<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
--------------------------
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the period ended: JUNE 30, 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)
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 July 28, 2000 there were 46,661,002 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,504,992 $ 1,021,998
Accounts Receivable, net 495,856 687,595
Employee Advances 1,003 -
Inventory 12,993 12,993
Prepaid Expenses and Deposits 59,490 22,640
------------ ------------
Total Current Assets 2,074,334 1,745,226
Property and Equipment, net 112,956 132,803
Capitalized Patent and Technology Costs, net 212,386 207,793
Other Assets 32,177 32,177
------------ ------------
Total Assets $ 2,431,853 $ 2,117,999
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes Payable 14,150 14,149
Notes Payable to Related Parties 337,742 337,742
Accounts Payable 33,631 234,117
Accrued Wages and Benefits 76,238 53,136
Accrued Expenses and Taxes 158,861 291,118
Net Liabilities of Discontinued Operation 337,059 419,600
------------ ------------
Total Current Liabilities 957,681 1,349,862
Shareholders' Equity:
Series B, 10% Redeemable Convertible Preferred shares, $.01 par value,
1,000,000 shares authorized, 102,967 and 102,967 shares issued and
outstanding at June 30, 2000
and December 31, 1999, respectively 1,030 1,030
Common shares, $.01 par value, 50,000,000 shares
authorized, 46,661,002 and 46,174,970 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 466,613 461,750
Additional Paid-In Capital 46,332,100 45,913,503
Accumulated Deficit (45,325,571) (45,608,146)
------------ ------------
Total Shareholders' Equity 1,474,172 768,137
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,431,853 $ 2,117,999
============ ============
</TABLE>
2
<PAGE> 3
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Six Month Period Ended
-------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License Revenues $ - $ - $ - $ -
Royalty Revenues 530,050 294,122 1,035,700 652,052
Product Development Revenues - - - -
Product Revenues - - - -
------------ ------------ ------------ ------------
530,050 294,122 1,035,700 652,052
Cost of Revenues 65,589 7,784 98,066 8,619
------------ ------------ ------------ ------------
Gross Profit 464,461 286,338 937,634 643,433
Operating Expenses:
General and Administrative 172,601 107,709 244,789 211,877
Research and Development 88,850 92,741 202,044 250,460
Sales and Marketing 87,151 49,216 186,686 122,378
------------ ------------ ------------ ------------
348,602 249,666 633,519 584,715
------------ ------------ ------------ ------------
Operating Profit 115,859 36,672 304,115 58,718
Interest Income 17,232 1,046 30,902 3,801
Interest Expense (9,047) (24,139) (17,171) (45,696)
------------ ------------ ------------ ------------
8,185 (23,093) 13,731 (41,895)
------------ ------------ ------------ ------------
Income Before Income Taxes 124,044 13,579 317,846 16,823
Income Taxes (12,000) (2,000) (35,271) (3,000)
------------ ------------ ------------ ------------
Net Income $ 112,044 $ 11,579 $ 282,575 $ 13,823
============ ============ ============ ============
Basic/Diluted Earnings Per Share $ 0.00 $ 0.00 $ 0.01 $ 0.00
============ ============ ============ ============
Weighted Average Shares
Outstanding 46,661,002 29,155,651 46,518,032 28,575,159
============ ============ ============ ============
</TABLE>
3
<PAGE> 4
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 282,575 $ 13,823
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and Amortization 42,229 17,156
Options Issued for Services - -
Net change in Assets and Liabilities:
Accounts Receivable and Employee Advances 190,736 (201,651)
Inventory - (5,000)
Prepaid Expenses and Deposits (36,850) (4,774)
Deferred Transaction Costs - -
Accounts Payable (200,486) 44,722
Deferred Revenue - (250,000)
Changes in Discontinued Operation (82,541) (8,394)
Accrued Liabilities (109,153) (120,386)
----------- -----------
Net Cash Provided (Used) In Operating Activities 86,510 (514,504)
----------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (11,879) (1,570)
Increase in Capitalized Patent and Technology Costs (15,097) 4,672
----------- -----------
Net Cash Provided (Used) in Investing Activities (26,976) 3,102
----------- -----------
Cash flows from Financing Activities:
Issuance of Preferred Shares, Net - -
Exercise of Options 423,460 -
Exercise of Warrants - -
Issuance of Notes Payable - 360,000
Issuance of Related Party Payable - -
Repayment of Bank Line of Credit - -
Repayment of Notes Payable - (484)
----------- -----------
Net Cash Provided by Financing Activities 423,460 359,516
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 482,994 (151,886)
Cash and Cash Equivalents, Beginning of Period 1,021,998 264,054
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,504,992 $ 112,168
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 16,875 $ -
Income Taxes - -
=========== ===========
</TABLE>
4
<PAGE> 5
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Series B, 10% Redeem. Conv.
Preferred Shares Common Shares
-------------------------- -------------------------- Total
Number of Number of Additional Accumulated Shareholders'
shares Par value shares Par value paid-in-capital Deficit Equity
------------ ------------ ------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 102,967 $ 1,030 46,174,970 $ 461,750 $ 45,913,503 $(45,608,146) $ 768,137
Issuance of Preferred Shares,
Net - - - - - - -
Options Exercised - - 486,333 4,863 418,597 - 423,460
Warrants Exercised - - - - - - -
Options Issued for Services - - - - - - -
Conv. of Pref. Shares, net - - - - - - -
Net Income - - - - 282,575 282,575
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 102,967 $ 1,030 46,661,303 $ 466,613 $ 46,332,100 $(45,325,571) $ 1,474,172
------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
5
<PAGE> 6
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 six-month period ended June 30, 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) EARNINGS 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 per
share with a presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings 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 per share
is computed similarly to fully diluted earnings 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
6
<PAGE> 7
during the six month periods ended June 30, 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 2,122,300
Warrants 2,730,000 1,017,000
---------- ----------
5,083,134 3,139,300
========== ==========
</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 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 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 six-month periods ended June 30, 2000 and 1999. As a result,
comprehensive income is the same as the net income for the six-month periods
ended June 30, 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 June 30, 2000, we have only one operating segment, DPI, the Company's Audio
Signal Processing business.
