-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SV5YAIZAPTsfYQAqbgMrFWbIvZrqeP/m8su2mhjhHQv3wnwRSz27mLlsducXJtyb xcNocMJ7sdhJIwaVvlvJ+A== 0000950150-00-000247.txt : 20000331 0000950150-00-000247.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950150-00-000247 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 28 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPATIALIZER AUDIO LABORATORIES INC CENTRAL INDEX KEY: 0000890821 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 954484725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26460 FILM NUMBER: 586905 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 10-K405 1 FORM 10-K405 YEAR ENDED DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED: DECEMBER 31, 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 (I.R.S. 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant at March 24, 2000 was approximately $83,669,000. As of March 24, 2000, there were 46,174,970 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Overview Spatializer Audio Laboratories, Inc. ("The Company" or "we") is a leading developer, licensor and marketer of next generation technologies for the consumer electronics, personal computing, enterprise computing and entertainment industries. Our position as a leading developer of next generation technologies is based on our strong relationships with brand leaders, such as Apple, Toshiba and Hitachi. We conduct our audio business through our parent company and our wholly owned subsidiary, Desper Products, Inc. ("DPI"). DPI has developed a full complement of patented and proprietary 3-D or virtual audio signal processing technologies directed to the consumer electronics and multimedia PC markets. We continue to expand our product offerings to take advantage of the emerging digital audio marketplace specifically for consumer products like Digital Versatile Disc ("DVD") for personal computers, and home entertainment; and interactive positional audio for PC gaming on the Windows 95/98(TM) platforms. As of December 31, 1999, more than 17 million licensed units had been shipped covering all of these applications. DPI's 3-D audio signal processing technologies have been incorporated in over 380 products offered by global brand leaders including in consumer electronics, Toshiba, Panasonic, JVC, Hitachi, Mitsubishi, Samsung, Sanyo, Goldstar, Emerson, Zenith and Proton, in the PC multimedia marketplace, Apple, Compaq, Dell, Gateway, Hewlett Packard, Sony, Micron, Fujitsu, NEC, Seiko-Epson and Labtec, among others, and on the Internet through software plug-ins for the WinAmp and Xing MP3 players. We are focused on broadening recognition for the Spatializer brand name through association with these and other globally recognized consumer electronics and multimedia computer brand leaders, and on broadening our audio technology and software base to position ourselves for continued growth. We believe that with the accelerating growth in the digital audio/video marketplace, the market for virtual audio technologies, and therefore for our products, is entering a new phase of opportunity. Our other wholly owned subsidiary, MultiDisc Technologies, Inc., ("MDT") formed in June 1996 when we acquired development stage optical disc storage and robotics assets and technologies from Home Theater Products, International, Inc., a debtor in possession, is now inactive. In September 1998, we announced our plan to refocus our business on the exploitation of our core audio technologies, suspend research and development at MDT and to properly position the MultiDisc assets for sale. Therefore, MDT has been accounted for as a discontinued operation. Since 1998 we have been unsuccessful in identifying a purchaser for this technology. This repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond our current capacity. We believe this strategy provides a better opportunity to further solidify our position as a leading provider of virtual audio solutions, based on available capital resources. In December 1999, we completed the placement of $1 million of Common Stock, at no discount from market, the conversion of $1 million of short-term debt to new Series B Redeemable Convertible Preferred Stock and the restatement of $225,000 of existing secured debt to secured long-term debt (the "December Transactions"). The December Transactions significantly strengthen our balance sheet and restore working capital and shareholder's equity. The resulting liquidity will allow us to emerge from turnaround mode and to pursue growth. Our executive offices are located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, Telephone (818) 227-3370. We maintain a Website at www.spatializer.com. We were incorporated in the State of Delaware in February, 1994. 2 3 DESPER PRODUCTS, INC. -- 3-D AUDIO SIGNAL PROCESSING TECHNOLOGIES DPI has developed a suite of proprietary advanced audio signal processing technologies for the entire spectrum of applications falling under the general category of "3-D" or virtual audio. The objective in each product category is to create or simulate the effect of a multi-speaker sonic environment using two ordinary speakers (or headphones) for playback. The market for 3-D audio is segmented into five broad categories of technology as identified in the listing below. Each of these technologies utilizes different underlying scientific principles in accomplishing its design objectives and is targeted to a specific class of consumer electronics or multimedia computer depending on the intended product use and functional capability of the product. DPI currently has other audio signal processing technologies under development which will serve to expand its market scope and partner product capabilities.
- ---------------------------------------------------------------------------------------------------------- CATEGORY OF TECHNOLOGY PRODUCT CATEGORIES 3-D AUDIO ENHANCEMENT - ---------------------------------------------------------------------------------------------------------- 3-D Stereo Consumer electronics products Surround Sound enhancement from an (Spatializer(R) 3-D Stereo) providing stereo playback -- DVD ordinary stereo signal Players, Stereo TV's, VCR's, Stereo Components and Systems, Car Audio, Laptop and Desktop Multimedia Computers, Set-top Boxes - ---------------------------------------------------------------------------------------------------------- Positional Audio Interactive Gaming for Multimedia Simulation of immersive, (Spatializer enCompass(TM) V2.0) Computers under Windows '95/'98, interactive sonic environments Virtual Reality Applications. including sound objects that move in real time with related graphics objects or changes in game player position or perspective. - ---------------------------------------------------------------------------------------------------------- Two-Speaker Virtualization Products incorporating Creation of spatially accurate (Spatializer N-2-2(TM)) Digital multi-channel audio sources like multi- speaker cinematic audio Virtual Surround Dolby Digital(R) (AC-3), Dolby experience from two speakers, and ProLogic(R) or MPEG-2. Home headphones utilizing discrete Theater, DVD-Video, Multimedia multi-channel audio information. Computers utilizing DVD/MPEG and decoding. - ---------------------------------------------------------------------------------------------------------- Bass Enhancement Consumer electronics products Simulation of lower frequency (Vi.B.E.(TM)) providing stereo playback -- DVD response from speakers with Players, Stereo TV's, VCR's, relatively high low frequency Stereo Components and Systems, Car capability Audio, Laptop and Desktop Multimedia Computers and Speakers - ---------------------------------------------------------------------------------------------------------- Internet Audio Enhancement Laptop and Desktop Multimedia Surround Sound and bass (Spatializer(R) StreamFX(TM)) Computers and portable music enhancement to playback of devices running MP3 media player ordinary MP3 files software - ----------------------------------------------------------------------------------------------------------
LICENSED PRODUCTS Our current technology product applications are directed to (1) stereo enhancement in consumer electronics products and multimedia PCs, (2) interactive positional audio for PC gaming, and (3) two-speaker and headphone virtualization of multi-channel audio for DVD based multimedia computer and home theater applications. 1. SPATIALIZER(R) 3D STEREO. Based upon proprietary and patented methods of stereo signal processing, the Company's Spatializer(R) 3-D Stereo technology is designed to create a vivid and expansive three- dimensional surround sound listening experience from any stereo source input using only two ordinary speakers. Along with professional audio quality and coherent stable sonic imaging, the technology includes the Company's unique DDP(TM) (Double Detect and Protect(TM)) algorithm. DDP(TM) continuously monitors the underlying stereo signal and dynamically optimizes spatial processing, avoiding deleterious sonic artifacts common in other systems and provides "set and forget" ease of use for consumers. First introduced in July 1994, in the form of a 20 pin analog integrated circuit (IC) from 3 4 Matsushita Electronics Corporation ("MEC"), the technology is now incorporated into low-cost, standard process ICs by four chip foundries (Matsushita, ESS Technologies, Inc., OnChip Systems and Luxsonor) for easy and inexpensive implementation in any consumer electronics or computer products utilizing stereo audio. The technology is currently available in both analog and digital formats. Matsushita introduced a new Spatializer IC design in 1999, offering the Spatializer 3-D Stereo effect in a simplified, lower cost package. 2. SPATIALIZER(R)ENCOMPASS(TM) V2.0. In March 1998, we introduced Spatializer(R) enCOMPASS(TM) V2.0, a real-time software-only positional 3-D audio engine based upon our proprietary implementation of HRTF (head related transfer functions) algorithms, and Interaural Intensity and Interaural Time differences. Version 2.0 has variable radiation pattern models for greater sound functionality, variable frequency dependent propagation and distance modeling to provide greater depiction of sound in relation to the player, and a choice of rendering quality levels to address different processing requirements between PC CPUs. Spatializer enCOMPASS permits PC game developers to easily create immersive and interactive audio environments under the Windows '95 DirectSound 3-D audio API where sound objects move in real time in response to changes in the location or the perspective of the player in the game. This provides the game designer the ability of developing under the industry standard Microsoft DirectSound 5.0 open API, rather than under proprietary systems. The system supports playback over speakers or through headphones. On December 23, 1998, the Company signed its first license of Spatializer(R) enCOMPASS(TM) with Apple Computer, Inc., which released the technology in its products in October 1999. 3. SPATIALIZER(R) N-2-2(TM)DIGITAL VIRTUAL SURROUND. In September 1996, DPI introduced Spatializer N-2-2, which the Company considers a "core", and "enabling" technology for DVD based personal computer and home theater products. DVD is considered by many to be the single most important and potentially most widely adopted consumer audio/computer technology ever introduced. The audio standards for DVD (based upon geographic region) are multi-channel audio formats (Dolby Digital(R) (AC-3) and MPEG-2) which carry six (or more) discrete (independent) channels of audio -- the front left and right channels, a center channel (for vocal tracks), two rear surround channels and a Low Frequency Effects (LFE or "sub-woofer") channel for sound effects. The Spatializer N-2-2 software-based algorithms permit spatially accurate reproduction of this multi-channel audio over any ordinary stereo system using two rather than the five or six speakers normally required in traditional home theater setups. Spatializer N-2-2 runs in real-time on general purpose Digital Signal Processing ("DSP") hardware platforms like those offered by C-Cube, Acer Labs, Inc., Motorola, and Zoran; may be integrated with host based software-only MPEG-2 or DVD decoders (like SoftDVD and DVDExpress, offered by CompCore Multimedia and Mediamatics, respectively, for the Intel(R) Pentium(R) microprocessors); and can be ported to any of the principal audio codecs or media processor/accelerator platforms performing Dolby Digital (AC-3) or MPEG-2 audio decoding. N-2-2 has been approved by Dolby Laboratories and qualifies Spatializer licensees to use the newly created Dolby Digital VIRTUAL(TM) trademark on products incorporating the technology. We believe our Spatializer N-2-2 process will serve to widen and accelerate the market for DVD acceptance, because it delivers the full cinematic audio experience to ordinary consumers without the additional expense and complication of multi-speaker home theater playback systems. The Spatializer N-2-2 technology is also available for use over headphones, which accurately renders a spatially accurate 5 speaker position simulating the typical home theater arrangement. In the third quarter 1999, we licensed Spatializer N-2-2 to Acer Labs, Inc. 4. SPATIALIZER(R)VI.B.E. In early 1999, DPI introduced Spatializer Vi.B.E., a virtual bass enhancement technology. Spatializer Vi.B.E. produces a dynamic bass response from even the lowest-end speakers or headphones. Spatializer Vi.B.E. uses proprietary technology to generate realistic bass frequencies that are unaffected by speaker system frequency response. 5. SPATIALIZER(R)STREAMFX. Spatializer StreamFX creates a dramatic and enveloping sound experience out of any pair of regular speakers or headphones when playing MP3 music files. Spatializer StreamFX utilizes Spatializer 3-D Stereo and is a long-time favorite of both movie and sound studios 4 5 in addition to numerous audio product manufacturers. Combined with Vi.B.E., this product widens and deepens the soundfield to surround the listener with rich and ambient enhanced audio. A headphone option generates the same equally immersive experience over headphones creating a dramatic audio experience. LICENSING ACTIVITIES We have traditionally licensed our technologies through semiconductor manufacturing and distribution licenses ("Foundry Licenses") with semiconductor foundries ("Foundries"). In turn, these Foundries manufacture and distribute integrated circuits ("ICs") incorporating Spatializer technology to manufacturers of consumer electronics and multimedia computer products ("OEMs"). The terms of the Foundry Licenses are negotiated on an individual basis requiring the payment of a per unit running royalty according to sliding scales based upon cumulative volume. Certain of the licenses call for the payment of an up-front license issuance fee either in lieu of, or in addition to the running royalty. Per unit royalties are payable in the quarter following shipment from the Foundry to the OEM. OEMs who desire to incorporate these ICs into their products are required to enter into a license ("OEM Licenses") with us before they may purchase the ICs in quantity. Foundry Licenses generally have limited the sale of Spatializer ICs to OEMs who have entered into an OEM License with us. OEM licenses generally provide for the payment of a further per unit royalty by the OEM for OEM products incorporating a Spatializer IC ("Licensed Products") payable in the quarter following shipment by the OEM of its Licensed Products. In mid-1996, we modified our licensing program to ease the licensing process and accelerate cash flow by offering Foundries an alternative "Bundled Royalty" arrangement which permits the IC foundry to make a traditional component IC sale to an OEM without requiring the OEM to negotiate a separate royalty license agreement with the Company. In these situations, the IC Foundry is authorized to sell Spatializer ICs to OEMs, which enter into a simplified Logo Usage Agreement ("LUA"), or to be authorized customers in consideration for a higher ("bundled") per unit royalty from the IC Foundry. This license structure has relieved much of the licensing burden from the IC foundries and has resulted in an increase in License signings. Because the Spatializer N-2-2 technology may be fully implemented in software to run in host based (Intel Pentium(R)) or general purpose DSP (C-Cube, Motorola, Zoran, and Acer Labs) environments, no IC Foundry may be involved, as is the licensing arrangement with Apple Computer, Inc. In these situations, we will enter into royalty bearing licenses directly with the OEM. However, we may still pursue bundled agreements with DSP providers, if appropriate. We are currently negotiating new IC/DSP Foundry and OEM licenses for its N-2-2, enCOMPASS V2.0, and 3-D stereo technologies. IC Foundry Licenses In October 1999, Acer Labs, Inc. entered into a Foundry License for Spatializer N-2-2. As of December 31, 1999, we have entered into six non-exclusive Foundry Licenses for its 3-D Audio Signal Processing technologies with Matsushita Electronics Corporation ("MEC"), ESS Technology, Inc. ("ESS"), OnChip Systems, Inc. ("OnChip") C-Cube Technologies, Inc. ("C-Cube") Acer Labs, Inc. ("Ali") and Luxsonor. Foundry Licenses generally require the payment of per unit running royalties based upon a sliding scale computed on the number of Spatializer ICs or DSPs sold. MEC currently manufactures and sells four 3-D Stereo IC's incorporating Spatializer audio signal processing and has several more ICs in design. ESS currently manufactures and sells two Spatializer(R) ICs, which are primarily used for multimedia and notebook applications. OnChip currently manufactures three versions of the 3-D Stereo Spatializer(R) IC. C-Cube currently incorporates N-2-2 on their Ziva-3 DSP and Ali incorporates N-2-2 into their M3321 DSP. 5 6 As of December 31, 1999, more than 17 million ICs and DSPs incorporating Spatializer 3-D audio signal processing and N-2-2 digital virtual surround sound technology had been manufactured and sold. OEM Licensees and Customers As of December 31, 1999, our technology has been incorporated in products offered by over 90 separate OEM Licensees and customers on various economic and business terms. Some of these OEM Licenses required a license issuance fee and/or a separate per unit royalty, while others were licensed under the LUA or were authorized customers under bundled royalty licenses with the IC foundries. The OEM licensees and customers offer a wide range of products, which include DVDs, car stereo systems, direct view TVs, wide screen and projection TVs, VCRs, powered speakers, portable audio systems ("Boomboxes"), HiFi stereo systems and components, computer sound cards and graphics accelerator cards, multimedia desktop personal computers, notebook computers, LCD projectors, multimedia computer monitors, and arcade pinball and video games. The following table is a partial list of the OEM Licensees and authorized customers as of December 31, 1999:
- --------------------------------------------- --------------------------------------------- PARTIAL LIST OF OEM LICENSEES OR CUSTOMERS LISTING -- CONTINUED - --------------------------------------------- --------------------------------------------- Apple, Computer Inc. NEC Compaq Computer Corp. Panasonic TV & VCR (Matsushita Kotobuki Dell Computer Corp. Electronics Industries, Ltd.) Digital Technology Systems Of California, Panasonic Car Audio (Matsushita Inc. Communications Industrial Co., Ltd.) Emerson Proton Electronic Industrial Co., Ltd. Fujitsu Computer Corp. Samsung Hewlett Packard Seiko Epson Corp. Hitachi, Ltd. Sanyo Corp. Iiyama Electric Co., Ltd. Sharp Corp. Gateway Computer Corp. Toshiba DVD Golden Regent Toshiba TV LG Electronics Taisei Electric, Inc. JVC Taiyo Electric Company, Ltd. Labtec Enterprises, Inc. Texas Instruments Mag Monitors Theta Digital Marantz VM Labs, Inc. Micron Computer Corp Zenith Mitsubishi Image and Information Works - --------------------------------------------- ---------------------------------------------
HARDWARE PRODUCTS Sales of our professional and consumer hardware products to date have not generated significant revenues and we do not plan to manufacture these products in the future. Instead, we are focusing our attention on licensing these product designs to third parties and concentrating on software-only products and "plug-ins" for use with MP3 players for PC platforms and portable audio devices. MultiDisc Technologies, Inc. -- Network Based Modular, Scaleable Compact Disc/DVD Servers As its first effort to broaden our technology portfolio and capitalize on our strong relationships with manufacturers of consumer electronics and personal computer peripheral products, the Company acquired certain developmental stage technologies and assets from Home Theatre Products ("HTP"), for approximately $1,062,000 in June 1996 and formed a subsidiary, MDT. The MultiDisc transaction, which was implemented through a court-approved sale in the HTP bankruptcy proceeding, included an array of compact disc server robotics and software technologies in various stages of completion. The MultiDisc transaction was intended to position the Company for long term growth in a significant new market. The Company expects to license this technology or enter into third party manufacturing arrangements for sale of MDT CD/DVD changer products to OEMs. 6 7 The MultiDisc transaction brought a unique combination of proprietary electromechanical designs, robotics, operating software, firmware, intellectual property, and engineering know-how and five patent applications acquired in the asset acquisition. MDT added an additional forty-seven patent applications filed with the United States Patent & Trademark Office ("USPTO") to bring the total to fifty-two patent applications filed. On September 25, 1998, we announced our plan to refocus our business on the exploitation of its core audio technologies and to properly position the MultiDisc assets for sale. The repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond the Company's capacity. As a result, all research and development activities were suspended and the Company has accounted for MDT as a discontinued operation. The Company has explored the sale of the business or the patent portfolio with interested parties, but to date, no transaction has been consummated. Revenues and Expenses We generate revenues in its audio business from royalties pursuant to its Foundry, OEM, and other licenses, and from non-recurring engineering fees to port our technologies to specific licencees' applications. The Company's revenues, which totaled $1,660,371 in 1999, were derived substantially from Foundry and OEM license fees and royalties. We seek to maximize return on our intellectual property base by concentrating its efforts in very high margin licensing and software products and has eliminated its hardware product operations. Licensing operations have been managed internally by our personnel and through use of an international sales rep force. We had four major customers, C-Cube Technologies, Inc., Apple Computer, Inc., Matsushita Electronics Corp. (MEC) and Toshiba Corporation in 1999, each of whom accounted for greater than 10% of our total 1999 revenues. One OEM accounted for 30%, another accounted for 26% and two accounted for between 10% and 15% of our royalty revenues during 1999. All other OEM's accounted for less than 10% of royalty revenues individually. In September, 1998, the U.S. Court of Appeals for the Federal Court upheld the U.S District Court's ruling of August 1996, in which we prevailed in a 22-month legal battle over its 3-D Stereo intellectual property when the U.S. District Court granted the Company's motion for summary judgment against a competitor's assertions of patent infringement.. (See ITEM 3 -- LEGAL PROCEEDINGS, Page 8, for further detail). The uncertainties caused by the patent litigation had hindered our corporate results, particularly since licensing revenue depends upon OEM unit shipments, which follow three to four quarter production cycles. The resolution of this litigation contributed to the Company's ability to attract new licensing and financing arrangements and to reposition the Company for positive growth in profitability. In September 1998, we implemented cost cutting measures in conjunction with the suspension of our research and development activities at MDT and to further rationalize the overhead of Desper Products and the corporate office in response to lower levels of operating performance. The result of these initiatives was to reduce 1999 operating costs from 1998 levels, which enabled the Company to achieve profitable operating results in 1999. Competition 3-D AUDIO SIGNAL PROCESSING MARKETPLACE We compete with a number of entities that produce various audio enhancement processes, technologies and products, some utilizing traditional two-speaker playback, others utilizing multiple speakers, and others restricted to headphone listening. These include the consumer versions of multiple speakers, matrix and discrete digital technologies developed for theatrical motion picture exhibition (like Dolby Digital(R), Dolby ProLogic(R), and DTS(R)), as well as other technologies designed to create an enhanced stereo image from two or more speakers. 