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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: 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.
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ITEM I. FINANCIAL STATEMENTS
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED FOR THE NINE MONTH PERIOD ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
SERIES A, 7% CONVERTIBLE
PREFERRED SHARES COMMON SHARES
----------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES PAR VALUE SHARES PAR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED SHAREHOLDERS'
PAID-IN-CAPITAL DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
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)
------------ ------------ ------------
</TABLE>
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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") 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.
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(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:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Options 2,122,300 2,008,300
Warrants 1,017,000 1,521,750
--------- ---------
3,139,300 3,530,050
========= =========
</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 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.
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(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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Customer A 26% 0%
Customer B 0% 57%
Customer C 36% 0%
</TABLE>
(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
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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.
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(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.
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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.
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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
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 1
Exhibit 21.1
Schedule of Subsidiaries of the Company
Desper Products, Inc. -- California, USA
MultiDisc Technologies, Inc. -- Delaware, USA
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 102,150
<SECURITIES> 0
<RECEIVABLES> 384,960
<ALLOWANCES> 0
<INVENTORY> 12,9937
<CURRENT-ASSETS> 578,427
<PP&E> 651,802
<DEPRECIATION> 470,093
<TOTAL-ASSETS> 971,221
<CURRENT-LIABILITIES> 2,477,736
<BONDS> 0
0
281
<COMMON> 360,912
<OTHER-SE> (1,857,708)
<TOTAL-LIABILITY-AND-EQUITY> 971,221
<SALES> 976,525
<TOTAL-REVENUES> 976,525
<CGS> (28,619)
<TOTAL-COSTS> (28,619)
<OTHER-EXPENSES> 823,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (72,749)
<INCOME-PRETAX> 51,475
<INCOME-TAX> (4,500)
<INCOME-CONTINUING> 46,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,975
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