(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 six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Customer A 39% 37%
Customer B 27% 26%
Customer C 10% 7%
</TABLE>
(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 has been
7
<PAGE> 8
settled. The settlement specifies that 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
were terminated and have filed various employment and compensation related
claims with the various State labor authorities all but two of which claims have
either been settled or have been paid. 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. In
July 2000, the Labor Commission of the State of California awarded $122,000 to a
claimant arising from a claim for commissions over a three-year period. We are
appealing the order in the Superior Court of California, Santa Clara County.
Under California law, the Labor Commission order will have no effect on the
court's consideration of the matter. The outcome of the appeal can not be
determined at this time.
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, which are covered by Form S-1.
In the December 1999 transaction, $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.
(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 shares to be issued
on exercise of the warrants for resale under Form S-1, as required by the
placement documents.
8
<PAGE> 9
(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.
9
<PAGE> 10
Item 2. Management's discussion and analysis of financial condition and results
of operations
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 June 30, 2000 were $530,000, compared to
revenues of $294,000 in the comparable period last year, an increase of 80%. The
increase in such revenues resulted primarily from running royalties earned in
the second 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
digital signal processor (DSP) sales by our licensees. This increase was
partially offset by lower royalty rates as compared to those earned in the
comparable period last year. Some of our license agreements provide for royalty
rate reductions as volume milestones are achieved. As such, the royalty rates
earned in the comparable period when one licensee initially began shipping its
DSP were significantly higher when cumulative volume levels were low. Virtually
all volume milestones have been achieved at June 30, 2000, which should result
in the stabilization of the royalty rate going forward.
GROSS PROFIT
Gross profit for the three months ended June 30, 2000 was $464,000 (88% of
revenue) compared to gross profit of $286,000 (97% of revenue) in the comparable
period last year, an increase of 62%. 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 due to a change in mix to higher
foreign sourced revenue which is commission bearing.
OPERATING EXPENSES
Operating expenses in the three months ended June 30, 2000 were $349,000 (66% of
revenue) compared to operating expenses of $250,000 (85% of revenue) in the
comparable period last year, an increase of 40%. The increase in operating
expenses for the three months ended June 30, 2000 resulted primarily increased
sales and marketing activity, legal expense, office consolidation expenses and
the launch of an investor relations program.
General and Administrative
General and administrative expenses in the three months ended June 30, 2000 were
$173,000 (32% of revenue) compared to general and administrative expenses of
$108,000 (37% of revenue) in the comparable period last year, an increase of
60%. The increase in general and administrative expense resulted from an
increase in legal expenses relating to the I.N and labor settlements, corporate
office consolidation expenses and the launch of an investor relations program.
Research and Development
Research and development expenses in the three months ended June 30, 2000 were
$89,000 (17% of revenue) compared to research and development expenses of
$93,000 (32% of revenue) in the comparable period last year, a decrease of 4%.
The decrease in such expenses resulted primarily from lower engineering
headcount in the current period as compared with the comparable period last
year. However, due to new hires late in the quarter, engineering headcount at
June 30, 2000 was higher than the comparable period last year.
Sales and Marketing
Sales and marketing expenses in the three months ended June 30, 2000 were
$87,000 (16% of revenue) compared to sales and marketing expenses of $49,000
(17% of revenue) in the comparable period last year, an increase of 78%. 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.
10
<PAGE> 11
NET INCOME
Net Income in the three months ended June 30, 2000 was $112,000 (21% of
revenues) compared to net income of $12,000 (4% of revenue) in the comparable
period last year, an increase of 833%. The increase in net income was the result
of the increase in revenues, partially offset by lower gross margin and the
increase in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $1,505,000 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 $1,117,000 at June 30, 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 June, 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 $337,700 to related parties as of June 30, 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, which are covered by Form S-1.
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, 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
11
<PAGE> 12
$.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.
12
<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,
2000 with respect to the Company's litigation with QSound Labs, Inc. and others.
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 has
been settled. The settlement specifies that 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
were terminated and have filed various employment and compensation related
claims with the various State labor authorities all but two of which claims have
either been settled or have been paid. 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. In
July 2000, the Labor Commission of the State of California awarded $122,000 to a
claimant arising from a claim for commissions over a three-year period. We are
appealing the order in the Superior Court of California, Santa Clara County.
Under California law, the Labor Commission order will have no effect on the
court's consideration of the matter. The outcome of the appeal can not be
determined at this time.
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.
No material developments in such litigation occurred during the three-month
period ended June 30, 2000
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.
13
<PAGE> 14
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) 21.1 Schedule of Subsidiaries of the Company:
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: August 2, 2000
SPATIALIZER AUDIO LABORATORIES, INC.
(REGISTRANT)
/s/ HENRY R. MANDELL
------------------------------------------
HENRY R. MANDELL
CHAIRMAN OF THE BOARD
Chief Executive Officer
Chief Financial Officer
