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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, 2000
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 (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 April 28, 2000 there were 46,661,303 shares of the Registrant's Common
Stock outstanding.
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,713,048 $ 1,021,998
Accounts Receivable, net 447,690 687,595
Employee Advances 1,003 -
Inventory 12,993 12,993
Prepaid Expenses and Deposits 13,476 22,640
------------ ------------
Total Current Assets 2,188,210 1,745,226
Property and Equipment, net 116,569 132,803
Capitalized Patent and Technology Costs, net 202,598 207,793
Other Assets 32,177 32,177
------------ ------------
Total Assets $ 2,539,554 $ 2,117,999
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 14,149 $ 14,149
Notes Payable to Related Parties 337,742 337,742
Accounts Payable 135,590 234,117
Accrued Wages and Benefits 28,482 53,136
Accrued Expenses 249,404 291,118
Deferred Income 75,000 -
Net Liabilities of Discontinued Operation 337,058 419,600
------------ ------------
Total Current Liabilities 1,177,425 1,349,862
Shareholders' Equity:
Series B, 10% Redeemable Convertible Preferred shares, $.01 par value,
1,000,000 shares authorized, 102,967 shares issued and outstanding at
March 31, 2000 and December 31, 1999 1,030 1,030
Common shares, $.01 par value, 50,000,000 shares
authorized, 46,661,303 and 46,174,970 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 466,613 461,750
Additional Paid-In Capital 46,332,100 45,913,503
Accumulated Deficit (45,437,614) (45,608,146)
------------ ------------
Total Shareholders' Equity 1,362,129 768,137
------------ ------------
$ 2,539,554 $ 2,117,999
============ ============
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
License Revenues $ -- $ --
Royalty Revenues 505,000 357,930
Product Revenues 650 -
------------ ------------
505,650 357,930
Cost of Revenues 32,477 835
------------ ------------
Gross Profit 473,173 357,095
Operating Expenses:
General and Administrative 72,188 104,168
Research and Development 113,194 157,719
Sales and Marketing 99,535 73,162
------------ ------------
284,917 335,049
------------ ------------
Operating Profit 188,256 22,046
Interest and Other Income 13,670 2,755
Interest and Other Expense (8,124) (21,557)
------------ ------------
5,546 (18,802)
------------ ------------
Income Before Income Taxes 193,802 3,244
Income Taxes (23,271) (1,000)
------------ ------------
Net Income $ 170,531 $ 2,244
============ ============
Basic and Diluted Income Per Share $ 0.00 $ 0.00
============ ============
Weighted Average Shares
Outstanding 46,375,062 27,414,148
============ ============
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 170,532 $ 2,244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and Amortization 20,929 10,425
Net Change in Assets and Liabilities:
Accounts Receivable and Employee Advances 238,902 18,931
Inventory - 743
Prepaid Expenses and Deposits 9,164 (12,171)
Accounts Payable (98,527) 54,722
Other Assets - -
Deferred Revenue 75,000 (250,000)
Changes in Discontinued Operation (82,542) (2,267)
Accrued Liabilities (66,367) (120,929)
----------- -----------
Net Cash Provided By (Used In) Operating Activities 267,091 (298,305)
----------- -----------
Cash Flows from Investing Activities:
Purchase/Disp of Property and Equipment 499 (1,894)
Increase in Capitalized Patent and Technology Costs - 5,000
----------- -----------
Net Cash Provided By (Used in) Investing Activities 499 3,106
----------- -----------
Cash Flows from Financing Activities:
Issuance of Preferred Shares, Net - -
Issuance of Common Shares, Net - -
Exercise of Options 423,460 -
Exercise of Warrants - -
Issuance of Notes Payable - 75,000
Issuance of Related Party Payable - -
Repayment of Notes Payable - -
----------- -----------
Net Cash Provided by Financing Activities 423,460 75,000
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 691,050 (220,199)
Cash and Cash Equivalents, Beginning of Period 1,021,998 264,054
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,713,048 $ 43,855
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,811 $ -
Income Taxes 2,400 -
=========== ===========
</TABLE>
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
SERIES B, 10% CONVERTIBLE
PREFERRED SHARES COMMON SHARES
------------------------------ ------------------------------
NUMBER OF NUMBER OF
SHARES PAR VALUE SHARES PAR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 102,967 $ 1,030 46,174,970 $ 461,750
Issuance of Preferred Shares, Net - - - -
Options Exercised - - 486,333 4,863
Warrants Exercised - - - -
Options Issued for Services - - - -
Conversion of Preferred Shares, Net - - - -
Net Income - - - -
------------ ------------ ------------ ------------
Balance, March 31, 2000 102,967 $ 1,030 46,661,303 $ 466,613
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED SHAREHOLDERS'
PAID-IN-CAPITAL DEFICIT EQUITY
--------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1999 $ 45,913,503 $(45,608,146) $ 768,137
Issuance of Preferred Shares, Net - - -
Options Exercised 418,597 - 423,460
Warrants Exercised - - -
Options Issued for Services - - -
Conversion of Preferred Shares, Net - - -
Net Income - 170,532 170,532
------------ ------------ ------------
Balance, March 31, 2000 $ 46,332,100 $(45,437,614) $ 1,362,129
------------ ------------ ------------
</TABLE>
5
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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", "our" and
"we") are in the business of developing and licensing technology.