7 8 Our principal competitors in the field of 3-D audio are QSound Labs, Inc. ("QSound"), SRS Labs, Inc., Aureal Semi-conductor, Inc., CRL and Harman International. In the future, our products and technologies also may compete with audio technologies and product applications developed by other companies including entities that have business relationships with the Company. We believe that we will favorably compete in this market because we offer a single source, complete suite of patented and proprietary 3D Stereo, interactive positional, and speaker virtualization technologies, and because of our superior engineering and OEM support, the strength of our IC Foundry and OEM relationships, and the Spatializer brand name recognition in the industry. Patents, Trademarks and Copyrights Our core Spatializer audio signal processing technology is covered by our U.S. patent 5,412,731, issued May 2, 1995. On July 15, 1997, the Company filed a patent in the U.S. Patent office on our N-2-2(TM) intellectual property with the U.S. Patent Office. On March 20, 1998, we filed a patent on our enCompass V 2.0 technology with the U.S. Patent Office covering the Company's enCompass 2.0 positional audio gaming technology. Additional patent applications for our reduced cost/higher performance 3-D Stereo designs and other technologies are currently in process. Much of our intellectual property consists of trade secrets. We possesses copyright protection for its principal software applications and has U.S. and foreign trademark protection for its key product names and logo marks. The MultiDisc transaction brought a unique combination of proprietary electromechanical designs, robotics, operating software, firmware, intellectual property, and engineering know-how and five patent applications acquired in the asset acquisition. MDT added an additional forty-seven patent applications filed with the United States Patent & Trademark Office ("USPTO") to bring the total to fifty-two patent applications filed. However, due to the suspension of all operating activities of MDT, we are not pursuing these applications and some applications have lapsed. The core MDT data storage technology is covered by U.S. patents 5,774,431, 5,822,283, 5,886,960 and 5,886,974. We have either obtained or applied for U.S. trademark protection for its principal product names and logo marks. On September 25, 1998, we announced our plan to refocus our business on the exploitation of its core audio technologies and to properly position the MultiDisc assets for sale. The repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond our capacity. As a result, all research and development activities were suspended and we have accounted for MDT as a discontinued operation. Employees We began 1999 with thirteen full-time and five part-time employees and sales representatives and reduced our staff to five full-time and six part-time employees by December 31, 1999. At year-end, there were two employees engaged in research and development. From time to time, we also employ the services of outside professional consultants. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We consider our relations with our employees and consultants to be satisfactory. 8 9 PART II ITEM 2. PROPERTIES Our executive office is located in Woodland Hills, California where we occupy approximately 900 square feet with an annual rent of approximately $32,000. The lease term on this space is month to month. During 1999, we also had leased facilities in Mountain View, CA, and Santa Clara, CA. Our regional office in Mountain View, CA, was the primary location for our audio technology division, ("DPI"). We occupied approximately 4,200 square feet in this location and the annual rent on a triple net basis for these premises was approximately $101,000, with the lease term expiring December 31, 1999. This lease has not been renewed. On November 16, 1999, we entered into a lease for approximately 2,700 square feet of office space in Santa Clara, CA for DPI, and relocated our DPI office from Mountain View on December 12, 1999. The annual rent for this facility on a full service basis is approximately $75,000, with the lease expiring on November 30, 2002. Our regional office in Huntington Beach, CA, was the primary location for MDT. MDT occupied approximately 4,000 square feet of office in this location and the annual rent for these premises was approximately $50,000, with the lease term expiring July 31, 1999. In connection with the suspension of MDT operations, this space was vacated in November 1998. Rent deposits were forfeited in connection with a full settlement and termination of the lease. We lease our space at rental rates and on terms which management believes are consistent with those available for similar space in the applicable local area. Our properties are well maintained, considered adequate and are being utilized for their intended purposes. ITEM 3. LEGAL PROCEEDINGS 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, 9 10 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 October, 1999, a complaint was filed in the Superior Court of Orange County, California, by Bentall U.S. LLC, against the Company alleging breach of contract, and claiming $18,630.73 in damages, attorneys fees, interest and costs of the suit. This claim was settled and the complaint dismissed in November 1999. 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. The Company also anticipates that, from time to time, it may be named as a party to other legal proceedings that may arise in the ordinary course of its business. 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 fourth quarter of the fiscal year ended December 31, 1999. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock was listed and commenced trading on the NASDAQ SmallCap market on August 21, 1995 under the symbol "SPAZ". In January 1999, the shares were delisted by the NASDAQ SmallCap Market due to our inability to maintain listing requirements. Our Common Stock immediately commenced trading on the OTC Bulletin Board under the same symbol. The following table sets forth the high and low sales price of our Common Stock on its principal market for fiscal years 1998 and 1999:
PERIOD: HIGH (U.S. $) LOW (U.S. $) ------- ------------- ------------ 1998 First Quarter..................................... $2.88 $1.00 Second Quarter.................................... $1.56 $0.56 Third Quarter..................................... $0.75 $0.19 Fourth Quarter.................................... $0.25 $0.06 1999 First Quarter..................................... $0.44 $0.08 Second Quarter.................................... $0.36 $0.08 Third Quarter..................................... $0.90 $0.20 Fourth Quarter.................................... $0.96 $0.26
On March 24, 2000, the closing price reported by NASDAQ was U.S. $1.81. Stockholders are urged to obtain current market prices for our Common Stock. Beginning April 1, 1997, Harris Trust Company of California has been our transfer agent. RECORD HOLDERS To our knowledge there were approximately 125 holders of record of the stock of the Company as of March 24, 2000. However, our transfer agent has indicated that beneficial ownership is in excess of 3,300 shareholders. 10 11 DIVIDENDS We have not paid any cash dividends on its Common Stock and has no present intention of paying any dividends. Our current policy is to retain earnings, if any, for use in operations and in the development of its business. Our future dividend policy will be determined from time to time by the Board of Directors. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in Item 7. The selected data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" as of and for the years ended December 31, 1997, 1996 and 1995, are derived from the consolidated financial statements of Spatializer Audio Laboratories, Inc. and subsidiaries, which consolidated balance sheets have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected financial data for the years ended December 31, 1999 and 1998 are derived from the Company's consolidated financial statements which have been audited by Farber & Hass LLP, independent public accountants. The consolidated statements of operation and cashflows for the year ended December 31, 1997 and the report thereon are included elsewhere in this Report.
FISCAL YEAR ENDED --------------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995(1) 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................... $ 1,230 $ 2,024 $ 2,781 $ 1,680 $ 1,660 Cost Of Revenues............ (79) (186) (230) (134) (49) ----------- ---------- ----------- ----------- ----------- Gross Profit................ 1,151 1,838 2,551 1,546 1,611 Total Operating Expenses.... (4,403) (27,042)(3) (7,238) (3,490) (1,156) Other Income (Expense), Net....................... 74 119 27 (108) (94) Loss from Discontinued Operations................ (3,702) Income taxes................ (63) (310) (60) (38) (6) ----------- ---------- ----------- ----------- ----------- Net Income (Loss)........... $ (3,241) $ (25,395)(4) $ (4,720) $ (5,792) $ 355 ----------- ---------- ----------- ----------- ----------- Basic Income (Loss) Per Share(5).................. $ (0.32) $ (2.01) $ (0.23) $ (0.29 $ 0.01 =========== ========== =========== =========== =========== Diluted Income (Loss) Per Share(5).................. $ (0.32) $ (2.01) $ (0.23) $ (0.29) $ 0.01 =========== ========== =========== =========== =========== Weighted Average Common Shares.................... 10,156,816 12,644,751 20,604,095 22,180,180 33,805,512 =========== ========== =========== =========== =========== CONSOLIDATED BALANCE SHEET DATA: Cash and Cash Equivalents... $ 3,113 $ 1,587 $ 577 $ 264 $ 1,022 Working Capital (Deficit)... 3,159 2,092 83 (1,975) 395 Total Assets................ 4,420 4,141 3,165 893 2,118 Advances From Related Parties................... 325 113 113 857 337 Shareholders' Note Payable................... -- -- -- Total Shareholders' Equity (Deficit)................. $ 3,697 $ 3,268 $ 1,525 $ (1,553) $ 768
- --------------- (1) A Plan of Arrangement was completed on July 27, 1994 whereby the situs of the Company was moved to Delaware. Spatializer Audio Laboratories, Inc., a Delaware corporation, became the parent company for 11 12 Spatializer-Yukon and DPI. The financial statements for this fiscal year reflect the consolidation of all three entities. (2) Not used. (3) Includes two one-time significant changes. Compensation Expense of $20,218,450 was recorded associated with the transfer of the Company's performance shares from Canadian Escrow into a new escrow arrangement which will provide for the release of the performance shares over the next six years. Based on the revised escrow arrangement, which primarily converts the escrow shares release from performance criteria to time-based criteria, the Company recorded compensation expense on the date the new escrow arrangement terms were accepted by the Company. Additionally, In-Process Research & Development ("IPR&D") expense of $679,684 related to the allocation of costs was incurred as a result of the MultiDisc Technologies, Inc. ("MDT") asset acquisition in June 1996. (4) The Company incurred and paid Canadian income taxes in the amount of $249,000 during the year associated with the liquidation of Spatializer-Yukon, the Company's Canadian predecessor. (5) Loss per share has been calculated based on the weighted average number of common shares outstanding including escrowed performance shares, which are factored into the calculation as of December 30, 1996, the date on which the British Columbia Securities Commission ("BCSC") issued its consent to the Company's revised escrow arrangement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to the financial condition and results of operations of Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") for the year ended December 31, 1999 compared to the year ended December 31, 1998, and the year ended December 31, 1998, compared with the year ended December 31, 1997. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 REVENUES Revenues declined to $1,660,000 for the year ended December 31, 1999 compared to $1,680,000 for the year ended December 31, 1998, a decline of 1%. Revenues include license issuance fees and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs and non-recurring engineering fees. The decrease in revenues is attributed primarily to the settlement in early 1998 of royalty claims from a licensee for which there was no comparable license settlement in the current fiscal year, competitive market pricing pressure and decreases in recurring royalties for the licensing of Spatializer audio technology reflecting weakness in the Japanese 3-D audio market. This was substantially offset by increases in royalties derived from DSP foundries and OEMs for the Company's N-2-2 technology and royalty and engineering fees from a new licensee in 1999. Gross profit increased to 98% in the year ended December 31, 1999 compared with 92% for the comparable period last year. This increase reflects the impact of the discontinuation of lower margin consumer products sales, and inventory write-downs on the remaining consumer products inventory to market in 1998, for which there was no comparable adjustment in 1999. The Company maintains a high margin as the majority of revenues are from licensing and royalty activities, which have little or no associated direct costs. OPERATING EXPENSES Operating expenses for the year ended December 31, 1999 decreased to $1,156,000 from $3,490,000 for the year ended December 31, 1998, a decrease of 67%. The decrease in operating expenses result from the rationalization of overhead, particularly with regard to the corporate office, implemented in late September 1998, as part of the Company's strategic repositioning to focus exclusively on its core audio business. 12 13 Based on this strategic refocusing, MultiDisc Technologies, Inc. is being treated as a discontinued operation for accounting purposes. Operating expenditures in 1999 were minimal and were accrued in the year ending December 31, 1998. Operating and wind down expenses of MultiDisc Technologies, Inc totaling $3,000,000 were excluded from 1998 operating expenses and presented separately as a discontinued operation. Total operating expenses of MultiDisc Technologies, Inc. for the year ended December 31, 1997 were $3,791,000. GENERAL AND ADMINISTRATIVE General and administrative costs decreased to $516,000 for the year ended December 31, 1999 from $1,732,000 for the year ended December 31, 1998, a decrease of 70%. The decrease is primarily due decreased payroll and payroll-related costs primarily related to the downsizing of the corporate office as a result of overhead rationalizations implemented beginning in September 1998. General operating costs include rent, telephone, office supplies and stationery, postage, depreciation and similar costs. RESEARCH AND DEVELOPMENT Research and Development costs decreased to $383,000 for the year ended December 31, 1999, compared to $756,000 for the year ended December 31,1998, a decrease of 49%. The decrease in research and development expense was due to headcount attrition and a delay in efforts to fill open positions until additional working capital became available through the December Transactions. In addition, the Company continued efforts to identify, validate, and develop new product ideas at DPI. Specific engineering efforts were directed toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to current and potential licensees during the year and toward development of StreamFX, an Internet audio enhancement product and Vi.B.E., a virtual bass enhancement technology. SALES AND MARKETING Sales and marketing costs decreased to $257,000 for the year ended December 31, 1999, compared to $1,002,000 for the year ended December 31, 1998, a decrease of 73%. The decrease results from headcount reductions effected in September 1998 and suspension of public relations, formal trade show participation and advertising efforts until the additional working capital became available through the December Transactions. LOSS ON DISCONTINUED OPERATION There was no loss on discontinued operation in the year ended December 31, 1999. Compared to a loss on discontinued operation of $3,702,000 for the year ended December 31, 1998. Expenditures for MDT were minimal in fiscal 1999 and were accrued in the year ended December 31, 1998. Loss on discontinued operation was comprised of the reclassification of $2,847,000 of the net MDT expenses and valuation adjustments of $855,000. The net expense primarily represented general and administrative, sales and marketing and research and development expenses for the period January 1 through September 30,1998. The Board of Directors announced the discontinued operation of MDT on September 25, 1998 and had preliminary indications from its banker and potential buyers that the sale of MDT's assets would not result in a loss to the Company. However, since no transaction had been consummated for the MDT assets as of the date on which the Company filed its annual report Form 10-K in April 1999, the Company elected to reserve for the contingency. NET INCOME (LOSS) Net Income increased to $355,000 for the year ended December 31, 1999, compared to a net loss of $5,792,000 for the year ended December 31, 1998, an increase of 103%. The improvement for the period is primarily the result of overhead rationalization and corporate refocusing which began its implementation in September 1998 and the wind down costs of MDT in 1998, for which there were no such expenses in the current fiscal year. 13 14 FOR THE YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 REVENUES Revenues declined to $1,680,000 for the year ended December 31, 1998 compared to $2,781,000 for the year ended December 31, 1997, a decline of 40%. Revenues include license issuance fees and royalties pertaining to the licensing of Spatializer(R) audio signal processing designs and the sales of professional recording systems and consumer products. The decrease in revenues is attributed primarily to decreases in recurring royalties for the licensing of Spatializer audio technology reflecting competitive market pricing pressure, the discontinuation of consumer product sales, as well as the signing in late 1997 of a flat fee license agreement for which there was no comparable license agreement in the current fiscal year and weakness in the Asian market. Gross profit was unchanged at 92% in the year ended December 31, 1998 compared with 92% for the comparable period. This increase reflects the impact of the discontinuation of lower margin consumer products sales, partially offset by inventory write-downs ($86,000) on the remaining consumer products inventory to market. The Company maintains a high margin as the majority of revenues are from licensing and royalty activities, which have little or no associated direct costs. OPERATING EXPENSES Operating expenses from continuing operations for the year ended December 31, 1998 decreased to $3,490,000 from $7,238,000 for the year ended December 31, 1997, a decrease of 51%. The decrease in operating expenses result primarily from the reclassification of certain MDT expenses as discontinued operation and higher technology demonstrator development expense in 1997. Based on the corporate strategic refocusing, MDT is being treated as a discontinued operation. Operating expenses of MDT of approximately $2,800,000 have been excluded from operating expenses and presented separately as a discontinued operation. Total operating expenses of MDT for the year ended December 31, 1997 were $3,791,000. GENERAL AND ADMINISTRATIVE General and administrative costs decreased to $1,732,000 for the year ended December 31, 1998 from $2,174,000 for the year ended December 31, 1997, a decrease of 20%. The decrease is primarily due to the reclassification of MDT expenses of $511,000 to discontinued operations, partially offset by a provision of $100,000 for corporate restructuring. General operating costs include rent, telephone, office supplies and stationery, postage, depreciation and similar costs. RESEARCH AND DEVELOPMENT Research and Development costs decreased to $756,000 for the year ended December 31, 1998, compared to $3,708,000 for the year ended December 31,1997, a decrease of 79%. The decrease in research and development expense was due to headcount attrition and a delay in efforts to fill open positions until the additional working capital became available through the December Transactions. In addition, the Company continued efforts to identify, validate, and develop new product ideas at DPI. Specific engineering efforts were directed toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to current and potential licensees during the year, simplified low cost 3-D stereo solutions and toward enCompass, a true interactive, real-time 3-D audio positioning technology. SALES AND MARKETING Sales and marketing costs decreased to $1,002,000 for the year ended December 31, 1998, compared to $1,356,000 for the year ended December 31, 1997, a decrease of 26%. The decrease is primarily due to the reclassification of MDT expenses of $531,000 to discontinued operations, partially offset by an expansion in DPI sales personnel, travel and international sales representative expenses. 14 15 LOSS ON DISCONTINUED OPERATION Loss on discontinued operation was $3,702,000 for the year ended December 31, 1998. There was no comparable loss in the prior year. Loss on discontinued operation is comprised of the reclassification of $2,847,000 of the net MDT expenses and valuation adjustments of $855,000. The net expense represents primarily general and administrative, sales and marketing and research and development expenses for the period January 1 through September 30,1998. The Board of Directors announced the discontinued operation of MDT on September 25, 1998 and had preliminary indications from its banker and potential buyers that the sale of MDT's assets would not result in a loss to the Company. However, since no transaction has been consummated for the MDT assets as of this filing date, the Company has elected to reserve for this contingency. NET LOSS The net loss decreased to $5,792,000 for the year ended December 31, 1998, compared to $4,720,000 for the year ended December 31, 1997, an increase of 22%. The increased net loss for the period is primarily the result of wind down costs at the Company's discontinued operation, MDT and lower revenues of DPI, partially offset by significantly lower technology demonstrator development compared with the prior year. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, we had $1,022,000 in cash and cash equivalents as compared to $264,000 at December 31, 1998. The increase in cash and cash equivalents is attributed to cash provided by the issuance of 1,884,254 additional shares of Common Stock ($1.05 million in new capital from the December Transaction), and cash provided by other operating activities. We had working capital of $395,000 at December 31, 1999 as compared with a working capital deficit of $1,975,000 at December 31, 1998. 