertaining to the Q-Sound litigation.
Research and Development
Research and Development costs increased from $569,000 for the three-month
period ended March 31, 1997 to $600,000 for the current period in 1998 an
increase of 5%. The increase in research and development expense was due to the
increased investment in MDT's research and development activity particularly for
prototypes of the MultiDisc eXpandable Network Server, XNS(TM)technology
partially offset by efficiencies in focusing research and development at DPI.
MDT, which began operations on June 24, 1996, represented approximately 71%
or $427,000 of the total research and development costs of $600,000 for the
three-month period ended March 31, 1998. In addition, the Company continued
efforts to identify, validate, and develop new products at DPI. Specific
engineering efforts were directed toward porting support of N-2-2(TM) -- Digital
Virtual Surround technologies to current
9
<PAGE> 11
and potential licensees during the quarter and toward an advanced version of
enCompass(TM), an interactive, real-time 3-D audio positioning technology.
Sales and Marketing
Sales and marketing costs increased from $341,000 for the three-month
period ended March 31, 1997 to $361,000 for the current period in 1998, an
increase of 6%. The increase is attributed to the hiring of an additional sales
executive at DPI, and the initiation of marketing activity at MDT as it enters
its next phase of development.
Net Loss
The net loss declined from $1,027,000 (198% of revenues) in the three month
period ended March 31, 1997 to $920,000 (176% of revenues) for the current
period in 1998, a decrease of 10%. The decreased net loss for the period is
primarily a result of the increase in gross profit and cost savings realized by
the continuation of the Company's cost cutting measures begun last year.
Liquidity and Capital Resources
At March 31, 1998, the Company had $151,000 in cash and cash equivalents as
compared to $577,000 at December 31, 1997. The decrease in cash and cash
equivalents is attributed to cash used for the development of MDT's principal
technology demonstrators and cash used in other operating activities. The
Company had a working capital deficit of $618,000 at March 31, 1998 as compared
with working capital of $283,000 at December 31, 1997. The Company's future cash
flows are expected to come primarily from the audio signal processing licensing
business' Foundry and Original Equipment Manufacturers' ("OEM") royalties,
common and/or preferred stock issuances including warrant and option exercises,
or through venture or strategic investors in MDT. At March 31, 1998 the Company
had five Foundry licensees, sixty-nine OEM Licensees and sixteen authorized
customers for its audio signal processing business as compared with five Foundry
licensees and sixty-two OEM Licensees and fourteen authorized customers at
December 31, 1997. The Company is actively engaged in negotiations for
additional audio signal processing licensing arrangements which will 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 which would require any long-term debt or
obligations to be incurred. The Company owed $762,500 and $112,500 to related
parties as of March 31, 1998 and at December 31, 1997, respectively.
On April 14, 1998, the Company entered into a $5 million private placement
of which $3 million has been funded. In connection with the private placement,
the Company authorized 100,000 shares of a new Series A, 7% Convertible
Preferred Stock at a stated price of $50 per share and issued 60,000 shares for
the $3 million investment. Of the balance of the $5 million, $1 million will be
funded within 45 days of the closing and $1 million will be funded between 60
and 120 days after the effective date of a registration statement covering the
common stock into which the Preferred Stock is convertible. In connection with
the private placement, the Company agreed to issue 1,000,000 common stock
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, 750,000 are being issued to investors (of which 450,000 were issued)
and 250,000 warrants are being issued to placement agents (of which 150,000 were
issued). 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% will be 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 current investment.
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
10
<PAGE> 12
Funds generated by these financing activities as well as cash generated
from the Company's existing operations is expected to be sufficient for the
Company to meet its operating obligations and the anticipated additional
research, development, and commercial prototype cost for the MultiDisc business
during the next twelve months. However, if the $6 million MultiDisc funding is
not completed, the Company will require additional capital, and need to identify
other debt, equity or strategic investment sources to complete the research
development and commercial introduction of the MultiDisc CD/DVD server
technology and for marketing costs related to such activities. If the Company is
unsuccessful in completing the MultiDisc funding management will be required to
modify or delay the timing of the additional MultiDisc development and marketing
activities.
The Company has responded to an inquiry from NASDAQ and confirmed that
based on the April 14, 1998 financing, the Company meets the requirements for
its continued listing on the NASDAQ Small Cap Market. In addition to the private
placement, during the first quarter of 1998 the Company received short term
unsecured advances of $650,000 from a related party, all of which are intended
to be repaid with interest at 10% per annum on or before December 31, 1998.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the year ended December
31, 1997 with respect to the Company's litigation with QSound Labs, Inc. No
material developments in such litigation occurred during the three-month period
ended March 31, 1998.
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 first quarter
of the fiscal year ending December 31, 1998.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) 21.1 Schedule of Subsidiaries of the Company.
(b) None.
12
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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.
SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)
/s/ STEVEN D. GERSHICK
--------------------------------------
Steven D. Gershick
President & Chief Executive Officer
/s/ HENRY R. MANDELL
--------------------------------------
Henry R. Mandell
Senior Vice President, Finance
Chief Financial Officer
Dated: May 12, 1998
13
<PAGE> 1
SPATIALIZER AUDIO LABORATORIES, INC.
EXHIBIT 21.1 SCHEDULE OF SUBSIDIARIES OF THE COMPANY
Desper Products, Inc. -- California, USA
MultiDisc Technologies, Inc. -- Delaware, USA
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 151,043
<SECURITIES> 0
<RECEIVABLES> 725,010
<ALLOWANCES> 0
<INVENTORY> 91,300
<CURRENT-ASSETS> 1,345,521
<PP&E> 1,145,573
<DEPRECIATION> 594,905
<TOTAL-ASSETS> 2,615,536
<CURRENT-LIABILITIES> 1,963,620
<BONDS> 0
0
0
<COMMON> 214,233
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,615,536
<SALES> 523,409
<TOTAL-REVENUES> 523,409
<CGS> (20,359)
<TOTAL-COSTS> (20,359)
<OTHER-EXPENSES> (1,401,132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,978)
<INCOME-PRETAX> (909,060)
<INCOME-TAX> (11,152)
<INCOME-CONTINUING> (920,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (920,212)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