Our 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.
Our wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") was 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. Operations of MDT were
discontinued in the fourth quarter of 1998. Our efforts to sell these assets,
though continuing, have not been successful to date.
(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. Operating
results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. Accordingly, your attention is directed to footnote disclosures found in
the December 31, 1999 Annual Report and particularly to Note 2 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
We accrue 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
We expense research and development expenditures as incurred.
(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)
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per share is computed similarly to fully diluted earnings (loss) per share
pursuant to the Accounting Principles Board ("APB") Opinion No. 15. The
following table presents contingently issuable shares, options and warrants to
purchase shares of common stock that were outstanding during the three month
periods ended March 31, 2000 and 1999 which were not included in the computation
of diluted loss per share because the impact would have been antidilutive or
insignificant:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Options 2,353,134 1,972,300
Warrants 2,730,000 732,000
--------- ---------
5,083,134 2,704,300
========= =========
</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. We 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. We did not have components of other
comprehensive income during the three-month periods ended March 31, 2000 and
1999. As a result, comprehensive income is the same as the net income for the
three-month periods ended March 3, 2000 and 1999.
(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. We adopted SFAS 131 in December 1997.
At March 31, 2000, we have only one operating segment, DPI, the Company's Audio
Signal Processing business.
(6) MAJOR CUSTOMERS
A substantial portion of our licensing and royalty revenues are derived from
three major customers. The following customers comprised greater than 10% of
total revenues during the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Customer A 40% 70%
Customer B 25% 0%
Customer C 10% 15%
</TABLE>
7
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(7) CONTINGENCIES
Legal
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. The matter was subject to a mediation preceding in March 2000, and
settlement is currently being documented. If the current settlement is
finalized, the matter will be resolved without any cost to the Company and I.N.
will be entitled to a cashless exercise of warrants for the 125,000 shares
originally issued to them in 1997 and 1998.
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 which claims have either been
settled or are pending resolution. In September, 1999, an entry of judgement in
the Municipal Court of Santa Clara County, California was entered on behalf of
one claimant in the amount of $8,307.30. In February, 2000, an appeal was heard
in the Superior Court of Orange County, California, relating to a claim filed by
a former employee of MDT for back vacation pay and penalties. In March 2000,
both parties agreed to dismiss the action as part of a settlement, which was not
material to the financial statements for the period ended March 31, 2000.
We also anticipate that, from time to time, we may be named as a party
to other legal proceedings that may arise in the ordinary course of its
business.
(8) SALE OF PREFERRED STOCK
On April 14, 1998, we entered into a private placement for up to $5
million of which $3 million was 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 $3 million. In connection with the April funding, we 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 our common stock for the
10 days preceding the closing. In addition, cash placement fees of 10% were
paid. A related party 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. We do not expect any additional investment above the initial
$3 million to be received under this placement. At December 31, 1999, 60,000
shares of Series A Convertible Preferred Stock, representing the entire
placement had been converted into a total of 30,517,943 shares of our Common
Stock, some of which are covered by Form S-3 and the balance of which were
issued as restricted shares.
In the December 1999, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject
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to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We
have a three year option to redeem any Series B Preferred Stock, not sooner
converted, in whole or in part, in cash.
(9) SALE OF COMMON STOCK
In December 1999, we completed a set of financial transactions (the
"December Transactions") with certain existing holders of our equity and debt
and with new institutional investors. The December Transactions included the
private placement of 1,884,254 additional shares of our Common Stock ($1.05
million in new capital or $0.56 per share), the issuance of warrants to acquire
2,100,000 shares of Common Stock exercisable for three years at an exercise
price of $.67 per share), the cancellation of 500,000 warrants to acquire Common
Stock issued in the April 1998 financing. The placement of common shares was at
no discount to market. We have registered these shares and warrants for resale
under Form S-1, as required by the placement documents.