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 December 31, 1999 we had six Foundry licensees, seventy-six OEM Licensees and fourteen authorized customers for its audio signal processing business as compared with six Foundry licensees and seventy-three OEM Licensees and eight authorized customers at December 31, 1998. 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, convertible into Common Stock at our or Debtee's option. The obligation matures in June 2001. The Company owed $337,500 to related parties as of December 31, 1999 and $857,500 at December 31, 1998. 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 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. 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, 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 15 16 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. 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 our 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 our 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 our 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 increased by five percent (5%) when we were 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 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. 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". 16 17 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 $0.55725 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 the Company's 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. NET OPERATING LOSS CARRYFORWARDS At December 31, 1999, we had net operating loss carryforwards of $26,000,000 for income tax purposes. Our ability to utilize approximately $900,000 of these tax losses which accrued during 1994 against future income may be restricted as a result of the change in year-ends to December 31, 1994. The net operating loss carryforwards expire through 2012. INFLATION We believe that the moderate inflation rate of the 1990's has not impacted our operations. YEAR 2000 We are aware that many computer software programs may not currently be designed to properly handle the system date change after December 31, 1999. We have addressed this contingency with its computer consultants and has upgraded our software programs in 1998, the cost of which was approximately $15,000. The Company has not experienced any Year 2000 problems as of this filing date. THE ASIAN ECONOMIC CRISIS Approximately 51% of our revenues for the year ended December 31, 1999 were derived from foundries and OEM's based in Japan and other Asian countries. We believe that the relatively moderate level of the Company's Asian business, and the concentration of this Asian business with Matsushita Electronics Corporation, Toshiba Corporation, Samsung and LG Electronics which comprised 85% of revenues generated from Asian customers, has resulted in some impact on revenues and profitability. 17 18 COMPREHENSIVE INCOME The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997. FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. FAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company will adopt FAS No. 130 in the first quarter of fiscal year ended December 31, 1998. 18 19 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Spatializer Audit Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years ended December 31, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flow for the years then ended in conformity with generally accepted accounting principles. /s/ FARBER & HASS LLP Oxnard, California March 10, 2000 19 20 INDEPENDENT AUDITORS' REPORT The Board of Directors Spatializer Audio Laboratories, Inc. We have audited the accompanying consolidated balance sheets of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flow for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California March 6, 1998, except for note 19, which is as of April 15, 1998 20 21 ITEM 8. FINANCIAL STATEMENTS SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Current Assets: Cash and Cash Equivalents................................. $ 1,021,998 $ 264,054 Accounts Receivable....................................... 687,595 134,633 Inventory................................................. 12,993 7,993 Prepaid Expenses and Deposits............................. 22,640 65,718 ------------ ------------ Total Current Assets.............................. 1,745,226 472,398 Property and Equipment, Net................................. 132,803 184,140 Intangible Assets, Net...................................... 207,793 236,913 Other Assets................................................ 32,177 ------------ ------------ $ 2,117,999 $ 893,451 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Notes Payable............................................. $ 14,149 $ 14,795 Notes Payable to Related Party............................ 337,742 857,500 Accounts Payable.......................................... 234,117 335,784 Accrued Wages and Benefits................................ 53,136 84,423 Accrued Expenses.......................................... 291,117 370,548 Deferred Income........................................... 250,000 Net Liabilities of Discontinued Operation................. 419,600 533,891 ------------ ------------ Total Current Liabilities......................... 1,349,861 2,446,941 ------------ ------------ Commitments and Contingencies Stockholders' Equity (Deficit): 7% Series A Convertible Preferred shares, $0.01 par value; 100,000 shares authorized; no shares and 52,900 shares issued and outstanding at December 31, 1999 and 1998, respectively........................................... 529 10% Series B Convertible Redeemable Preferred shares, $0.01 par value; 1,000,000 shares authorized; 102,967 shares and no shares issued and outstanding at December 31, 1999 and 1998, respectively........................ 1,030 Common shares, $0.01 par value; 50,000,000 shares authorized; 46,174,970 and 25,841,867 shares issued and outstanding at December 31, 1999 and 1998, respectively........................................... 461,750 258,418 Additional Paid-In Capital................................ 45,913,503 44,150,501 Accumulated Deficit....................................... (45,608,146) (45,962,938) ------------ ------------ Total Shareholders' Equity (Deficit).............. 768,137 (1,553,490) ------------ ------------ $ 2,117,999 $ 893,451 ============ ============
See accompanying notes to consolidated financial statements 21 22 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues: Product Revenues, Net............................. $ 39,496 $ 336,703 Licensing Revenues................................ 663,522 880,000 Royalty Revenues.................................. $ 1,660,371 976,697 1,564,530 ----------- ----------- ----------- 1,660,371 1,679,715 2,781,233 Cost of Revenues............................... 48,780 134,190 229,736 ----------- ----------- ----------- 1,611,591 1,545,525 2,551,497 ----------- ----------- ----------- Operating Expenses: General and Administrative........................ 515,843 1,732,097 2,173,717 Research and Development.......................... 383,176 755,899 3,707,995 Sales and Marketing............................... 257,017 1,001,747 1,356,196 ----------- ----------- ----------- 1,156,036 3,489,743 7,237,908 ----------- ----------- ----------- Operating Income (Loss)........................ 455,555 (1,944,218) (4,686,411) ----------- ----------- ----------- Interest Income..................................... 3,401 27,672 57,305 Interest Expense.................................... (102,468) (84,723) (21,063) Other Income (Expense), Net......................... 4,804 (50,955) (8,949) ----------- ----------- ----------- (94,263) (108,006) 27,293 ----------- ----------- ----------- Income (Loss) from Continuing Operations..... 361,292 (2,052,224) (4,659,118) Loss from Discontinued Operations............ (3,701,599) ----------- ----------- ----------- Income (Loss) Before Income Taxes.............. 361,292 (5,753,823) (4,659,118) Income Taxes................................... (6,500) (38,238) (60,703) ----------- ----------- ----------- Net Income (Loss).............................. $ 354,792 $(5,792,061) $(4,719,821) =========== =========== =========== Basic and Diluted Income (Loss) per Share: Continued Operations......................... $ .01 $ (.12) $ (.23) Discontinued Operations...................... (.17) ----------- ----------- ----------- $ .01 $ (.29) $ (.23) =========== =========== =========== Weighted-Average Shares Outstanding.......... 33,805,512 22,180,180 20,604,095 =========== =========== ===========
See accompanying notes to consolidated financial statements 22 23 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 ---------- ----------- ----------- Cash Flows from Operating Activities: Net Income (Loss).................................. $ 354,793 $(5,792,061) $(4,719,821) Adjustments to Reconcile Net Income (Loss) to Net Cash Used by Operating Activities: Depreciation and Amortization................... 103,564 126,334 407,283 Discontinued Operations......................... 962,060 Deferred Transaction Costs...................... 146,529 Loss on Disposal of Property and Equipment...... 50,308 14,281 Provision for Doubtful Accounts................. 100,000 Options and Warrants Issued for Services........ 56,030 100,000 Net Change in Assets and Liabilities: Accounts Receivable and Employee Advances....... (558,583) 798,675 (249,806) Inventory....................................... (5,000) 85,257 203,289 Prepaid Expenses and Deposits................... 16,521 31,112 125,282 Other Assets.................................... (4,135) Accounts Payable................................ (101,667) 102,737 247,506 Accrued Expenses and Other Liabilities.......... (360,718) 503,007 78,701 Discontinued Operations......................... (114,291) (66,796) ---------- ----------- ----------- Net Cash Used by Operating Activities................ (665,382) (2,996,808) (3,697,465) ---------- ----------- ----------- Cash Flows from Investing Activities: Purchase of Property and Equipment.............. (16,365) (43,079) (187,485) Proceeds from Disposal.......................... 20,400 Intangible Assets............................... (6,740) (34,350) (237,036) Deferred Transaction Costs...................... (146,529) Discontinued Operations......................... (238,025) ---------- ----------- ----------- Net Cash Used by Investing Activities................ (23,105) (295,054) (571,050) ---------- ----------- ----------- Cash Flows from Financing Activities: Issuance of Common and Preferred Shares, Net....... 1,959,627 2,611,474 1,966,144 Exercise of Options and Warrants................... 7,208 45,954 910,917 Notes and Amounts Due to (from) Related Parties.... (519,757) 745,000 Proceeds (Repayments) on Line of Credit............ (400,000) 400,000 Discontinued Operations............................ (20,501) Repayments of Notes Payable........................ (647) (3,424) (18,528) ---------- ----------- ----------- Net Cash Provided by Financing Activities............ 1,446,431 2,978,503 3,258,533 ---------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents..... 757,944 (313,359) (1,009,982) Cash and Cash Equivalents, Beginning of Year......... 264,054 577,413 1,587,395 ---------- ----------- ----------- Cash and Cash Equivalents, End of Year............... $1,021,998 $ 264,054 $ 577,413 ========== =========== =========== Supplemental Disclosure of Cash Flow Information: Cash Paid During the Year for: Interest........................................ $ 11,250 $ 26,370 $ 21,063 Income Taxes.................................... $ 6,500 $ 35,838 $ 60,703
See accompanying notes to consolidated financial statements 23 24 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A, 7% CONVERTIBLE SERIES B, 10% CONVERTIBLE PREFERRED SHARES PREFERRED SHARES COMMON SHARES ------------------------- ------------------------- -------------------------------------------- NUMBER OF NUMBER OF NUMBER OF ADDITIONAL SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE PAID-IN-CAPITAL ----------- ----------- ----------- ----------- ---------- ------------- --------------- Balance, January 1, 1998................ 21,410,012 $214,100 $41,481,890 Issuance of Preferred Shares, Net......... 60,000 $ 600 2,610,874 Options Issued for Services............ 13,333 133 12,571 Options Exercised..... 19,000 190 33,060 Warrants Exercised.... Conversion of Preferred Shares.... (7,100) (71) 4,399,522 43,995 (43,924) Net Loss.............. -- -- -- ------- ----- ------- ------ ---------- -------- ----------- Balance, December 31, 1998................ 52,900 529 25,841,867 258,418 44,150,501 Issuance of Preferred Shares, Net......... 102,967 $1,030 1,028,617 Issuance of Common Shares, Net......... 1,884,254 18,843 911,137 Options Exercised..... 59,998 600 6,608 Conversion of Preferred Shares.... (52,900) (529) 18,388,851 183,889 (183,360) Net Income............ -- -- -- ------- ----- ------- ------ ---------- -------- ----------- Balance, December 31, 1999................ 0 $ 0 102,967 $1,030 46,174,970 $461,750 $45,913,503 ======= ===== ======= ====== ========== ======== =========== TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY ------------ ------------- Balance, January 1, 1998................ $(40,170,877) $ 1,525,113 Issuance of Preferred Shares, Net......... 2,611,474 Options Issued for Services............ 12,704 Options Exercised..... 33,250 Warrants Exercised.... Conversion of Preferred Shares.... Net Loss.............. (5,792,061) (5,792,061) ------------ ----------- Balance, December 31, 1998................ (45,962,938) (1,553,490) Issuance of Preferred Shares, Net......... 1,029,647 Issuance of Common Shares, Net......... 929,980 Options Exercised..... 7,208 Conversion of Preferred Shares.... Net Income............ 354,792 354,792 ------------ ----------- Balance, December 31, 1999................ $(45,608,146) $ 768,137 ============ ===========
See accompanying notes to consolidated financial statements 24 25 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") is in the business of developing and licensing technology. The Company's wholly-owned subsidiary, Desper Products, Inc. ("DPI"), is in the business of developing proprietary advanced audio signal processing technologies and products for consumer electronics, entertainment, and multimedia computing. The Company's wholly-owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), 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 12). (2) 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 (see Note 12). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION -- The Company recognizes revenue from product sales upon shipment to the customer. License revenues are recognized when earned, in accordance with the contractual provisions. Royalty revenues are recognized upon shipment of products incorporating the related technology by the original equipment manufacturers (OEMs) and foundries. CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially subject the company to concentrations of credit risk consist principally of cash and trade accounts receivable. At December 31, 1999, four customers accounted for 48%, 16%, 12% and 12%, respectively, of the Company's trade receivables. The Company performs ongoing credit evaluations of its customers and normally does not require collateral to support accounts receivable. CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid investments with original maturities of three months or less. MAJOR CUSTOMERS -- During the year ended December 31, 1999, four customers accounts for 30%, 26%, 15% and 10%, respectively, of the Company's net sales. INVENTORY -- Inventory, which consists primarily of finished goods, is stated at the lower of cost (first-in, first-out) or market. RESEARCH AND DEVELOPMENT COSTS -- The Company expenses research and development costs as incurred. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Property and equipment under capital leases are stated at the present value of minimum lease payments. Property and equipment are depreciated over three to five years using accelerated-depreciation methods, which approximates 150% declining balance. Leasehold improvements are amortized over the shorter of the useful life of the asset or lease term. INTANGIBLE ASSETS -- Intangible assets consist of patent costs which are amortized on a straight-line basis over the estimated useful lives of the patents which range from five to ten years. 25 26 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) VALUATION ACCOUNTS -- The Company had reserves for doubtful accounts recorded in the accompanying consolidated financial statements which are summarized as follows: BALANCE AT JANUARY 1, 1998............................... $ 190,000 Charged to Expense....................................... 0 Deductions............................................... (190,000) --------- BALANCE AT DECEMBER 31, 1998............................. 0 BALANCE AT DECEMBER 31, 1999............................. $ 0 =========
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 (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. The impact of Statement 128 on the calculation of earnings per share is as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- BASIC: Net Income (Loss) Available to Common Shareholders.................................... $ 354,792 $(5,792,061) Weighted Average Shares Outstanding............... 33,805,512 22,180,180 Basic Earnings per Share.......................... $ 0.01 $ (0.29) DILUTED: Net Income (Loss) Available to Common Shareholders.................................... $ 354,792 $(5,792,061) Weighted Average Shares Outstanding............... 33,805,512 22,180,180 Net Effect of Dilutive Stock Options and Warrants Based on the Treasury Stock Method Using Average Market Price.................................... 1,859,519 N/A Total Shares...................................... 35,665,031 Diluted Earnings per Share........................ $ 0.0100 N/A Average Market Price of Common Stock.............. $ 0.4700 N/A Ending Market Price of Common Stock............... $ 0.9375 N/A
The following table presents contingently issuable shares, options and warrants to purchase shares of common stock that were outstanding during 1998 and 1997 which were not included in the computation of diluted loss per share because the impact would have been antidilutive:
1999 1998 1997 --------- --------- --------- Options................................... 1,252,500 1,972,300 1,855,070 Warrants.................................. 2,730,000 732,000 934,750 --------- --------- --------- Total..................................... 3,982,500 2,704,300 2,789,820 ========= ========= =========
The loss per share for the year ended December 31, 1998 includes the effect of approximately $371,000 of the beneficial conversion feature of the Series "A", 72 Convertible Preferred Stock as well as dividends in arrears of approximately $149,000 related to this Preferred Stock. 26 27 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK OPTION PLAN -- Prior to January 1, 1996 the Company accounted for its stock option plan in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense using the fair-value-based method over the vesting period the fair value of all employee stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (Note 9). IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF -- The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts of the assets exceed the fair value of the assets (see Notes 4). Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 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. MDT is considered a discontinued operation as of September 1998. As of December 31, 1998, the Company has only one operating segment, DPI, the Company's 3-D Audio Signal Processing business. COMPREHENSIVE INCOME -- The Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 January 1, 1998. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from 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 years ended December 31, 1999, 1998 and 1997. As a result, comprehensive income (loss) is the same as the net income (loss) for the years ended December 31, 1999, 1998 and 1997. INCOME TAXES -- Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax 27 28 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS -- The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at December 31, 1999 and 1998 approximated fair value due to the short maturity of those investments. The fair value of the advances from related parties could not be estimated due to the nature of the borrowings. The fair values of notes payable at December 31, 1999 and 1998 are materially consistent with the related carrying values based on current rates offered to the Company for instruments with similar maturities. DISCONTINUED OPERATIONS -- In September 1998, the Board of Directors approved a plan to refocus corporate activities 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 (see Note 12). (3) PROPERTY AND EQUIPMENT Property and equipment, as of December 31, 1999 and 1998, consists of the following, net of a reserve for impairment loss in 1998 in accordance with application of SFAS 121:
1999 1998 -------- -------- Office Computers, Software, Equipment and Furniture.... $242,272 $225,907 Test Equipment......................................... 60,647 60,647 Tooling Equipment...................................... 44,136 44,136 Trade Show Booth and Demonstration Equipment........... 122,768 122,768 Leasehold Improvements................................. 22,122 22,122 -------- -------- Total Property and Equipment........................... 491,945 475,580 Less Accumulated Depreciation and Amortization......... 359,142 291,440 -------- -------- Property and Equipment, Net............................ $132,803 $184,140 ======== ========
(4) INTANGIBLE ASSETS Intangible assets, as of December 31, 1999 and 1998 consist of the following:
1999 1998 -------- -------- Capitalized Patent and Technology Costs................ $373,677 $365,637 Less Accumulated Amortization.......................... 165,884 128,724 -------- -------- Intangible Assets, Net................................. $207,793 $236,913 ======== ========
28 29 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) FINANCING ARRANGEMENTS NOTES PAYABLE -- Notes payable at December 31, 1999 and 1998 consist of the following:
1999 1998 ------- ------- Notes payable, secured by equipment, interest at 11.5% to 22%, payable in monthly installments through May 2002................................................... $14,149 $14,795 ======= =======
The notes payable balances as of December 31, 1999 and 1998 have been classified as current liabilities since the long-term portion of the debt is not material to the accompanying consolidated balance sheet. Capital lease obligations totalling $25,552 at December 31, 1999 are included in the Net Liabilities of Discontinued Operations. (6) NOTES PAYABLE TO RELATED PARTIES The Company was indebted to certain related parties for an amount totaling $337,742 at December 31, 1999. This amount bears interest at a fixed rate of 10% annually and is due on demand. It is convertible into shares of common stock based on the 10 day average closing bid price immediately prior to notice of conversion. At December 31, 1998, the Company was indebted to four of its directors and one of its executives for an amount totalling $745,000. This amount bears interest at a fixed rate of 10% annually. Of this amount, $650,000 was due on December 31, 1998. The remaining $95,000 was due on November 30, 1999, or upon the sale of the MDT assets. The Company granted 95,000 warrants to purchase common stock at $0.20 per share in connection with the $95,000 of indebtedness. This debt was converted into Series B preferred stock in December 1999 (see Note 7). (7) SHAREHOLDERS' EQUITY During the year ended December 31, 1999, shares were issued or converted as follows: In December 1999, the Company completed a set of financial transactions (the "December Transactions") 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 our common stock ($1.05 million in new capital or $0.55725 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 an earlier financing, the conversion of $1 million of short-term debt into a new Series B Convertible Redeemable Preferred Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured debt into secured long-term 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 $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. The Company has 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 the Company's assets. The debt, and accrued interest, is convertible at the Company's or the holder's options into registered common stock at a conversion price equal to the average 29 30 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Also, concurrently with the December Transactions, 55,000 shares were allocated to the Company's outside legal counsel in payment of a portion of its legal fees for this transaction. During the year ended December 31, 1998, shares were issued or converted as follows: On April 14, 1998, the Company entered into a private placement for up to $5 million of which $3 million was funded at December 31, 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 the $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. As of December 31, 1998, $1 million of the remaining $2 million of the funding was due but had not yet been received. 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 twenty (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 delisted 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. At December 31, 1998, 7,100 shares of the Convertible Preferred Series A Stock had been converted into a total of 4,399,522 shares of the Company's Common Stock. 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 December 31, 1998, dividends in arrears were $131,148. 30 31 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. During the year ended December 31, 1997, shares were issued or converted as follows: In March 1997, the Company completed a private placement of 1,600,000 units at a price of $1.25 per unit, each unit comprised of one common share and one-half of one non-transferable share purchase warrant. One warrant entitles the holder to purchase one additional share at a price of $1.75 on or before April 7, 1998. Stock issuance costs consisted of 67,500 shares of common stock, 12,000 warrants to purchase an equivalent number of shares of common stock at 1.50 per share and $33,856 cash. (8) ESCROWED PERFORMANCE SHARES In December 1996, the Company accepted the terms outlined by the British Columbia Securities Commissions ("BCSC") for the release of the Company's 5,776,700 escrowed "Performance Shares" from Canadian Escrow into a new escrow arrangement with the Company. The overall modification was approved by the Company's shareholders in August 1996. Under the revised arrangement, the performance shares will be released automatically as follows: 20% on June 22, 2000; 30% on June 22, 2001; and 30% on June 22, 2002. In addition to the automatic releases, performance shares can be released based on the cash flow release criteria contained in the original June 22, 1992 escrow agreement although, to maintain a stable market in the Company's stock, in any year not more than 30% of the shares will be released, based on the cash flow criteria. Under the revised escrow arrangement, the performance shares will vest, provided the individual has not voluntarily terminated his/her relationship with the Company prior to applicable vesting dates. Based on the revised escrow arrangement, which primarily converts the escrow shares release from performance criteria to a time-based criteria, the Company recorded as compensation expense the excess of the fair market value of the 5,776,700 performance shares on the date the Company accepted the terms of the new escrow arrangement over the purchase price of such escrow shares. All of the performance shares are included in the issued and outstanding shares for the years ended December 31, 1999, 1998 and 1997. However, the shares were not reflected in the calculation of loss per common share until earned by and released to the holders on December 30, 1996, the date on which the Company and the BCSC accepted and entered into the terms of the current escrowed agreement as discussed above. (9) STOCK OPTIONS In 1995, the Company adopted a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to directors, officers and employees. The Plan authorizes grants of options to purchase authorized but unissued common stock up to 10% of total common shares outstanding at each calendar quarter, 4,617,497 as of December 31, 1999. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. Stock options have five-year terms and vest and become fully exercisable up to three years from the date of grant. At December 31, 1999, there were 1,758,030 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 was $0.32, $0.25, and $1.44, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 and 1998 -- expected dividend yield 0%, risk-free interest rate of 9.0%, 31 32 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) expected volatility of 95% and an expected life of 3 years; 1997 -- expected dividend yield 0%, risk-free interest rate of 6.50%, expected volatility of 147% and an expected life of 5 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for the fair value of its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
1999 1998 1997 -------- ----------- ----------- NET INCOME (LOSS): As Reported................................... $354,792 $(5,792,061) $(4,719,821) Pro Forma..................................... $(49,978) $(5,792,061) $(6,408,547) BASIC AND DILUTED LOSS: As Reported................................... $ 0.01 $ (.29) $ (.23) Pro Forma..................................... $ (0.01) $ (.29) $ (.31)
Pro forma net loss reflects only options granted since December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Stock option activity during the periods indicated is as follows:
WEIGHTED-AVERAGE NUMBER EXERCISE PRICE --------- ---------------- Options outstanding at January 1, 1997........... 1,701,732 $2.737 Options granted.................................. 780,000 $1.560 Options exercised................................ (339,833) $1.182 Options forfeited................................ (286,829) $3.208 --------- Options outstanding at December 31, 1997......... 1,855,070 $1.897 Options granted.................................. 646,000 $0.728 Options exercised................................ (13,333) $0.953 Options forfeited................................ (515,437) $1.763 --------- Options outstanding at December 31, 1998......... 1,972,300 $1.515 Options granted.................................. 1,280,000 $0.316 Options exercised................................ (59,998) $1.242 Options forfeited................................ (332,835) $1.131 --------- Options outstanding at December 31, 1999......... 2,859,467 $1.271 =========
At December 31, 1999, the number of options exercisable was 2,401,300, and the weighted-average exercise price of those options was $1.48. 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 price for these options was adjusted to $.01875 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 32 33 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) grant date exercise price from $1.18 per share. The vesting schedules and expiration dates for these options were not modified. (10) WARRANTS Warrant activity for the periods indicated below is as follows:
WARRANTS WARRANT PRICE --------- ------------- Warrants outstanding at January 1, 1997............. 174,000 $3.79 Warrants issued..................................... 1,067,000 $1.45 Warrants exercised.................................. (287,250) $1.75 Warrants expired.................................... (19,000) $3.80 --------- Warrants outstanding at December 31, 1997........... 934,750 $1.70 Warrants issued..................................... 720,000 $1.45 Warrants exercised.................................. (19,000) $1.75 Warrants expired.................................... (903,750) $1.70 --------- Warrants outstanding at December 31, 1998........... 732,000 $1.11 Warrants issued..................................... 2,410,000 $0.60 Warrants exercised.................................. 0 Warrants expired.................................... 412,000 $1.26 --------- Warrants outstanding at December 31, 1999........... 2,730,000 $0.67 =========
All of the warrants granted in 1999, 1998 and 1997 were issued in connection with private placements except for the following: 100,000 warrants were granted in 1997 as consideration for consulting services rendered during 1997; 25,000 warrants were granted in 1998 as consideration for consulting services rendered during 1998; and 95,000 warrants were granted in 1998 in connection with a debt financing with the Company's directors. For those warrants granted as consideration for consulting services, the fair value of the consulting services was included in research and development costs in the accompanying consolidated statement of operations for the years ended December 31, 1998 and 1997. At December 31, 1999 and 1998, the number of warrants exercisable was 2,730,000 and 732,000, respectively. (11) INCOME TAXES The Company files a consolidated return for U.S. income tax purposes. Income tax expense for the years ended December 31, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997 ------ ------- ------- State franchise tax............................ $ 800 $ 2,400 $ 2,856 Foreign taxes.................................. 5,700 35,838 57,847 ------ ------- ------- Total.......................................... $6,500 $38,238 $60,703 ====== ======= =======
Certain revenues received from customers in foreign countries are subject to withholding taxes that are deducted from outgoing funds at the time of payment. These taxes range from approximately 8.5% to 15% and are recorded as foreign tax expense when incurred. Income tax expense for the years ended December 31, 1999, 1998 and 1997 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to loss before income taxes primarily due to the generation of additional net operating loss carryforwards for which no tax benefit has been provided. 33 34 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below.
1999 1998 ----------- ------------ DEFERRED TAX ASSETS: Net Operating Loss Carryforwards................. $ 9,854,000 $ 9,475,000 In-Process Research and Development Costs........ 272,000 Asset Reserves................................... 313,000 Accrued Liabilities.............................. 19,000 32,000 Property and Equipment, Principally Due to Differences in Depreciation and Capitalized Interest....................................... 23,000 20,000 ----------- ------------ Total Gross Deferred Tax Assets.................. 9,896,000 10,112,000 Less Valuation Allowance......................... (9,896,000) (10,112,000) ----------- ------------ Net Deferred Tax Assets.......................... $ 0 $ 0 =========== ============
The net change in the total valuation allowance for the years ended December 31, 1999 and 1998 was a change of $(216,000) and $2,074,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses, management believes it is more likely than not the Company will not realize the benefits of these deductible differences and has established a valuation allowance to fully reserve the deferred tax assets at December 31, 1999 and 1998. Additionally, the ultimate realizability of net operating losses may be limited by change of control provisions under Section 382 of the Internal Revenue Code. At December 31, 1999, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $26,000,000 which are available to offset future Federal taxable income, if any, through 2013. (12) DISCONTINUED OPERATION On September 25, 1998, the Board of Directors determined that it would be unable to raise the necessary capital required to properly commercialize the MDT technology. Therefore, the Company ceased funding the operations of MDT and is actively seeking to sell the assets and technology. All employees of MDT have been terminated and the Company has vacated the MDT facilities. Based on this action, the Company is treating MDT as a discontinued operation. Accordingly, the balance sheet and statement of operations of MDT are not consolidated in the continuing operations of the Company, but rather are disclosed as Net Liabilities of Discontinued Operation and Loss From Discontinued Operation, respectively. The Net Liabilities of Discontinued Operation at December 31, 1999 are comprised of the following: Accounts payable......................................... $(260,364) Accrued expenses......................................... (133,684) Notes payable............................................ (25,552) --------- Net liabilities of discontinued operations............... $(419,600) =========
34 35 SPATIALIZER AUDIO LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) COMMITMENTS AND CONTINGENCIES 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. Operating Lease Commitments The Company is obligated for future minimum rental payments for all operating leases of approximately $75,000 per year through November 2002. Rent expense amounted to approximately $140,000, $251,000 and $238,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 35 36 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required for this item incorporated by reference to the Definitive Proxy filed on January 12, 2000. ITEM 11. EXECUTIVE COMPENSATION Information required for this item incorporated by reference to the Definitive Proxy filed on January 12, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required for this item incorporated by reference to the Definitive Proxy filed on January 12, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required for this item incorporated by reference to the Definitive Proxy filed on January 12, 2000. PART IV ITEM 14. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1* Desper-Spatializer Reorganization Agreement dated January 29, 1992. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 2.2* Arrangement Agreement dated as of March 4, 1994 among Spatializer-Yukon, DPI and Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.1* Certificate of Incorporation of Spatializer-Delaware as filed February 28, 1994. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.2* Amended and Restated Bylaws of Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.3 Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock of the Company as filed December 27, 1999. 3.4 Certificate of Amendment of Certificate of Incorporation of the Company as filed on February 25, 2000. 4.1* Form of Subscription Agreement for August 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.)
36 37
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.2* Form of Subscription Agreement for November 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.3* Form of Spatializer-Yukon Incentive Stock Option Agreement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.4* Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.5* Performance Share Escrow Agreements dated June 22, 1992 among Montreal Trust Company of Canada, Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048 common shares of Spatializer-Yukon. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.6* Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company's Proxy Statement dated June 25, 1996 and previously filed with the Commission.) 4.7* Form of Subscription Agreement for 1995 Private Placements. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.8* Form of Subscription Agreement and Warrant Agreement for March 7, 1997 Private Placement. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) 4.9* Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to the Company's Definitive Proxy Statement dated June 28, 1996 and previously filed with the Commission.) 4.10 * Subscription Agreement for April 1998 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-3, Registrations No. 333-52863, filed May 15, 1998.) 4.11 Common Stock Purchase Agreement dated as of December 29, 1999 among the Company, CPR (USA) Inc., LibertyView Funds, L.P., LibertyView Fund, LLC. 4.12 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.13 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.14 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Fund, LLC. 4.15 Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.16 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.17 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.18 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Fund LLC. 4.19 Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC.
37 38
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.20 Agreement Regarding Cancellation of Warrants, dated as of December 29, 1999 among CPR (USA), Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.21 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.22 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Lufeng Investments (as assignee of Arab Commerce Bank). 4.23 Registration Rights Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.24 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.25 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Bank Insinger de Beaufort. 4.26 Registration Rights Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.27 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.28 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Romofin, A.G. 4.29 Registration Rights Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.30 10% Convertible Preferred Stock Subscription Agreement dated as of December 29, 1999 between the Company and Clarion Finanz, A.G. Carlo Civelli, Henry R. Mandell, James D. Pace, Jerold H. Rubinstein, Gilbert N. Segel, Aton Select Fund Ltd. and Romofin A.G. 10.1*** License Agreement dated June 29, 1994 between DPI and MEC. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.2*** License Agreement dated November 11, 1994 between DPI and ESS. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.3* License Agreement dated June 10, 1994 between Joel Cohen and DPI. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.4 Agreement Regarding Indebtedness dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.5 Security Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.6 Finder's Fee Agreement dated as of December 27, 1999 between the Company and Bristol Capital, L.L.C. 21.1 Schedule of Subsidiaries of the Company. 27 Financial Data Schedule.
- --------------- * Previously filed. ** To be filed by amendment. *** Previously filed and portions subject to request for confidential treatment. The confidential portions omitted have been filed separately with the Commission. 38 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2000 SPATIALIZER AUDIO LABORATORIES, INC. (Registrant) /s/ HENRY R. MANDELL -------------------------------------- Henry R. Mandell Chief Executive Officer & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CARLO CIVELLI Director March 30, 2000 - --------------------------------------------- Carlo Civelli /s/ STEPHEN W. DESPER Director March 30, 2000 - --------------------------------------------- Stephen W. Desper /s/ JAMES D. PACE Director March 30, 2000 - --------------------------------------------- James D. Pace /s/ GILBERT N. SEGEL Director March 30, 2000 - --------------------------------------------- Gilbert N. Segel
39 40 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1* Desper-Spatializer Reorganization Agreement dated January 29, 1992. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 2.2* Arrangement Agreement dated as of March 4, 1994 among Spatializer-Yukon, DPI and Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.1* Certificate of Incorporation of Spatializer-Delaware as filed February 28, 1994. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.2* Amended and Restated Bylaws of Spatializer-Delaware. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.3 Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock of the Company as filed December 27, 1999. 3.4 Certificate of Amendment of Certificate of Incorporation of the Company as filed on February 25, 2000. 4.1* Form of Subscription Agreement for August 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.2* Form of Subscription Agreement for November 1994 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.3* Form of Spatializer-Yukon Incentive Stock Option Agreement. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.4* Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.5* Performance Share Escrow Agreements dated June 22, 1992 among Montreal Trust Company of Canada, Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048 common shares of Spatializer-Yukon. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.6* Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company's Proxy Statement dated June 25, 1996 and previously filed with the Commission.) 4.7* Form of Subscription Agreement for 1995 Private Placements. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 4.8* Form of Subscription Agreement and Warrant Agreement for March 7, 1997 Private Placement. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) 4.9* Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to the Company's Definitive Proxy Statement dated June 28, 1996 and previously filed with the Commission.) 4.10 * Subscription Agreement for April 1998 Private Placement. (Incorporated by reference to the Company's Registration Statement on Form S-3, Registrations No. 333-52863, filed May 15, 1998.)
40 41
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.11 Common Stock Purchase Agreement dated as of December 29, 1999 among the Company, CPR (USA) Inc., LibertyView Funds, L.P., LibertyView Fund, LLC. 4.12 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.13 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.14 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to LibertyView Fund, LLC. 4.15 Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.16 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to CPR (USA) Inc. 4.17 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Funds, L.P. 4.18 Secured Non-Negotiable Convertible Promissory Note dated as of December 29, 1999 issued by the Company to LibertyView Fund LLC. 4.19 Registration Rights Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.20 Agreement Regarding Cancellation of Warrants, dated as of December 29, 1999 among CPR (USA), Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.21 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.22 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Lufeng Investments (as assignee of Arab Commerce Bank). 4.23 Registration Rights Agreement dated as of December 29, 1999 between the Company and Lufeng Investments (as assignee of Arab Commerce Bank). 4.24 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.25 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Bank Insinger de Beaufort. 4.26 Registration Rights Agreement dated as of December 29, 1999 between the Company and Bank Insinger de Beaufort. 4.27 Common Stock Subscription Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.28 Stock Purchase Warrant, dated as of December 29, 1999 issued by the Company to Romofin, A.G. 4.29 Registration Rights Agreement dated as of December 29, 1999 between the Company and Romofin, A.G. 4.30 10% Convertible Preferred Stock Subscription Agreement dated as of December 29, 1999 between the Company and Clarion Finanz, A.G. Carlo Civelli, Henry R. Mandell, James D. Pace, Jerold H. Rubinstein, Gilbert N. Segel, Aton Select Fund Ltd. and Romofin A.G. 10.1*** License Agreement dated June 29, 1994 between DPI and MEC. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.)
41 42
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2*** License Agreement dated November 11, 1994 between DPI and ESS. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.3* License Agreement dated June 10, 1994 between Joel Cohen and DPI. (Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.4 Agreement Regarding Indebtedness dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.5 Security Agreement dated as of December 29, 1999 among the Company and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 10.6 Finder's Fee Agreement dated as of December 27, 1999 between the Company and Bristol Capital, L.L.C. 21.1 Schedule of Subsidiaries of the Company. 27 Financial Data Schedule.