(10) DISCONTINUED OPERATIONS
In September, 1998, the Board of Directors approved a plan to refocus
corporate activities on our core audio business, Desper Products, Inc. In
conjunction to this strategic refocusing, we permanently suspended operations of
MDT and placed the business and its related patent portfolio up for sale. We are
accounting for the on-going operating and termination expenses of MDT as a
discontinued operation.
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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. Our actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.
REVENUES
Revenues for the three months ended March 31, 1999 were $506,000, compared to
revenues of $358,000 in the comparable period last year, an increase of 41%. The
increase in such revenues resulted primarily from running royalties earned in
the first quarter of 2000 from a license agreement for which there were no
comparable running royalties, from this account, in the comparable period last
year, and increased royalties from Spatializer N-2-2 on higher DVD player and
DSP sales by our licensees. This increase was partially offset by non recurring
engineering fees received from a licensee in the comparable period last year for
which there were no comparable fees in the current period.
GROSS PROFIT
Gross profit for the three months ended March 31, 2000 was $473,000 (94% of
revenue) compared to gross profit of $357,000 (99% of revenue) in the comparable
period last year, an increase of 32%. Gross profit primarily increased due to
the increase in revenue. Gross margin decreased due to commissions paid to
foreign sales reps in the current period on higher running royalties, compared
to lower commissions earned on lower running royalties in the comparable period
last year since non-recurring engineering fees are not commissionable.
OPERATING EXPENSES
Operating expenses in the three months ended March 31, 2000 were $285,000 (56%
of revenue) compared to operating expenses of $335,000 (93% of revenue) in the
comparable period last year, a decrease of 15%. The decrease in operating
expenses for the three months ended March 31, 2000 resulted primarily from
reduced headcount and corporate office expense from the comparable period last
year.
General and Administrative
General and administrative expenses in the three months ended March 31, 2000
were $72,000 (14% of revenue) compared to general and administrative expenses of
$104,000 (29% of revenue) in the comparable period last year, a decrease of 31%.
The decrease in general and administrative expense resulted from a reduction in
corporate office rent expense and the elimination of consulting services
utilized in the comparable period last year.
Research and Development
Research and development expenses in the three months ended March 31, 2000 were
$113,000 (22% of revenue) compared to research and development expenses of
$158,000 (44% of revenue) in the comparable period last year, a decrease of 28%.
The decrease in such expenses resulted primarily from lower engineering
headcount in the current period as compared with the comparable period last
year.
Sales and Marketing
Sales and marketing expenses in the three months ended March 31, 2000 were
$100,000 (20% of revenue) compared to sales and marketing expenses of $73,000
(20% of revenue) in the comparable period last year, an increase of 37%. The
increase in sales and marketing expense resulted primarily from greater
international travel in the current period and marketing support expense as
compared with the comparable period last year.
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NET INCOME
Net Income in the three months ended March 31, 2000 was $171,000 (34% of
revenues) compared to net income of $2,000 (1% of revenue) in the comparable
period last year, an increase of 8,450%. The increase in net income was the
result of the increase in revenues and the reduction in operating expenses,
partially offset by lower gross margin.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had $1,713,000 in cash and cash equivalents as compared to
$1,022,000 at December 31, 1999. The increase in cash and cash equivalents is
attributed to cash provided by the exercise of options to purchase shares of
common stock and cash provided by other operating activities. We had working
capital of $1,011,000 at March 31, 2000 as compared with working capital of
$395,000 at December 31, 1999. Our future cash flow will come primarily from the
audio signal processing licensing business' Foundry and Original Equipment
Manufacturers' ("OEM") royalties and common stock issuances including warrant
and option exercises. At March 31, 2000 we had six Foundry licensees,
seventy-six OEM Licensees and fourteen authorized customers for its audio signal
processing business, the same number at December 31, 1999. We are 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.
We have related party obligations of $225,000, which are convertible into Common
Stock at our or Debtee's option. The obligation matures in June 2001. The
Company owed a total of $337,500 to related parties as of March 31, 2000 and
December 31, 1999.
On April 14, 1998, we entered into a private placement for up to $5 million of
which $3 million was 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 $3
million. In connection with the April funding, we 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 our common stock for the
10 days preceding the closing. In addition, cash placement fees of 10% were
paid. A related party 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. We do not expect any additional investment above the initial
$3 million to be received under this placement. At December 31, 1999, 60,000
shares of Series A Convertible Preferred Stock, representing the entire
placement had been converted into a total of 30,517,943 shares of our Common
Stock, some of which are covered by Form S-3 and the balance of which were
issued as restricted shares.