- --------------- * Previously filed. ** To be filed by amendment. *** Previously filed and portions subject to request for confidential treatment. The confidential portions omitted have been filed separately with the Commission. 42 EX-3.3 2 CERTIFICATE OF DESIGNATION SERIES B 10% 1 EXHIBIT 3.3 CERTIFICATE OF DESIGNATION OF SERIES B 10% REDEEMABLE CONVERTIBLE PREFERRED STOCK OF SPATIALIZER AUDIO LABORATORIES, INC. Pursuant to Section 151 of the General Corporation Law ("GCL") of the State of Delaware, and the Bylaws of SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), we the undersigned, being President and Secretary, respectively, DO HEREBY CERTIFY, that the following resolution was duly adopted by the Board of Directors on December 24, 1999: RESOLVED, that pursuant to the authority conferred upon the Board of Directors by the Company's Certificate of Incorporation and Bylaws, the Board of Directors hereby provides for the issuance of a series of Preferred Stock of the Company consisting of 150,000 authorized shares which shall have the voting powers, designations, preferences and relative participating, optional or other rights, if any, and the qualifications, limitations, or restrictions, set forth in such Certificate of Incorporation, and in addition thereto, the following: Section 1. Designation and Amount. The series of Preferred Stock hereby created shall be designated as the "Series B Preferred Stock", shall have a par value of $0.01 per share and the number of shares constituting the Series B Preferred Stock shall be 150,000 shares. The Series B Preferred Stock shall have a stated value of US$10.00 per share, with a 10% per annum dividend as set forth herein. Section 2. Rank. The Series B Preferred Stock shall rank: (i) prior to all of the Company's Common Stock, par value $0.01 per share ("Common Stock"), (ii) prior to any class or series of capital stock of the Company hereafter created (unless such future class specifically, by its terms, ranks on parity with the Series B Preferred Stock), and (iii) junior to any class or series of capital stock of the Company created before the date hereof (including without limitation the Series A Preferred Stock of the Company), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series B Preferred Stock will bear a 10% per annum cumulative dividend, payable out of assets legally available therefor, at the "Conversion Date" (as defined below) in cash or Common Stock at the "Conversion Price" (as defined below), at the Company's option. No dividends shall be paid on the Common Stock or any stock issued pursuant to Section 9 prior to the payment of dividends on Series B Preferred Stock. Section 4. Sinking Funding. No provisions shall be made for any sinking fund. 2 Section 5. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive an amount per share equal to the sum of (i) US$10.00 for each outstanding share of Series B Preferred Stock, plus (ii) an amount equal to all accrued and unpaid dividends which shall accrue through the Conversion Date (the "Liquidation Preference"). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts due to such holders, then the entire assets and funds of the Company legally available for distribution shall be distributed among the holders of the Series B Preferred Stock on a pro rata basis. (b) Notwithstanding anything set forth above, holders of Series B Preferred Stock shall not be entitled to receive more than the Liquidation Preference in the event of any corporate reorganizations or any other transaction (or series of related transactions) that results in the transfer of more than fifty percent (50%) of the outstanding voting power of the Company, and such transactions shall not constitute a liquidation, dissolution, or winding up of the Company if the successor assumes that obligations of the Company with respect to the Series B Preferred Stock. A sale, conveyance, or other disposition of all or substantially all of the Company's assets, shall constitute a liquidation, dissolution or winding up within the meaning of this paragraph and shall entitle the holders of the Series B Preferred Stock to the Liquidation Preference, to the extent available above. The purchase or redemption by the Company of stock of any class, in any number permitted by law, for the purpose of this paragraph, shall not be regarded as a liquidation, dissolution or winding up of the Company. Section 6. Conversion. The record holders of this Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"). (a) Right to Convert. (1) The holders may not convert shares of Series B Preferred Stock until December 29, 2000. On or after December 29, 2000, the holders shall have the right, subject to Section 6(a)(2) below, to convert, in whole or in part, shares of Series B Preferred Stock into shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to the holder upon conversion shall be determined by (i) multiplying the number of shares of Series B Preferred Stock to be converted by US$10.00, and (ii) dividing this product by the Conversion Price, provided, however, that the Company shall not issue to any holder a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (2) Upon an election by a holder to convert shares of Series B Preferred Stock into shares of Common Stock, the Company shall have the right to pay cash to such holder in lieu of issuing shares of Common Stock. If the Company elects to pay cash rather than issuing shares of Common Stock, the Company shall pay to the 3 holder US$10.00 for each share of Series B Preferred Stock that such holder had elected to convert to shares of Common Stock. The holder shall surrender the shares of Series B Preferred Stock to the Company for cancellation. (3) The "Conversion Price" shall be determined on the Conversion Date, and shall equal Ninety percent (90%) of the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Conversion Date, provided, however, that the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to December 29, 1999 (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by any authoritative source acceptable to the Company. (4) In the event of any stock split, reverse stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (b) Mechanics of Conversion. Conversion of the Series B Preferred Stock to Common Stock may be exercised by holder telecopying an executed and completed notice of conversion ("Notice of Conversion") to the Company, and delivering the original Notice of Conversion and the certificate representing the shares of Series B Preferred Stock to the Company by hand or by overnight courier within three (3) business days of exercise. Each date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company will transmit the certificates representing the Common Stock issuable upon conversion of all or any part of the shares of Series B Preferred Stock (together with any certificates for replacement shares of Series B Preferred Stock not previously converted but included in the original certificate presented for conversion) to the holder via overnight courier within three (3) business days after the Company has received the original Notice of Conversion and certificate for the shares of Series B Preferred Stock being so converted. The Notice of Conversion and certificate representing the portion of the shares of Series B Preferred Stock converted shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Blvd., Suite 140 Woodland Hills, CA 91364-2357 Attention: Henry Mandell Telephone: (818) 227-3370 Facsimile: (818) 227-9751 or to such other person at such other place as the Company shall designate to the holder in writing. 4 (c) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any certificates representing shares of Series B Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the certificate(s), if mutilated, the Company shall execute and deliver new certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen certificates if holder contemporaneously requests the Company to convert such Series B Preferred Stock into Common Stock. (d) Mandatory Conversion. The Series B Preferred Stock is subject to mandatory conversion after three (3) years from the Closing Date, at which time all shares of Series B Preferred Stock will automatically be converted upon the terms set forth in Section 6(a) at the Conversion Price in effect at such time. Mandatory conversion shall not occur in the event of the occurrence of one or both of the following at the time of such mandatory conversion: (x) the Company is unable, or admits in writing its inability, to pay its debts, or is not paying its debts generally as they come due, or has made any assignment for the benefit of creditors; or (y) the Company has commenced, or there has been commenced against the Company, any case, proceeding, or other action seeking to have an order for relief entered with respect to the Company, or to adjudicate the Company as a bankrupt or insolvent. (e) Reservation of Stock Issuable upon Conversion. As of the date hereof, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the conversion in full of all shares of Series B Preferred Stock. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. After such time as the Company has increased the number of authorized shares of Common Stock, it shall at all times thereafter reserve and keep available out of its authorized but unissued shares of Common Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock at the Floor Price. (f) Conversion Adjustments. (1) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all Series B Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Company or another entity, or other property, then each holder of Series B Preferred Stock shall, upon being given at least ten (10) business days advance written notice of such transaction, thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities or other property as would have been issuable or payable with respect to or in 5 exchange for the number of shares of Common Stock purchasable and receivable upon the conversion of Series B Preferred Stock held by such holder immediately prior to the merger, consolidation, exchange of shares, recapitalization or reorganization. Appropriate provisions shall be made with respect to the rights and interests of the holders of the Series B Preferred Stock to the end that the provisions hereof shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the conversion thereof. The Company shall not effect any transaction described in this subsection unless (1) each holder of Series B Preferred Stock has been given at least ten (10) business days advance written notice of such transaction, and (2) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the holders of the Series B Preferred Stock such shares of stock and/or securities or other property as the holders of the Series B Preferred Stock would be entitled to receive pursuant to this Section 6(f). (2) No Fractional Shares. If any adjustment under this Section would create a fractional share, or a right to acquire a fractional share, of any security, such fractional share shall be disregarded and the number of shares of such security issuable upon conversion shall be the next higher number of shares. Section 7. Voting Rights. The holders of the Series B Preferred Stock shall have no voting power whatsoever, except with respect to any amendment to the Company's Certificate of Incorporation which would have an adverse effect on the Series B Preferred Stock or as otherwise provided by the Delaware Corporation Laws. Section 8. Status of Converted Stock. In the event any shares of Series B Preferred Stock shall be converted pursuant to Section 6 hereof, or if the Company has elected to pay cash to such holder pursuant to Section 6(a)(2) in lieu of issuing shares of Common Stock, the shares of Series B Preferred Stock so converted (or for which cash was paid in lieu of conversion) shall be cancelled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Company as Series B Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series B Preferred Stock. Section 10. Restrictions on Trading. Each holder of Series B Preferred Stock shall agree that, during the ten (10) trading days immediately preceding the Conversion Date, it shall not, whether directly or indirectly: (i) buy or sell, or make or accept any offer to buy or sell, any shares of capital stock of the Company; or (ii) buy or sell, or make or accept any offer to buy or sell, any derivative security based on or relating to any capital stock of the Company (including without limitation options to buy or sell shares of capital stock of the Company). Each holder of Series B Preferred Stock shall also agree not to engage in any short sales of any shares of capital stock of the Company for so long as any of its shares of Series B Preferred Stock remain issued and outstanding. No holder of Series B Preferred Stock shall be entitled to convert its Series B Preferred 6 Stock into Common Stock until ten (10) consecutive trading days have elapsed during which such holder has not engaged in any of the transactions prohibited by this Section 10. [Remainder of Page Intentionally Left Blank] 7 IN WITNESS THEREOF, the Company has caused the undersigned to sign this Certificate of Designation this 24th day of December, 1999. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer Attest: By: /S/ Henry R. Mandell --------------------------- Name: Henry R. Mandell Title: Secretary EX-3.4 3 ARTICLES OF INCORPORATION, BY-LAW 1 EXHIBIT 3.4 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SPATIALIZER AUDIO LABORATORIES, INC. FIRST: That at a meeting of the Board of Directors of Spatializer Audio Laboratories, Inc. (the "Corporation") resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling for such amendment to be voted upon by the stockholders of the Corporation at the annual meeting of such stockholders. The resolution setting forth the proposed amendment is as follows: "RESOLVED, that the Certificate of Incorporation of Spatializer Audio Laboratories, Inc. (the "Corporation") be amended by changing the Article thereof numbered "IV" so that, as amended, said Article shall be and read as follows: "SECTION 1. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 66,000,000 shares, consisting of 65,000,000 shares of Common Stock, par value $.01 per share ("Common Stock"), and 1,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred Stock")." SECOND: That thereafter, pursuant to a resolution of its Board of Directors, the above amendment was put forth for a vote of the stockholders of the Corporation at the Corporation's Annual Meeting of Stockholders, duly called and held, upon notice in accordance with Section 222 of the General Corporations Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That at any time prior to the filing of the foregoing Certificate of Amendment of Certificate of Incorporation of the Corporation, notwithstanding authorization of such proposed Certificate of Amendment by the stockholders of the Corporation, the Board of Directors may abandon such proposed Certificate of Amendment without further action by the stockholders. FOURTH: That said amendment was duly adopted in accordance with Section 242 of the General Corporation law of the State of Delaware. FIFTH: That the capital of the Corporation shall not be reduced under or by reason of said amendment. SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Henry R. Mandell ------------------------------- Henry R. Mandell Chief Executive Officer EX-4.11 4 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.11 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscribers listed on Schedule A annexed hereto (collectively referred to as a "Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. 2 Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: SECTION 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock and Warrants to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder, for an aggregate purchase price of Four Hundred Fifty Thousand U.S. Dollars (US$450,000.00) (the "Aggregate Purchase Price") based on the purchase price per share of Common Stock (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Four Hundred Fifty Thousand U.S. Dollars (US$450,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price and the Company shall deliver the shares of Common Stock and Warrants to counsel for Subscriber, who shall release such shares and Warrants to Subscriber after the Aggregate Purchase Price has been paid to the Company. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and 2 3 any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as 3 4 defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or 4 5 (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement or pursuant to an available exemption to registration, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States. Accordingly, without agreeing to hold the Securities for any specific period of time, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations (such restrictions not in effect after two years). Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities (Subscriber is however entering into this transaction based upon the Company's 5 6 representations and covenants below in Section 5), or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a Material Adverse Effect. A "Material Adverse Effect" shall mean any effect on the business, operations, properties, results of operations, prospects, or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement, or Warrants in any material respect. Except as set forth in Section 2.14, the Company is not in violation of any material terms of its Certificate of Incorporation (as defined below) or Bylaws (as defined below). 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 6 7 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a Material Adverse Effect on the Company. The financial statements of the Company included in the Company's filings with the SEC as referenced above comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement (and all Exhibits annexed hereto) and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement (and all Exhibits annexed hereto) by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a Material Adverse Effect. 7 8 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a Material Adverse Effect on the Company. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a Material Adverse Effect on the Company. 8 9 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in a Material Adverse Effect on the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were 9 10 outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. No shares of Common Stock or preferred stock of the Company are entitled to preemptive or similar rights. Except (i) as disclosed in the Reports, (ii) for the issuance to Subscribers and other investors of Common Stock and Warrants pursuant to a private placement involving an aggregate investment of up to One Million Twenty-five Thousand United States Dollars (US$1,025,000), (iii) for the delivery to Subscribers of promissory notes in an aggregate principal amount of Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10) that are convertible into Common Stock according to their terms, and (iv) the issuance of Series B 10% Redeemable Convertible Preferred Stock to certain investors that is convertible into Common Stock according to the terms of the Company's Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock, there are no outstanding options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any subsidiary is or may become bound to issue additional shares of Common Stock or securities or rights convertible or exchangeable into shares of Common Stock. Except as disclosed in the Reports, to the knowledge of the Company, no Person or group of Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the 1934 Act) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of five percent of the Common Stock. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. 3.21 Corporate Documents. The Company has furnished or made available to the Subscribers true and correct copies of the Company's Certificate of Incorporation, as amended and in effect on the date hereof (the "Certificate of Incorporation"), and the Company's bylaws, as amended and in effect on the date hereof (the "Bylaws"). The Certificate of Incorporation and Bylaws are in full force and effect as of the Closing Date, without change or amendment. 3.22 No Material Adverse Effect. Since January 1, 1999, no Material Adverse Effect has occurred or exists with respect to the Company, except as disclosed in the Reports, or as publicly announced. 3.23 Employee Relations. The Company is not involved in any labor dispute, nor, to the knowledge of the Company, is any such dispute threatened which could reasonably be expected to have a Material Adverse Effect. None of the Company's employees is a member of a union and the Company believes that its relations with its employees are good. 3.24 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has no notice to believe that it will not be able to renew its existing insurance coverage 10 11 as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. 3.25 Board Approval. The Board of Directors of the Company has concluded, in its good faith business judgment that the issuances of the Securities in connection with this Agreement are in the best interests of the Company. 3.26 Patents and Trademarks. The Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses, trade secrets and other intellectual property rights which are necessary for use in connection with its business or which the failure to so have would have a Material Adverse Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS"). To the best knowledge of the Company, none of the Intellectual Property Rights infringe on any rights of any other Person, and the Company either owns or has duly licensed or otherwise acquired all necessary rights with respect to the Intellectual Property Rights. The Company has not received any notice from any third party of any claim of infringement by the Company of any of the Intellectual Property Rights, and has no reason to believe there is any basis for any such claim. To the best knowledge of the Company, there is no existing infringement by another Person on any of the Intellectual Property Rights. 3.27 Use of Proceeds. The net proceeds are to be used for general working capital and not for the repayment of any judgment. 3.28 Taxes. Except for the Company's failure to (i) file its federal and state tax returns for its fiscal year 1998, and (ii) pay any federal or state taxes owed for its fiscal year 1998, (which taxes are not of a material amount), all federal, state, city and other tax returns, reports and declarations required to be filed by or on behalf of the Company have been filed and such returns are complete and accurate and disclose all taxes (whether based upon income, operations, purchases, sales, payroll, licenses, compensation, business, capital, properties or assets or otherwise) required to be paid in the periods covered thereby. 3.29 No Bankruptcy. The Company is aware of no facts or claims against it that would, and the Company has no present intention to, liquidate the assets of the Company and/or seek bankruptcy protection either voluntarily or involuntarily. SECTION 4. COVENANTS OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. 11 12 (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. The Company shall (a) not later than the fifth Business Day following the Closing Date prepare and file with the OTC Bulletin Board an additional shares listing application covering at least the sum of (i) the shares of Common Stock issued on the Closing Date, and (ii) the Warrant Shares issuable upon exercise in full of the Warrants, (b) take all steps necessary to cause such shares to be approved for listing on the OTC Bulletin Board (as well as on any other national securities exchange, market or trading facility on which the Common Stock is then listed) as soon as possible thereafter, and (c) provide to the Subscribers evidence of such listing, and the Company shall maintain the listing of its Common Stock on such exchange or market for so long as the Securities is owned by any of the Subscribers. In addition, if at any time the number of shares of Common Stock issuable on exercise in full of the Warrant is greater than the number of shares of Common Stock theretofore listed with the OTC Bulletin Board (and any such other national securities exchange, market or trading facility), the Company shall promptly take such action (including the actions described in the preceding sentence), if required pursuant to the rules and regulations of the OTC Bulletin Board, to file an additional shares listing application with the OTC Bulletin Board (and any such other national securities exchange, market or trading facility) covering at least a number of shares equal to the number of Warrant Shares as would be issuable upon exercise in full of the Warrants. The Company warrants that it (i) has not received any notice, oral or written, affecting its continued listing on the OTC Bulletin Board, and (ii) is in full compliance with the requirements for continued listing on the OTC Bulletin Board. The Company will take no action, which would impact its continued listing or the eligibility of the Company for such listing. The Company will comply with the listing and trading requirements of its Common Stock on the OTC Bulletin Board and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the OTC Bulletin Board. If the Company receives notification from Nasdaq or any other controlling entity stating that the Company is not in compliance with the listing qualifications of such OTC Bulletin Board, the Company will immediately thereafter give written notice to the Subscribers and take all action necessary to bring the Company into compliance with all applicable listing standards of the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants and shall deliver the shares of Common Stock to the Subscriber upon exercise of the Warrants as per the terms of the Warrant. SECTION 5. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: 12 13 (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) not take any action or file any document (whether or not permitted by the 1934 Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act. (iv) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. SECTION 6. INDEMNIFICATION. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. SECTION 7. REGISTRATION OR EXEMPTION REQUIREMENTS. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless they are registered or such registration is not required. SECTION 8. LEGEND. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. 13 14 The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. SECTION 9. CLOSING DATE. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. SECTION 10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. SECTION 11. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Date; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. 14 15 SECTION 12. MISCELLANEOUS. 12.1 Governing Law/Jurisdiction. This Agreement will be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement (or any Exhibit annexed hereto) or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 15 16 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 16 17 IN WITNESS WHEREOF, this Agreement was duly executed on and as of December 29, 1999. SPATIALIZER AUDIO LABORATORIES, INC., By: /s/ HENRY R. MANDELL ------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer CPR (USA) INC. By: /s/Steven S. Rogers ------------------- Name: Steven S. Rogers ---------------- Title: Managing Director, CPR (USA), Inc. ---------------------------------- LIBERTYVIEW FUNDS, L.P. By: /s/ Steven S. Rogers -------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- LIBERTYVIEW FUND, LLC By: /s/ Steven S. Rogers -------------------- Name: ------------------------------- Title: Authorized Signatory -------------------- 17 18 SCHEDULE A
SUBSCRIBER NUMBER OF SHARES NUMBER NAME AND ADDRESS PURCHASE PRICE OF COMMON STOCK OF WARRANTS - ---------------- -------------- --------------- ----------- CPR (USA) Inc. US$225,000 403,769 450,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982 LibertyView Funds, L.P. US$180,000 323,015 360,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982 LibertyView Fund, LLC US$45,000 80,754 90,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982
19 SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 20 EXHIBIT A Stock Purchase Warrant 21 THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 450,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, CPR (USA) INC. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Four Hundred Fifty Thousand (450,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Twenty-five Thousand United States Dollars (US$225,000) between the Company, the Investor, LIBERTYVIEW FUNDS, L.P., and LIBERTYVIEW FUND, LLC, and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable or assignable other than to an affiliate of the Investor. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; 22 whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 23 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide 24 its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the 25 date hereof. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 26 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 27 NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated: CPR (USA) INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 28 EXHIBIT B Registration Rights Agreement 29 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, collectively referred to as the "Holder" or "Holders"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, an aggregate of Eight Hundred Seven Thousand Five Hundred Thirty-eight (807,538) shares of Common Stock, and a Warrant to purchase an aggregate of Nine Hundred Thousand (900,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holders are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holders pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. 30 Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. 31 (f) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by the April 15, 2000 (the "EFFECTIVE DATE"), then the Company will pay, in cash, to the Holders on a pro-rata basis by wire transfer, as liquidated damages for such failure and not as a penalty, two (2%) percent of the then value of the Registrable Securities then outstanding each month thereafter until the Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder(s). If the Company does not remit the damages to the Holder as set forth above, the Company will pay the to the Holders the reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Holders in cash immediately if the registration of the Registrable Securities are not effected; provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Registrable Securities pursuant to this Section. The registration of the Securities pursuant to this provision shall not affect or limit Holder's other rights or remedies as set forth in this Agreement. (g) The Company agrees that within three Business Days after being notified by the SEC that the Registration Statement(s) has been cleared to go effective, the Company it will declare such Registration Statement effective. The Company also agrees that it shall respond in writing to any questions and/or comments from the SEC that relate to the Registration Statement(s) within ten business days of receipt of such question or comment. (h) In the event the number of shares of Common Stock included in the Registration Statement shall be insufficient to cover the number of Registrable Securities due to the Holder under the terms of the Purchase Agreement and/or the Notes, the Company agrees that it shall file either a new Registration Statement including such additional shares or amend the then existing Registration Statement. The Company agrees that in such event it will file with the SEC either an amendment to the then existing Registration Statement or a new Registration Statement within 30 days of when required hereunder, and use its best efforts to cause either the amendment or such Registration Statement to become effective within 90 calendar days from when required. If such amendment or new Registration Statement is not filed and/or declared effective in a timely manner as set forth herein, the Company shall be subject to liquidated damages as pursuant to the provisions of Section 3(f). Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: 32 (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall be assigned to affiliates, heirs, and successors of the Holders. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. 33 Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue 34 statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. 35 Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) business days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to 36 include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision 37 had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 38 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- WITNESSED: - ------------------------- Margaret G. Graf CPR (USA) INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- LIBERTYVIEW FUNDS, L.P. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- LIBERTYVIEW FUND, LLC By: ------------------------------- Name: ----------------------------- Title: ---------------------------- EX-4.12 5 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.12 CPR (USA) INC. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 450,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, CPR (USA) INC. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Four Hundred Fifty Thousand (450,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Twenty-five Thousand United States Dollars (US$225,000) between the Company, the Investor, LIBERTYVIEW FUNDS, L.P., and LIBERTYVIEW FUND, LLC, and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable or assignable other than to an affiliate of the Investor. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of 2 CPR (USA) INC. the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 3 CPR (USA) INC. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 CPR (USA) INC. Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 5 CPR (USA) INC. hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 6 CPR (USA) INC. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell -------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- 6 7 CPR (USA) INC. NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:_______________ CPR (USA) INC. By:_______________________________ Name:_____________________________ Title:____________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.13 6 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.13 LIBERTYVIEW FUNDS, L.P. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 360,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, LIBERTYVIEW FUNDS, L.P. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Three Hundred Sixty Thousand (360,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of One Hundred Eighty Thousand United States Dollars (US$180,000) between the Company, the Investor, CPR (USA) INC., and LIBERTYVIEW FUND, LLC, and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable or assignable other than to an affiliate of the Investor. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for 2 LIBERTYVIEW FUNDS, L.P. the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 3 LIBERTYVIEW FUNDS, L.P. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 LIBERTYVIEW FUNDS, L.P. Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 5 LIBERTYVIEW FUNDS, L.P. hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 6 LIBERTYVIEW FUNDS, L.P. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- 6 7 LIBERTYVIEW FUNDS, L.P. NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ LIBERTYVIEW FUNDS, L.P. By:_______________________________ Name:_____________________________ Title:____________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.14 7 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.14 LIBERTYVIEW FUND, LLC THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 90,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, LIBERTYVIEW FUND, LLC (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Ninety Thousand (90,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Forty-five Thousand United States Dollars (US$45,000) between the Company, the Investor, LIBERTYVIEW FUNDS, L.P., and CPR (USA) INC., and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable or assignable other than to an affiliate of the Investor. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for 2 LIBERTYVIEW FUND, LLC the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 3 LIBERTYVIEW FUND, LLC 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 LIBERTYVIEW FUND, LLC Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 5 LIBERTYVIEW FUND, LLC hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 6 LIBERTYVIEW FUND, LLC IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- 6 7 LIBERTYVIEW FUND, LLC NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ LIBERTYVIEW FUND, LLC By:_______________________________ Name:_____________________________ Title:____________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.15 8 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.15 SUBSCRIPTION REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, collectively referred to as the "Holder" or "Holders"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, an aggregate of Eight Hundred Seven Thousand Five Hundred Thirty-eight (807,538) shares of Common Stock, and a Warrant to purchase an aggregate of Nine Hundred Thousand (900,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holders are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holders pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that 2 SUBSCRIPTION such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or 2 3 SUBSCRIPTION transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. (f) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by the April 15, 2000 (the "EFFECTIVE DATE"), then the Company will pay, in cash, to the Holders on a pro-rata basis by wire transfer, as liquidated damages for such failure and not as a penalty, two (2%) percent of the then value of the Registrable Securities then outstanding each month thereafter until the Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder(s). If the Company does not remit the damages to the Holder as set forth above, the Company will pay the to the Holders the reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Holders in cash immediately if the registration of the Registrable Securities are not effected; provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Registrable Securities pursuant to this Section. The registration of the Securities pursuant to this provision shall not affect or limit Holder's other rights or remedies as set forth in this Agreement. (g) The Company agrees that within three Business Days after being notified by the SEC that the Registration Statement(s) has been cleared to go effective, the Company it will declare such Registration Statement effective. The Company also agrees that it shall respond in writing to any questions and/or comments from the SEC that relate to the Registration Statement(s) within ten business days of receipt of such question or comment. (h) In the event the number of shares of Common Stock included in the Registration Statement shall be insufficient to cover the number of Registrable Securities due to the Holder under the terms of the Purchase Agreement and/or the Notes, the Company agrees that it shall file either a new Registration Statement including such additional shares or amend the then existing Registration Statement. The Company agrees that in such event it will file with the SEC either an amendment to the then existing Registration Statement or a new Registration Statement within 30 days of when required hereunder, and use its best efforts to cause either the amendment or such Registration Statement to become effective within 90 calendar days from when required. If such amendment or new Registration Statement is not filed and/or declared effective in a timely manner as set forth herein, the Company shall be subject to liquidated damages as pursuant to the provisions of Section 3(f). Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information 3 4 SUBSCRIPTION reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has 4 5 SUBSCRIPTION knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall be assigned to affiliates, heirs, and successors of the Holders. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations 5 6 SUBSCRIPTION promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the 6 7 SUBSCRIPTION Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7 8 SUBSCRIPTION Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) business days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 9 SUBSCRIPTION Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 9 10 SUBSCRIPTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- WITNESSED: /S/ Margaret G. Graf - --------------------- Margaret G. Graf CPR (USA) INC. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Managing Director, ------------------ CPR (USA), Inc. LIBERTYVIEW FUNDS, L.P. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- LIBERTYVIEW FUND, LLC By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- 10 EX-4.16 9 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.16 CPR (USA) INC. SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$112,620.55 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001
FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to CPR (USA) INC. ("Payee"), the principal amount of One Hundred Twelve Thousand, Six Hundred Twenty and 55/100 Dollars (US$112,620.55), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the 2 CPR (USA) INC. event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered 2 3 CPR (USA) INC. by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. 3 4 CPR (USA) INC. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been 4 5 CPR (USA) INC. issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or 5 6 CPR (USA) INC. (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named 6 7 CPR (USA) INC. below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted 7 8 CPR (USA) INC. by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 9 CPR (USA) INC. IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ Henry r. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- 9 EX-4.17 10 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.17 LIBERTYVIEW FUNDS, L.P. SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$90,096.43 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001 FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to LIBERTYVIEW FUNDS, L.P. ("Payee"), successor-in-interest to LIBERTYVIEW PLUS FUND, the principal amount of Ninety Thousand, Ninety-six and 43/100 Dollars (US$90,096.43), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New 2 LIBERTYVIEW FUNDS, L.P. Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead 2 3 LIBERTYVIEW FUNDS, L.P. round the number of shares of Common Stock issued up to the next whole share of Common Stock. In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) 3 4 LIBERTYVIEW FUNDS, L.P. be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall 4 5 LIBERTYVIEW FUNDS, L.P. provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or 5 6 LIBERTYVIEW FUNDS, L.P. (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 6 7 LIBERTYVIEW FUNDS, L.P. 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace 7 8 LIBERTYVIEW FUNDS, L.P. and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 9 IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- 9 EX-4.18 11 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.18 LIBERTYVIEW FUND, LLC SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$22,524.12 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001 FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to LIBERTYVIEW FUND, LLC ("Payee"), the principal amount of Twenty-two Thousand, Five Hundred Twenty-four and 12/100 Dollars (US$22,524.12), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion 2 LIBERTYVIEW FUND, LLC Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 2 3 LIBERTYVIEW FUND, LLC In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive 3 4 LIBERTYVIEW FUND, LLC trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax 4 5 LIBERTYVIEW FUND, LLC under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or 5 6 LIBERTYVIEW FUND, LLC (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 6 7 LIBERTYVIEW FUND, LLC 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace 7 8 LIBERTYVIEW FUND, LLC and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 9 LIBERTYVIEW FUND, LLC IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer 9 EX-4.19 12 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.19 CONVERTIBLE NOTES REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, the "Holders"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are receiving from the Company that certain Secured Non-Negotiable Convertible Promissory Note (the "Note"), dated of even date herewith, made by the Company in favor of the Holders. WHEREAS, pursuant to the terms and conditions of the Note, the principal and accrued interest outstanding under the Note may under certain circumstances be converted into shares of Common Stock. (Capitalized terms used and not otherwise defined herein shall have the respective meanings set forth in the Note). The shares of Common Stock issuable to Holders pursuant to a conversion under the Note are referred to herein as the "Note Shares"; and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" shall mean the Note Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holders acknowledge and understand that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holders understand that no disposition or transfer of the Registrable Securities may be made by 2 CONVERTIBLE NOTES Holders in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holders' Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of Registrable Securities to be registered shall be the number of shares of Common Stock that the Company would issue if the entire amount of principal and accrued interest outstanding under the Note as of the date hereof were converted into shares of Common Stock at the Floor Price. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holders shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holders reasonably designate and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holders with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holders. (d) The Company shall not be required by this Section 3 to include the Holders' Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holders and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the 2 3 CONVERTIBLE NOTES Holders and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. (f) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by the April 15, 2000 (the "EFFECTIVE DATE"), then the Company will pay, in cash, to the Holders on a pro-rata basis by wire transfer, as liquidated damages for such failure and not as a penalty, two (2%) percent of the principal amount of the Notes then outstanding each month thereafter until the Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder(s). If the Company does not remit the damages to the Holder as set forth above, the Company will pay the to the Holders the reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Holders in cash immediately if the registration of the Securities are not effected; provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Securities pursuant to this Section. The registration of the Securities pursuant to this provision shall not affect or limit Holder's other rights or remedies as set forth in this Agreement. (g) The Company agrees that within three business days after being notified by the SEC that the Registration Statement(s) has been cleared to go effective, the Company it will declare such Registration Statement effective. The Company also agrees that it shall respond in writing to any questions and/or comments from the SEC that relate to the Registration Statement(s) within ten business days of receipt of such question or comment. (h) In the event the number of shares of Common Stock included in the Registration Statement shall be insufficient to cover the number of Registrable Securities due to the Holder under the terms of the Purchase Agreement and/or the Notes, the Company agrees that it shall file either a new Registration Statement including such additional shares or amend the then existing Registration Statement. The Company agrees that in such event it will file with the SEC either an amendment to the then existing Registration Statement or a new Registration Statement within 30 days of when required hereunder, and use its best efforts to cause either the amendment or such Registration Statement to become effective within 90 calendar days from when required. If such amendment or new Registration Statement is not filed and/or declared effective in a timely manner as set forth herein, the Company shall be subject to liquidated damages as pursuant to the provisions of Section 3(f). 3 4 CONVERTIBLE NOTES Section 4. Cooperation with Company. Holders will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holders of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holders such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as the Holders may reasonably request in order to facilitate the public sale or other disposition of the securities owned by the Holders; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holders shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holders to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holders; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; 4 5 CONVERTIBLE NOTES (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holders under this Agreement shall only be assigned to affiliates, heirs, and successors of the Holders. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to any Holder upon the occurrence of any of the following: (a) all of such Holder's securities subject to this Agreement have been registered; (b) the Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) the Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holders and each person, if any, who controls any Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or 5 6 CONVERTIBLE NOTES liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel 6 7 CONVERTIBLE NOTES reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7 8 CONVERTIBLE NOTES Section 10. Notices. Any notice pursuant to this Agreement by the Company or by any Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holders: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark (b) If to the Company, at the address set forth above, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) business days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holders shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holders agree they shall not have any piggy-back registration rights pursuant to this Section if the Note Shares may be sold in the United States pursuant to the provisions of Rule 144. The Holders shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holders or not include the Holders as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the Holders, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the Holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the 8 9 CONVERTIBLE NOTES Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holders. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Note. [Remainder of Page Intentionally Left Blank] 9 10 CONVERTIBLE NOTES IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell ---------------- Title: Interim Chief Executive Officer ------------------------------- WITNESSED: /S/ Margaret G. Graf - --------------------- Margaret G. Graf CPR (USA) INC. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Managing Director, ------------------ CPR (USA), Inc. LIBERTYVIEW FUNDS, L.P. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- LIBERTYVIEW FUND, LLC By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- 10 EX-4.20 13 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.20 AGREEMENT REGARDING CANCELLATION OF WARRANTS This AGREEMENT REGARDING CANCELLATION OF WARRANTS (this "Agreement"), dated as of December 29, 1999, is entered into by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC"), CLARION FINANZ, A.G., a Swiss corporation ("Clarion"), and ATON SELECT FUND, LTD., a Swiss corporation ("Aton", and together with CPR, LP, LLC and Clarion, collectively, "Holders"). WHEREAS, the Holders are holders of Stock Purchase Warrants (the "Warrants") to purchase shares of common stock of the Company, par value $0.01 per share (the "Common Stock"), in the amounts set forth on Schedule A attached hereto; WHEREAS, concurrently herewith, the Company intends to enter into a private placement (the "Private Placement") of Common Stock in return for investments of up to an aggregate amount of One Million Fifty Thousand United States Dollars (US$1,050,000); WHEREAS, the Company deems the Private Placement to be in the best interest of the Company; WHEREAS, the Company requires that each Holder agree to cancel its Warrants as a condition to consummating the Private Placement and all concurrent transactions contemplated thereby. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. All Warrants are hereby cancelled. As of the date hereof, the Holders shall have no further rights of any kind under the Warrants, including without limitation the right to purchase or receive Common Stock pursuant to the Warrants. 2. All written documentation evidencing the Warrants shall be null and void and of no force or effect. The Holders shall return any such written documentation to the Company for cancellation. The failure of a Holder to return such documentation shall not affect the void and cancelled status of such Warrant. 3. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to conflict of laws principles. [Remainder of Page Intentionally Left Blank] 2 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------- Name: Henry R. Mandell Title: Chief Executive Officer CPR (USA) INC. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Managing Director, ------------------ CPR (USA), Inc. LIBERTYVIEW FUNDS, L.P. By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- LIBERTYVIEW FUND, LLC By: /S/ Steven S. Rogers --------------------- Name: Steven S. Rogers ---------------- Title: Authorized Signatory -------------------- 2 3 CLARION FINANZ, A.G. By: /S/ C. Civelli --------------- Name: Carlo Civelli ------------- Title: Director -------- ATON SELECT FUND, LTD. By: /S/ Barcikoski --------------- Name: Barcikoski Jan -------------- Title: Director -------- 3 4 SCHEDULE A
HOLDER NUMBER OF WARRANTS ------ ------------------ CPR (USA) Inc. 150,000 LibertyView Funds, L.P. 120,000 LibertyView Fund, LLC 30,000 Clarion Finanz, A.G. 50,000 Aton Select Fund, Ltd. 150,000 ======= TOTAL: 500,000
EX-4.21 14 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 LUFENG INVESTMENTS THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. 2 Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: SECTION 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of One Hundred Thousand U.S. Dollars (US$100,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing One Hundred Thousand U.S. Dollars (US$100,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement 2 3 or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under 3 4 the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or 4 5 (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that 5 6 Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. 6 7 There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed 7 8 of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 8 9 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. 9 10 SECTION 4. COVENANTS OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer SECTION 5. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: 11 (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. SECTION 6. INDEMNIFICATION. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. SECTION 7. REGISTRATION OR EXEMPTION REQUIREMENTS. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. SECTION 8. LEGEND. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also 11 12 bear any legend required under any applicable state securities law. SECTION 9. CLOSING DATE. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. SECTION 10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. SECTION 11. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. 12 13 SECTION 12. MISCELLANEOUS. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 13 14 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 14 15 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ HENRY R. MANDELL Name: Henry R. Mandell Title: Interim Chief Executive Officer SUBSCRIBER: LUFENG INVESTMENTS By: /S/ A. DE NAZARETH Name: A. De Nazareth Title: Co. Secretary Executed this 29th day of December, 1999. 15 16 SCHEDULE A
SUBSCRIBER NUMBER OF SHARES NUMBER NAME AND ADDRESS PURCHASE PRICE OF COMMON STOCK OF WARRANTS - ---------------- -------------- --------------- ----------- Lufeng Investments US $100,000 179,453 200,000 [address]
17 SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 18 EXHIBIT A Stock Purchase Warrant 19 THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 200,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, LUFENG INVESTMENTS (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Two Hundred Thousand (200,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of One Hundred Thousand United States Dollars (US$100,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common 20 Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 21 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide 22 its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the 23 date hereof. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 24 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 25 NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ LUFENG INVESTMENTS By: --------------------------------- Name: ------------------------------- Title: ------------------------------ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 26 EXHIBIT B Registration Rights Agreement 27 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between LUFENG INVESTMENTS (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, One Hundred Seventy-Nine Thousand Four Hundred Fifty-Three (179,453) shares of Common Stock, and a Warrant to purchase an aggregate of Two Hundred Thousand (200,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate 28 form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. 29 Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 30 Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all 31 purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in 32 writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant 33 to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 34 Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ WITNESSED: - ------------------------ Margaret G. Graf LUFENG INVESTMENTS By: --------------------------------- Name: ------------------------------- Title: ------------------------------ EX-4.22 15 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.22 LUFENG INVESTMENTS THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 200,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, LUFENG INVESTMENTS (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Two Hundred Thousand (200,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of One Hundred Thousand United States Dollars (US$100,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for 2 LUFENG INVESTMENTS the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 3 LUFENG INVESTMENTS 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 LUFENG INVESTMENTS Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 5 LUFENG INVESTMENTS hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 6 LUFENG INVESTMENTS IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer 6 7 LUFENG INVESTMENTS NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ LUFENG INVESTMENTS By:____________________________ Name:__________________________ Title:_________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.23 16 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.23 LUFENG INVESTMENTS REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between LUFENG INVESTMENTS (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, One Hundred Seventy-Nine Thousand Four Hundred Fifty-Three (179,453) shares of Common Stock, and a Warrant to purchase an aggregate of Two Hundred Thousand (200,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. 2 LUFENG INVESTMENTS Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. 2 3 LUFENG INVESTMENTS (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 4 LUFENG INVESTMENTS (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 5 LUFENG INVESTMENTS final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 6 LUFENG INVESTMENTS connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 7 LUFENG INVESTMENTS expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. 7 8 LUFENG INVESTMENTS Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 8 9 LUFENG INVESTMENTS IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer WITNESSED: /S/ Margaret G. Graf - ------------------------------- Margaret G. Graf LUFENG INVESTMENTS By: /S/ A. De Nazareth ------------------------------- Name: A. De Nazareth Title: Co. Secretary 9 EX-4.24 17 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.24 BANK INSINGER DE BEAUFORT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. 2 Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: SECTION 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by any authoritative source acceptable to the Company. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. In connection with this transaction, the parties agree that the Company shall pay a finder's fee to Bristol Capital, LLC, pursuant to the Finder's Fee Agreement between the Company and Bristol Capital, LLC dated as of December 27, 1999. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of 2 3 any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act 3 4 whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; 4 5 (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 promulgated by the SEC under the Act is not presently available to exempt the sale of the Securities from the registration requirements of the Act. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as 5 6 applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact 6 7 required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 7 8 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the conversion or exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted in the Reports. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or 8 9 subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. 9 10 SECTION 4. COVENANTS OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer SECTION 5. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: 10 11 (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. SECTION 6. INDEMNIFICATION. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. SECTION 7. REGISTRATION OR EXEMPTION REQUIREMENTS. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. SECTION 8. LEGEND. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also 11 12 bear any legend required under any applicable state securities law. SECTION 9. CLOSING DATE. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. SECTION 10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. SECTION 11. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. 12 13 SECTION 12. MISCELLANEOUS. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 13 14 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. 12.9 Restriction on Trading Prior to Exercise of Warrants. Subscriber hereby agrees that, during the ten (10) trading days immediately preceding any exercise of its right to purchase Common Stock under the Warrant, it shall not, whether directly or indirectly, engage in any short sales of any shares of capital stock of the Company. Subscriber hereby agrees that it shall not be entitled to exercise its rights under the Warrant until ten (10) consecutive trading days have elapsed during which Subscriber has not engaged in any transaction prohibited by this Section 12.9. [Remainder of Page Intentionally Left Blank] 14 15 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ Henry R. Mandell - --------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer SUBSCRIBER: BANK INSINGER DE BEAUFORT, a Netherlands bank By: /S/ M.G.Boessenhoer /S/ R. Mooji ---------------------------------------- Name: M.G. Boessenhoer R. Mooji Title: Manager Operations Director Executed this 29th day of December, 1999. 15 16 SCHEDULE A