On September 25, 1998, we announced that our Board of Directors was refocusing
our business on the exploitation of its audio technologies, and, as noted above,
to properly position the MultiDisc assets for sale. Currently we are 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, we indicated that while we recognized the
prospects of MultiDisc, the capital investment required to properly
commercialize the technology was beyond our capacity and, therefore, we 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 continued to serve as chairman of the board
and director of the Company until February 10, 2000. 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. Mr. Mandell was
elected as a director by the stockholders on February 10, 2000 and also was
designated chief executive officer and chairman of the board.
We 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,
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NASDAQ provided us 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, we informed NASDAQ that we would be unable to
comply with these requirements. On January 5, 1999, our common stock was
delisted from the NASDAQ SmallCap Market and, on the same day, commenced trading
on the NASD Bulletin Board under the symbol "SPAZ".
In December 1999, we completed a set of financial transactions (the "December
Transactions") with certain existing holders of our equity and debt and with new
institutional investors. The December Transactions included the private
placement of 1,884,254 additional shares of our Common Stock ($1.05 million in
new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000
shares of Common Stock exercisable for three years at an exercise price of $.67
per share), the cancellation of 500,000 warrants to acquire Common Stock issued
in that earlier financing, the conversion of $1 million of short term debt into
a new Series B Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") and the conversion of $225,000 of secured debt into secured convertible
debt.
In the December Transactions, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56
per share and a maximum of $1.12 per share. We have a three year option to
redeem any Series B Preferred Stock, not sooner converted, in whole or in part,
in cash.
In the December Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long term convertible debt. The long term
debt is held by existing institutional investors and is secured by essentially
all of our assets. The debt, and accrued interest, is convertible at our or the
holder's options into registered Common Stock at a conversion price equal to the
average 10 day closing bid price prior to conversion but subject to the same
minimum and maximum conversion prices set for the Series B Preferred Stock.
Funds generated by these financing activities as well as cash generated from our
existing operations is expected to be sufficient for us to meet our operating
obligations and the anticipated additional research and development for its
audio technology business.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the year ended December 31,
1999 as filed with the Commission on March 30, 2000, with respect to the
Company's litigation with QSound Labs, Inc. and others.
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 which claims have either been
settled or are pending resolution and funding if Company resources allow. In
September 1999, an entry of judgement in the Municipal Court of Santa Clara
County, California was entered on behalf of one claimant in the amount of
$8,307.30. In February, 2000, an appeal was heard in the Superior Court of
Orange County, California, relating to a claim filed by a former employee of MDT
for back vacation pay and penalties. In March 2000, both parties agreed to
dismiss the action as part of a settlement.
No other matters occurred during the period covered by this report, nor were
there any other material developments to previously reported matters during the
period covered by this report.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 10, 2000 the Company held its annual meeting of stockholders (the
"Annual Meeting") at which stockholders were asked to vote (1) for the directors
of the Company for the following year; and (2) to approve an increase (the
"Capital Stock Increase") in the total amount of the Company's authorized common
stock (the "Common Stock"), $.01 par value per share, from 50,000,000 authorized
shares of Common Stock, to 65,000,000 authorized shares of Common Stock by means
of an amendment to the Company's Certificate of Incorporation. All nominated
directors were unopposed and elected at the Annual Meeting, with Mr. Stephen W.
Desper receiving 29,410,357 votes in favor, while authority was withheld on 43,
177 shares, Mr. Carlo Civelli receiving 29,410,357 votes in favor, while
authority was withheld on 43, 177 shares and with Mr. Henry R. Mandell receiving
29,410,357 votes in favor, while authority was withheld on 43, 177 shares. The
Capital Stock Increase was approved by the vote of 29,158,891 shares of the
Company with 246,174 shares voting against, 48,469 shares abstaining and 0
broker non-votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
On January 18, 2000, the Company filed a report on Form 8K. The report on Form
8K described a set of financial transactions (the "December Transactions") under
taken by the Company in December 1999 with certain existing holders of the
Company's equity and debt and with new institutional investors. The December
Transactions included the private placement of 1,884,254 additional shares of
the Company's Common Stock ($1.05 million in new capital or $0.55725 per share),
the issuance of warrants to acquire 2,100,000 shares of
13
<PAGE> 14
Common Stock exercisable for three years at an exercise price of $.67 per
share), the cancellation of 500,000 warrants to acquire Common Stock (at a
variable exercise ratio), the conversion of $1 million of short term debt into a
new Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock")
and the conversion of $225,000 of secured debt into secured long term
convertible debt.
14
<PAGE> 15
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: May 9, 2000
SPATIALIZER AUDIO LABORATORIES, INC.
(REGISTRANT)
/s/ HENRY R. MANDELL
----------------------------------------------
HENRY R. MANDELL
Chairman of the Board, Chief Executive Officer
Chief Financial Officer and Secretary
15
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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