SUBSCRIBER NUMBER OF SHARES NUMBER NAME AND ADDRESS PURCHASE PRICE OF COMMON STOCK OF WARRANTS - ---------------- -------------- --------------- ----------- BANK INSINGER DE BEAUFORT US $250,000 448,632 500,000 Herengracht 551 1017 BW Amsterdam The Netherlands
17 SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 18 EXHIBIT A Stock Purchase Warrant 19 THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, BANK INSINGER DE BEAUFORT, a Netherlands Bank (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Agreement and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. 20 Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except as follows: (i) to a person who, in the opinion of counsel to the Company, is a person to whom the Warrant Shares may legally be transferred without registration and without the delivery of a current prospectus under the Act with respect thereto, and then only against receipt of the written agreement of such person to comply with the provisions of this Section 6(a) with respect to any resale or other disposition of such securities; or (ii) to any person upon the effectiveness of the Company's Registration Statement on Form S-3 to be filed pursuant to that certain Registration Rights Agreement (the "Registration Rights Agreement"), dated of even date herewith, between the Company and the Investor. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption 21 from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or would have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (b) The Investor shall be granted registration rights for the Warrant Shares pursuant to the Registration Rights Agreement. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide 22 its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. 23 (b) Governing Law; Jurisdiction. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law principles or rules. The Company consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. The Company hereby agrees that if Investor obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the Company, and the Company hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. The Company irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. (c) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (d) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (e) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. (f) Legal Costs and Fees. In any action to enforce the provisions of this Warrant, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] 24 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By:___________________________________ Name: Henry R. Mandell Title: Interim Chief Executive Officer 25 NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ BANK INSINGER DE BEAUFORT By:_________________________________ Name:_______________________________ Title:______________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 26 EXHIBIT B Registration Rights Agreement 27 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated the 29th day of December, 1999, between BANK INSINGER DE BEAUFORT, a Netherlands Bank with an address at Herengracht 551, 1017 BW Amsterdam, The Netherlands (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-eight Thousand Six Hundred Thirty-two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration 28 statement on Form S-3 (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by May 1, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold by Holder pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf, the fees and expenses of any counsel it selects, and such other extraordinary expenses as are necessary to qualify the sale of the Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by April 15, 2000, then the Company will pay, in cash, to the Holder by wire transfer, as liquidated damages for such failure and not as a penalty, two percent (2%) of the Purchase Price (as defined in the Subscription Agreement) per share of Registrable Security each month thereafter until such Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. 29 Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 30 Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Amended Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all 31 purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Amended Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in 32 writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant 33 to Form S-8) and must be notified in writing of such filing; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement constitutes the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 34 Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. Section 16. Legal Costs and Fees. In any action to enforce the provisions of this Agreement, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name: Henry R. Mandell Title: Interim Chief Executive Officer WITNESSED: ____________________________ Margaret G. Graf BANK INSINGER DE BEAUFORT By:________________________________ Name:______________________________ Title:_____________________________ EX-4.25 18 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.25 BANK INSINGER DE BEAUFORT THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, BANK INSINGER DE BEAUFORT, a Netherlands Bank (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Agreement and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this 2 BANK INSINGER DE BEAUFORT Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except as follows: (i) to a person who, in the opinion of counsel to the Company, is a person to whom the Warrant Shares may legally be transferred without registration and without the delivery of a current prospectus under the Act with respect thereto, and then only against receipt of the written agreement of such person to comply with the provisions of this Section 6(a) with respect to any resale or other disposition of such securities; or (ii) to any person upon the effectiveness of the Company's Registration Statement on Form S-3 to be filed pursuant to that certain Registration Rights Agreement (the "Registration Rights Agreement"), dated of even date herewith, between the Company and the Investor. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable 2 3 BANK INSINGER DE BEAUFORT state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or would have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (b) The Investor shall be granted registration rights for the Warrant Shares pursuant to the Registration Rights Agreement. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 BANK INSINGER DE BEAUFORT Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. 4 5 BANK INSINGER DE BEAUFORT (b) Governing Law; Jurisdiction. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law principles or rules. The Company consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. The Company hereby agrees that if Investor obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the Company, and the Company hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. The Company irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. (c) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (d) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (e) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. (f) Legal Costs and Fees. In any action to enforce the provisions of this Warrant, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] 5 6 BANK INSINGER DE BEAUFORT IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell --------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer 6 7 BANK INSINGER DE BEAUFORT NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ BANK INSINGER DE BEAUFORT By:______________________________ Name:____________________________ Title:___________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.26 19 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.26 BANK INSINGER DE BEAUFORT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated the 29th day of December, 1999, between BANK INSINGER DE BEAUFORT, a Netherlands Bank with an address at Herengracht 551, 1017 BW Amsterdam, The Netherlands (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-eight Thousand Six Hundred Thirty-two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. 2 BANK INSINGER DE BEAUFORT Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by May 1, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold by Holder pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf, the fees and expenses of any counsel it selects, and such other extraordinary expenses as are necessary to qualify the sale of the Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by April 15, 2000, then the Company will pay, in cash, to the Holder by wire transfer, as liquidated damages for such failure and not as a penalty, two percent (2%) of the Purchase Price (as defined in the Subscription Agreement) per share of Registrable Security each month thereafter until such Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder. 2 3 BANK INSINGER DE BEAUFORT (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 4 BANK INSINGER DE BEAUFORT (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 5 BANK INSINGER DE BEAUFORT final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Amended Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Amended Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 6 BANK INSINGER DE BEAUFORT connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 7 BANK INSINGER DE BEAUFORT expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be 7 8 BANK INSINGER DE BEAUFORT considered an original document and which together shall be considered a complete document. This Agreement constitutes the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. Section 16. Legal Costs and Fees. In any action to enforce the provisions of this Agreement, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] 8 9 BANK INSINGER DE BEAUFORT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ----------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer WITNESSED: /S/ Margaret G. Graf - ----------------------------------- Margaret G. Graf BANK INSINGER DE BEAUFORT By: /S/ R. Mooji /S/ M.G. Boessenhoer -------------------------------------- Name: R. Mooji M.G. Boessenhoer Title: Director Manager Operations 9 EX-4.27 20 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.27 ROMOFIN AG THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. 2 Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: SECTION 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's 2 3 charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: 3 4 (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; 4 5 (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. 5 6 Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) 6 7 months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 7 8 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade 8 9 name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such 9 10 transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. SECTION 4. COVENANTS OF THE COMPANY. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions 10 11 immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer SECTION 5. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. SECTION 6. INDEMNIFICATION. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. SECTION 7. REGISTRATION OR EXEMPTION REQUIREMENTS. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 11 12 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. SECTION 8. LEGEND. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. SECTION 9. CLOSING DATE. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. SECTION 10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. 12 13 SECTION 11. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. SECTION 12. MISCELLANEOUS. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other 13 14 written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 14 15 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ HENRY R. MANDELL ------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer SUBSCRIBER: ROMOFIN AG By: /S/ B. J. MOSIMANN ---------------------------------- Name: B.J. Mosimann Title: President Executed this 29th day of December, 1999. 15 16 SCHEDULE A
SUBSCRIBER NUMBER OF SHARES NUMBER NAME AND ADDRESS PURCHASE PRICE OF COMMON STOCK OF WARRANTS - ---------------- -------------- --------------- ----------- ROMOFIN AG US $250,000 448,632 500,000 Burglestrasse 6 8027 Zurich, Switzerland
17 SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 18 EXHIBIT A Stock Purchase Warrant 19 THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, ROMOFIN, A.G. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Fifty Thousand United States Dollars (US$250,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on 20 the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 21 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject 22 to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or 23 any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 24 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 25 NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ ROMOFIN, A.G. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 26 EXHIBIT B Registration Rights Agreement 27 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between ROMOFIN, A.G. (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-Eight Thousand Six Hundred Thirty-Two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. 28 Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. 29 (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 30 (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information 31 furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such 32 counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 33 Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only 34 and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ WITNESSED: - --------------------- Margaret G. Graf ROMOFIN, A.G. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ EX-4.28 21 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.28 ROMOFIN, A.G. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, ROMOFIN, A.G. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Fifty Thousand United States Dollars (US$250,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for 2 ROMOFIN, A.G. the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 3 ROMOFIN, A.G. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 4 ROMOFIN, A.G. Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 5 ROMOFIN, A.G. hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 6 ROMOFIN, A.G. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ----------------------------------- Name: Henry R. Mandell --------------------------------- Title: Interim Chief Executive Officer -------------------------------- 6 7 ROMOFIN, A.G. NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated: ROMOFIN, A.G. ----------- By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EX-4.29 22 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.29 ROMOFIN, A.G. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between ROMOFIN, A.G. (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-Eight Thousand Six Hundred Thirty-Two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. 2 ROMOFIN, A.G. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. 2 3 ROMOFIN, A.G. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 4 ROMOFIN, A.G. (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 5 ROMOFIN, A.G. final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 6 ROMOFIN, A.G. connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 7 ROMOFIN, A.G. expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. 7 8 ROMOFIN, A.G. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 8 9 ROMOFIN, A.G. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ----------------------------------------- Name: Henry R. Mandell --------------------------------------- Title: Interim Chief Executive Officer -------------------------------------- WITNESSED: /S/ Margaret G. Graf - ---------------------------------- Margaret G. Graf ROMOFIN, A.G. By: /S/ B. J. Mosimann ----------------------------------------- Name: B. J. Mosimann --------------------------------------- Title: President -------------------------------------- 9 EX-4.30 23 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS 1 EXHIBIT 4.30 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. 10% CONVERTIBLE SERIES B PREFERRED STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. THIS 10% CONVERTIBLE SERIES B PREFERRED STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned parties in connection with the private placement of the 10% Convertible Series B Preferred Stock, $0.01 par value per share (the "Preferred Stock") of Spatializer Audio Laboratories, Inc., a corporation organized under the laws of Delaware, USA (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, (hereinafter referred to as the "Company") to the Subscribers listed on Schedule A annexed hereto (each a "Subscriber" or "Purchaser"). The terms on which the Preferred Stock may be converted into common stock of the Company, par value $0.01 per share (the "Common Stock") and the other terms of the Preferred Stock are set forth in the Certificate of Designation of the 10% Convertible Series B Preferred Stock (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Preferred Stock (sometimes referred to as the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 11 herein. 2 Each Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with each Subscriber, as follows: SECTION 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. 1.1 Closing. The Company will sell and each Subscriber will buy, in reliance upon the representations and warranties of the Company and the Subscribers contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Preferred Stock as set forth on Schedule A. 1.2 Cancellation of Existing Indebtedness. As of December 29, 1999, the Company owes that amount of outstanding principal and accrued interest thereon (the "Existing Indebtedness") as conclusively indicated for each Subscriber on Schedule B annexed hereto pursuant to those notes and agreements listed on Schedule B. The consideration for the issuance of shares of Preferred Stock to the Subscribers shall be the cancellation of the entire amount of Existing Indebtedness owed to the Subscribers. The Subscribers and the Company hereby agree that, upon the issuance of the Preferred Stock to the Subscribers in accordance with Schedule A, all Existing Indebtedness is completely extinguished, and that all obligations of the Company with respect to the Existing Indebtedness are completely satisfied and discharged. This Agreement constitutes the entire understanding of the Company and the Subscribers with respect to the Existing Indebtedness, and completely replaces and supercedes all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Existing Indebtedness, including without limitation those notes, agreements and understandings listed on Schedule B. All written documents that evidence or relate to any portion of the Existing Indebtedness shall be null and void and of no force or effect. Subscribers shall return any original copies of such documentation to the Company for cancellation. 1.3 Number of Shares. The number of shares of Preferred Stock to be issued to each Subscriber was determined by dividing (i) that portion of the Existing Indebtedness owed to such Subscriber as of December 29, 1999 (as set forth on Schedule B), by (ii) Ten Dollars (US$10.00); provided, however, that the Company shall not issue to any Subscriber a fraction of a share of Preferred Stock and shall instead round the number of shares of Preferred Stock issued up to the next whole share of Preferred Stock. 1.4 Dividends. Dividends will accrue and be paid at the rate of ten (10%) percent per annum on the Preferred Stock until the Preferred Stock has been converted, and all accrued dividends thereon shall be payable in Common Stock of the Company or in cash at the time of conversion at the option of the Company. For purposes of calculating dividends, each share of Preferred Stock shall be deemed to have a face value of Ten Dollars (US$10.00). SECTION 2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Each Subscriber hereby acknowledges, represents, warrants and agrees as follows: 2 3 2.1 Organization and Authorization. If not an individual, it is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that any Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 3 4 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of $5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; 4 5 (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 5 6 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 promulgated by the SEC under the Act is not presently available to exempt the sale of the Securities from the registration requirements of the Act. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.13. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. For so long as any shares of Preferred Stock held by any Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 6 7 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscribers which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under 7 8 state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule C annexed hereto, The Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the conversion or exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule C annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 8 9 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted in the Reports. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, 9 10 as long as the Preferred Stock is outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issued upon conversion of the Preferred Stock remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscribers shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of preferred stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. SECTION 4. COVENANTS OF THE COMPANY. For so long as any shares of Preferred Stock held by Subscribers remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscribers to exercise its right to convert the Preferred Stock by telecopying an executed and completed Notice of Conversion (in the form of Exhibit B annexed hereto) to the Company and delivering the original Notice of Conversion and the certificates representing the Preferred Stock to the Company by overnight courier. Each business date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company 10 11 will transmit the certificates representing shares of Common Stock issuable upon conversion of any Preferred Stock (together with the certificates representing the Preferred Stock not so converted) to the Subscriber via overnight courier, by electronic transfer or otherwise within three (3) business days after the Conversion Date if the Company has received the original Notice of Conversion and Preferred Stock Certificate being converted by such date. In addition to any other remedies which may be available to Subscribers, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, the Subscriber will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. The Notice of Conversion and Preferred Stock representing the portion of the Preferred Stock converted shall be delivered as follows: If to the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9751 Attn: Henry R. Mandell, Interim Chief Executive Officer If to Subscribers, at the respective addresses set forth on Schedule A. SECTION 5. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscribers forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as any Subscriber may reasonably request in availing itself 11 12 of any rule or regulation of the SEC allowing Subscribers to sell any such Securities without registration. SECTION 6. INDEMNIFICATION. The Company and Subscribers agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. SECTION 7. RESTRICTIONS ON CONVERSION OF PREFERRED STOCK. Subscribers acknowledge that any shares of Preferred Stock issued to it hereunder shall not be convertible into shares of Common Stock at any time prior to one year after the Closing Date. SECTION 8. MANDATORY CONVERSION. In the event the Preferred Stock has not been converted three (3) years from the Closing Date, at that time the Preferred Stock shall be automatically converted (and all dividends owed thereon shall be paid by the Company) as if Subscribers voluntarily elected such conversion in accordance with the procedure, terms and conditions set forth in this Agreement. SECTION 9. REGISTRATION OR EXEMPTION REQUIREMENTS. Subscribers acknowledge and understand that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscribers understand that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. SECTION 10. LEGEND. The certificates representing the Securities, including shares of Common Stock to be issued upon conversion of the Preferred Stock, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. 12 13 SECTION 11. CLOSING DATE. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999 on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. SECTION 12. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscribers understand that the Company's obligation to sell the Preferred Stock is conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all Exhibits thereto, duly executed by the Subscribers; (ii) Delivery by Subscribers of the all written documentation evidencing or relating to the Existing Indebtedness for cancellation as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscribers set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Preferred Stock shall be legally permitted by all laws and regulations to which Subscribers and the Company are subject. SECTION 13. CONDITIONS TO SUBSCRIBERS' OBLIGATION TO PURCHASE. The Company understands that Subscribers' obligation to purchase the Preferred Stock is conditioned upon: (i) Acceptance by Subscribers of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Preferred Stock; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Preferred Stock shall be legally permitted by all laws and regulations to which the Company and Subscribers are subject. SECTION 14. MISCELLANEOUS. 14.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement 13 14 and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 14.2 Confidentiality. The Company and Subscribers agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 14.3 Facsimile/Counterparts. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. 14.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 14.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscribers and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 14.6 Reliance by Company. Each Subscriber represents to the Company that its representations and warranties contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 14 15 14.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 14.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. 14.9 Restriction on Trading. Each Subscriber hereby agrees that, during the ten (10) trading days immediately preceding any Conversion Date (as defined in the New Note) and the ten (10) trading days immediately following the issuance of Common Stock in respect of such conversion, it shall not, whether directly or indirectly: (i) buy or sell, or make or accept any offer to buy or sell, any shares of capital stock of the Company; or (ii) buy or sell, or make or accept any offer to buy or sell, any derivative security based on or relating to any capital stock of the Company (including without limitation options to buy or sell shares of capital stock of the Company). Each Subscriber hereby further agrees not to engage in any short sales of any shares of capital stock of the Company for so long as any of its shares of Preferred Stock remain issued and outstanding. No Subscriber shall be entitled to convert its Preferred Stock into Common Stock until ten (10) consecutive trading days have elapsed during which it has not engaged in any of the transactions prohibited by this Section 14.9. [Remainder of Page Intentionally Left Blank] 15 16 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /S/ Henry R. Mandell ---------------------------------- Name: -------------------------------- Title: ------------------------------- CLARION FINANZ, A.G., a Swiss corporation By: /S/ C. Civelli ---------------------------------------- Name: Carlo Civelli -------------------------------------- Title: Director ------------------------------------- /S/ C. Civelli ------------------------------------------- CARLO CIVELLI, an individual /S/ Henry R. Mandell ------------------------------------------- HENRY R. MANDELL, an individual /S/ James D. Pace ------------------------------------------- JAMES D. PACE, an individual 16 17 /S/ Jerold H. Rubinstein ------------------------------------------- JEROLD H. RUBINSTEIN, an individual /S/ Gilbert N. Segel ------------------------------------------- GILBERT N. SEGEL, an individual ATON SELECT FUND, LTD., a Swiss corporation By: /S/ Jan Barcikoski ---------------------------------------- Name: Jan Barcikoski -------------------------------------- Title: Director ------------------------------------- ROMOFIN A.G., a Swiss corporation By: /S/ B. J. Mosimann ---------------------------------------- Name: B. J. Mosimann -------------------------------------- Title: President ------------------------------------- 17 18 SCHEDULE A
NUMBER OF SHARES SUBSCRIBER ADDRESS OF PREFERRED STOCK Clarion Finanz, A.G., a Swiss corporation Seefeldstrasse 214 76,651 8034, Zurich, Switzerland Carlo Civelli, an individual Seefeldstrasse 214 8,259 8034, Zurich, Switzerland Henry R. Mandell, an individual 20700 Ventura Boulevard, Suite 140 551 Woodland Hills, CA 91364 James D. Pace, an individual 551 Jerold H. Rubinstein, an individual 551 Gilbert N. Segel, an individual 550 Aton Select Fund, Ltd., a Swiss Seefeldstrasse 214 5,336 corporation 8034, Zurich, Switzerland Romofin A.G., a Swiss corporation Seefeldstrasse 214 10,518 8034, Zurich, Switzerland ======================= TOTAL: 102,967
19 SCHEDULE B
NOTE, LETTER OR OTHER AGREEMENT EXISTING INDEBTEDNESS SUBSCRIBER REGARDING EXISTING INDEBTEDNESS AS OF DECEMBER 29, 1999 - ---------- ------------------------------- ----------------------- Clarion Finanz, A.G., a Nonnegotiable Unsecured Promissory Note, issued on $ 766,506.85 Swiss corporation April 14, 1998, in the original principal amount of $650,000. Carlo Civelli, an Nonnegotiable Secured Promissory Note, issued on $ 82,582.19 individual December 14, 1998 (participant in the original principal amount of $75,000). Henry R. Mandell, an Nonnegotiable Secured Promissory Note, issued on $ 5,508.22 individual December 14, 1998 (participant in the original principal amount of $5,000). James D. Pace, an Nonnegotiable Secured Promissory Note, issued on $ 5,508.22 individual December 14, 1998 (participant in the original principal amount of $5,000). Jerold H. Rubinstein, an Nonnegotiable Secured Promissory Note, issued on $ 5,508.22 individual December 14, 1998 (participant in the original principal amount of $5,000). Gilbert N. Segel, an Nonnegotiable Secured Promissory Note, issued on $ 5,498.63 individual December 14, 1998 (participant in the original principal amount of $5,000). Aton Select Fund, Ltd., a ________________________________ in the original $ 53,356.16 Swiss corporation principal amount of $50,000. Romofin A.G., a Swiss ________________________________ in the original $ 105,178.08 corporation principal amount of $100,000. ======================= TOTAL: $ 1,029,646.57
20 SCHEDULE C 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 21 EXHIBIT A Certificate of Designation of the 10% Convertible Series B Preferred Stock 22 CERTIFICATE OF DESIGNATION OF SERIES B 10% REDEEMABLE CONVERTIBLE PREFERRED STOCK OF SPATIALIZER AUDIO LABORATORIES, INC. Pursuant to Section 151 of the General Corporation Law ("GCL") of the State of Delaware, and the Bylaws of SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), we the undersigned, being President and Secretary, respectively, DO HEREBY CERTIFY, that the following resolution was duly adopted by the Board of Directors on December 24, 1999: RESOLVED, that pursuant to the authority conferred upon the Board of Directors by the Company's Certificate of Incorporation and Bylaws, the Board of Directors hereby provides for the issuance of a series of Preferred Stock of the Company consisting of 150,000 authorized shares which shall have the voting powers, designations, preferences and relative participating, optional or other rights, if any, and the qualifications, limitations, or restrictions, set forth in such Certificate of Incorporation, and in addition thereto, the following: Section 1. Designation and Amount. The series of Preferred Stock hereby created shall be designated as the "Series B Preferred Stock", shall have a par value of $0.01 per share and the number of shares constituting the Series B Preferred Stock shall be 150,000 shares. The Series B Preferred Stock shall have a stated value of US$10.00 per share, with a 10% per annum dividend as set forth herein. Section 2. Rank. The Series B Preferred Stock shall rank: (i) prior to all of the Company's Common Stock, par value $0.01 per share ("Common Stock"), (ii) prior to any class or series of capital stock of the Company hereafter created (unless such future class specifically, by its terms, ranks on parity with the Series B Preferred Stock), and (iii) junior to any class or series of capital stock of the Company created before the date hereof (including without limitation the Series A Preferred Stock of the Company), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series B Preferred Stock will bear a 10% per annum cumulative dividend, payable out of assets legally available therefor, at the "Conversion Date" (as defined below) in cash or Common Stock at the "Conversion Price" (as defined below), at the Company's option. No dividends shall be paid on the Common Stock or any stock issued pursuant to Section 9 prior to the payment of dividends on Series B Preferred Stock. Section 4. Sinking Funding. No provisions shall be made for any sinking fund. 23 Section 5. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive an amount per share equal to the sum of (i) US$10.00 for each outstanding share of Series B Preferred Stock, plus (ii) an amount equal to all accrued and unpaid dividends which shall accrue through the Conversion Date (the "Liquidation Preference"). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts due to such holders, then the entire assets and funds of the Company legally available for distribution shall be distributed among the holders of the Series B Preferred Stock on a pro rata basis. (b) Notwithstanding anything set forth above, holders of Series B Preferred Stock shall not be entitled to receive more than the Liquidation Preference in the event of any corporate reorganizations or any other transaction (or series of related transactions) that results in the transfer of more than fifty percent (50%) of the outstanding voting power of the Company, and such transactions shall not constitute a liquidation, dissolution, or winding up of the Company if the successor assumes that obligations of the Company with respect to the Series B Preferred Stock. A sale, conveyance, or other disposition of all or substantially all of the Company's assets, shall constitute a liquidation, dissolution or winding up within the meaning of this paragraph and shall entitle the holders of the Series B Preferred Stock to the Liquidation Preference, to the extent available above. The purchase or redemption by the Company of stock of any class, in any number permitted by law, for the purpose of this paragraph, shall not be regarded as a liquidation, dissolution or winding up of the Company. Section 6. Conversion. The record holders of this Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"). (a) Right to Convert. (1) The holders may not convert shares of Series B Preferred Stock until December 29, 2000. On or after December 29, 2000, the holders shall have the right, subject to Section 6(a)(2) below, to convert, in whole or in part, shares of Series B Preferred Stock into shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to the holder upon conversion shall be determined by (i) multiplying the number of shares of Series B Preferred Stock to be converted by US$10.00, and (ii) dividing this product by the Conversion Price, provided, however, that the Company shall not issue to any holder a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (2) Upon an election by a holder to convert shares of Series B Preferred Stock into shares of Common Stock, the Company shall have the right to pay cash to such holder in lieu of issuing shares of Common Stock. If the Company elects to pay cash rather than issuing shares of Common Stock, the Company shall pay to the holder US$10.00 for each share of Series B 24 Preferred Stock that such holder had elected to convert to shares of Common Stock. The holder shall surrender the shares of Series B Preferred Stock to the Company for cancellation. (3) The "Conversion Price" shall be determined on the Conversion Date, and shall equal Ninety percent (90%) of the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Conversion Date, provided, however, that the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to December 29, 1999 (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by any authoritative source acceptable to the Company. (4) In the event of any stock split, reverse stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (b) Mechanics of Conversion. Conversion of the Series B Preferred Stock to Common Stock may be exercised by holder telecopying an executed and completed notice of conversion ("Notice of Conversion") to the Company, and delivering the original Notice of Conversion and the certificate representing the shares of Series B Preferred Stock to the Company by hand or by overnight courier within three (3) business days of exercise. Each date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company will transmit the certificates representing the Common Stock issuable upon conversion of all or any part of the shares of Series B Preferred Stock (together with any certificates for replacement shares of Series B Preferred Stock not previously converted but included in the original certificate presented for conversion) to the holder via overnight courier within three (3) business days after the Company has received the original Notice of Conversion and certificate for the shares of Series B Preferred Stock being so converted. The Notice of Conversion and certificate representing the portion of the shares of Series B Preferred Stock converted shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Blvd., Suite 140 Woodland Hills, CA 91364-2357 Attention: Henry Mandell Telephone: (818) 227-3370 Facsimile: (818) 227-9751 or to such other person at such other place as the Company shall designate to the holder in writing. 25 (c) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any certificates representing shares of Series B Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the certificate(s), if mutilated, the Company shall execute and deliver new certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen certificates if holder contemporaneously requests the Company to convert such Series B Preferred Stock into Common Stock. (d) Mandatory Conversion. The Series B Preferred Stock is subject to mandatory conversion after three (3) years from the Closing Date, at which time all shares of Series B Preferred Stock will automatically be converted upon the terms set forth in Section 6(a) at the Conversion Price in effect at such time. Mandatory conversion shall not occur in the event of the occurrence of one or both of the following at the time of such mandatory conversion: (x) the Company is unable, or admits in writing its inability, to pay its debts, or is not paying its debts generally as they come due, or has made any assignment for the benefit of creditors; or (y) the Company has commenced, or there has been commenced against the Company, any case, proceeding, or other action seeking to have an order for relief entered with respect to the Company, or to adjudicate the Company as a bankrupt or insolvent. (e) Reservation of Stock Issuable upon Conversion. As of the date hereof, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the conversion in full of all shares of Series B Preferred Stock. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. After such time as the Company has increased the number of authorized shares of Common Stock, it shall at all times thereafter reserve and keep available out of its authorized but unissued shares of Common Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock at the Floor Price. (f) Conversion Adjustments. (1) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all Series B Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Company or another entity, or other property, then each holder of Series B Preferred Stock shall, upon being given at least ten (10) business days advance written notice of such transaction, thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities or other property as would have been issuable or payable with respect to or in exchange for the number of shares of Common Stock purchasable and receivable upon the conversion of Series B Preferred Stock held by such holder immediately prior to the merger, consolidation, exchange of shares, 26 recapitalization or reorganization. Appropriate provisions shall be made with respect to the rights and interests of the holders of the Series B Preferred Stock to the end that the provisions hereof shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the conversion thereof. The Company shall not effect any transaction described in this subsection unless (1) each holder of Series B Preferred Stock has been given at least ten (10) business days advance written notice of such transaction, and (2) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the holders of the Series B Preferred Stock such shares of stock and/or securities or other property as the holders of the Series B Preferred Stock would be entitled to receive pursuant to this Section 6(f). (2) No Fractional Shares. If any adjustment under this Section would create a fractional share, or a right to acquire a fractional share, of any security, such fractional share shall be disregarded and the number of shares of such security issuable upon conversion shall be the next higher number of shares. Section 7. Voting Rights. The holders of the Series B Preferred Stock shall have no voting power whatsoever, except with respect to any amendment to the Company's Certificate of Incorporation which would have an adverse effect on the Series B Preferred Stock or as otherwise provided by the Delaware Corporation Laws. Section 8. Status of Converted Stock. In the event any shares of Series B Preferred Stock shall be converted pursuant to Section 6 hereof, or if the Company has elected to pay cash to such holder pursuant to Section 6(a)(2) in lieu of issuing shares of Common Stock, the shares of Series B Preferred Stock so converted (or for which cash was paid in lieu of conversion) shall be cancelled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Company as Series B Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series B Preferred Stock. Section 10. Restrictions on Trading. Each holder of Series B Preferred Stock shall agree that, during the ten (10) trading days immediately preceding the Conversion Date, it shall not, whether directly or indirectly: (i) buy or sell, or make or accept any offer to buy or sell, any shares of capital stock of the Company; or (ii) buy or sell, or make or accept any offer to buy or sell, any derivative security based on or relating to any capital stock of the Company (including without limitation options to buy or sell shares of capital stock of the Company). Each holder of Series B Preferred Stock shall also agree not to engage in any short sales of any shares of capital stock of the Company for so long as any of its shares of Series B Preferred Stock remain issued and outstanding. No holder of Series B Preferred Stock shall be entitled to convert its Series B Preferred Stock into Common Stock until ten (10) consecutive trading days have elapsed during which such holder has not engaged in any of the transactions prohibited by this Section 10. 27 [Remainder of Page Intentionally Left Blank] 28 IN WITNESS THEREOF, the Company has caused the undersigned to sign this Certificate of Designation this 24th day of December, 1999. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ----------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer Attest: By: /S/ Henry R. Mandell ------------------------------ Name: Henry R. Mandell Title: Secretary 29 EXHIBIT B Form of Notice of Conversion 30 NOTICE OF CONVERSION (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT 10% CONVERTIBLE SERIES B PREFERRED STOCK) The undersigned hereby irrevocably elects to convert Preferred Stock Certificate No. ______ into shares of Common Stock of Spatializer Audio Laboratories, Inc. (the "Company") according to the conditions hereof, as of the date written below. The undersigned represents and warrants that: (i) all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Preferred Stock shall be made pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Act"), or pursuant to registration of the Common Stock under the Act, subject to any restrictions on sale or transfer set forth in the 10% Convertible Series B Preferred Stock Subscription Agreement between the Company and the holder of the Preferred Stock submitted herewith for conversion; (ii) the undersigned has not engaged in any transaction or series of transaction that is a part of or a plan or scheme to evade the registration requirements of the Act; and (iii) upon conversion pursuant to this Notice of Conversion, the undersigned will not own or be deemed to beneficially own (within the meaning of the Securities Exchange Act of 1934, as amended) 4.99% or more of the then issued and outstanding shares of the Company. _______________________________________ ___________________________________ Conversion Date Applicable Conversion Price _______________________________________ ___________________________________ Number of Common Shares upon Conversion Dollar Amount of Conversion _______________________________________ ___________________________________ Signature Print Name Address: ___________________________________ ___________________________________ ___________________________________ The original certificate(s) of Preferred Stock and Notice of Conversion must be received by the Company by the third (3rd) business day following the Conversion Date. EX-10.4 24 MATERIAL CONTRACT 1 EXHIBIT 10.4 AGREEMENT REGARDING INDEBTEDNESS This AGREEMENT REGARDING INDEBTEDNESS (this "Agreement"), dated as of December 29, 1999, is entered into by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, "Payees"). WHEREAS, Payees have advanced funds to Maker in the aggregate original principal amount of Two Hundred Ten Thousand Dollars (US$210,000) pursuant to: (i) that certain letter agreement by and among Maker and Payees, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payees, dated April 16, 1999; (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payees; and (iv) certain other agreements and understandings, whether written or oral; WHEREAS, as of the date hereof, the aggregate amount of outstanding principal and accrued interest that Maker owes to Payees is Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10). WHEREAS, Maker has executed and delivered to Payees that certain Non-Negotiable Convertible Promissory Note (the "New Note"), dated of even date herewith, which is intended to supercede and replace all prior agreements and understandings with respect to the indebtedness of Maker to Payees referenced above, and the obligations of Maker with respect to such indebtedness. NOW THEREFORE, the parties hereto hereby agree as follows: 1. The aggregate amount of all outstanding principal and accrued interest existing as of the date hereof (the "Prior Indebtedness") owed by Maker to Payees, and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"), shall become the new original principal amount outstanding under the New Note (the "New Principal"), to be repaid according to its terms. Maker and Payees hereby agree that, as of the date hereof, the Prior Indebtedness equals Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10). 2. The New Note, and the indebtedness evidenced thereby, completely replaces, supercedes and extinguishes all Prior Indebtedness. This Agreement, the New Note, and that certain Security Agreement, dated of even date herewith, among Maker and Payees, together constitute the entire understanding of Maker, Payees and all Related Parties with respect to any indebtedness of Maker to Payees or to any other Related Party, and completely replace and supercede all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among 2 Maker and Payees, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payees, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payees. 3. All written documents that evidence or relate to any portion of the Prior Indebtedness shall be null and void and of no force or effect. Payees shall return any original copies of such documentation to Maker for cancellation. 4. Provided that Maker is in full compliance with the terms of this Note, each Payee hereby agrees not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal (as defined in the New Note) and accrued interest thereon shall remain outstanding and payable under the New Note. 5. Maker hereby restates and reaffirms all of the representations and warranties contained in that certain Subscription Agreement entered into between the Maker and the Payees of even date herewith as if same are set forth herein. 6. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of New York, except for matters arising under the federal securities laws, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ------------------------------------------- Name: Henry R. Mandell ----------------------------------------- Title: Interim Chief Executive Officer ---------------------------------------- CPR (USA) INC. By: /S/ Steven S. Rogers ------------------------------------------- Name: Steven S. Rogers ----------------------------------------- Title: Managing Director, ---------------------------------------- CPR (USA), Inc. LIBERTYVIEW FUNDS, L.P. By: /S/ Steven S. Rogers ------------------------------------------- Name: Steven S. Rogers ----------------------------------------- Title: Authorized Signatory ---------------------------------------- LIBERTYVIEW FUND, LLC By: /S/ Steven S. Rogers ------------------------------------------- Name: Steven S. Rogers ----------------------------------------- Title: Authorized Signatory ---------------------------------------- 3 EX-10.5 25 MATERIAL CONTRACT 1 EXHIBIT 10.5 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "AGREEMENT") is made as of December 29, 1999, by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("DEBTOR"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and collectively with CPR and LP, "SECURED PARTY") 1. Definitions. (a) Certain Defined Terms. The following terms, as used herein, have the meanings set forth below: ARI - means that certain Agreement Regarding Indebtedness (including all Exhibits annexed thereto) of even date herewith, by and between Debtor and Secured Party. Assets - shall mean all of the assets (including but not limited to: tangible, intangible and goodwill, all "equipment" (as defined in the UCC), including, without limitation, all machinery, motor vehicles, trucks, trailers, vessels, and rolling stock and all parts thereof and all additions and accessions thereto and replacements therefor) of the Debtor. Collateral - has the meaning assigned to that term in Section 2. Event of Default - has the meaning assigned to that term in Section 9. Material Adverse Effect - means any effect on the business, operations, properties, results of operations, prospects, or financial condition of the Debtor that is material and adverse to the Debtor and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Debtor to enter into and perform any of its obligations under this Agreement or the Notes in any material respect. Notes - mean those certain Secured Non-Negotiable Convertible Promissory Notes of even date herewith, in the aggregate original principal amount of $225,241.10, made and executed by Debtor and issued to Secured Party, and all amendments and supplements thereto, restatements thereof and renewals, extensions, restructuring and refinancings thereof. Person - means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. Proceeds - means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, any Collateral including, without limitation, all claims against third 1 2 parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance with respect to any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. Secured Obligations - has the meaning assigned to that term in Section 3. Security Interests - means the security interests granted pursuant to Section 2, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. UCC - means the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy. (b) Other Definition Provisions. References to "SECTIONS", "SUBSECTIONS", "EXHIBITS" and "SCHEDULES" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1(a) may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All references to statutes and related regulations shall include (unless otherwise specifically provided herein) any amendments of same and any successor statutes and regulations. 2. Grant of Security Interest In order to secure the payment and performance of the Secured Obligations in accordance with the terms thereof, Debtor hereby grants to Secured Party a continuing security interest in and to all right, title and interest of Debtor in the Assets (and any Proceeds therefrom) described on Attachment A hereto, whether now owned or existing or hereafter acquired or arising (all being collectively referred to as the "COLLATERAL"). 3. Security for Obligations This Agreement secures the payment and performance of the ARI and the Notes, and all renewals, extensions, restructuring and refinancings thereof (the "SECURED OBLIGATIONS"). 4. Representations and Warranties. Debtor represents and warrants as follows: (a) Binding Obligation. This Agreement has duly executed and delivered by the Debtor, which is a legal, valid and binding obligation of Debtor, enforceable against Debtor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditor's rights generally. This Agreement is not in violation of any other agreements, 2 3 instruments, orders or judgments by which Debtor is bound or subject. The execution, delivery and performance of this Agreement by Debtor does not require the consent or approval of any other person, entity or governmental agency. (b) Location of Assets. All of the Assets are located in the State of California. (c) Ownership of Collateral. Debtor owns the Collateral free and clear of any lien, security interest or encumbrance. No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office. Debtor is, and as long as this Agreement shall be in effect pursuant to its terms, shall be the sole, record, legal and beneficial owner of, and has good and marketable title to, the Assets, subject to no lien, pledge or encumbrance, except the lien on the Assets created by this Agreement. (d) Office Locations; Debtor Names. (i) As of the date hereof, the chief place of business, the chief executive office and the office where Debtor keeps its books and records is located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, CA 91346. Debtor has not maintained any other street address at any time during the five years preceding the date hereof. (ii) Debtor does not do business nor, as of the date hereof, has it done business during the past five years under any corporate name, trade name or fictitious business name except for Debtor's corporate name set forth above. (e) Perfection. This Agreement, and the filing of an appropriate UCC-1 financing statement with the Secretary of State of the State of California, create to secure the Secured Obligations a valid, perfected and priority security interest in the Collateral. (f) Governmental Authorizations; Consents. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or consent of any other Person is required either (i) for the grant by Debtor of the Security Interests granted hereby or for the execution, delivery or performance of this Agreement by Debtor, or (ii) for the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Debtor or Secured Party) other than the filing of appropriate UCC-1 financing statements in connection with the perfection of the Security Interests. (g) Value of Collateral. The value of the Collateral as of the date hereof is equal to not less than Three Hundred Thousand United States Dollars ($300,000). (h) Accurate Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Debtor with respect to the Collateral is and will be accurate and complete in all material respects. 3 4 (i) Deficiency. Debtor will remain liable for any deficiency in the event that the delivery of the Assets to the Secured Party is insufficient to satisfy the Debtor's obligations under the Notes. (j) Survival. From and after the date hereof and so long as this Agreement shall be in effect pursuant to its terms, the Debtor agrees that it shall not take any action that would cause the Debtor to be in breach or default of any of the Secured Obligations, that all representations and warranties made by Debtor shall survive this Agreement and that as of the date hereof, the Secured Party shall be deemed to have a priority lien on the Assets for the purposes and in accordance with the terms and provisions hereof, and the Debtor shall cooperate with the Secured Party and take all action requested by the Secured Party to ensure the representations and warranties shall survive this Agreement with respect thereto. (k) Validity. The Debtor's performance of its obligations under this Agreement will not result in the creation or imposition by the Debtor of any liens, charges, claims or other encumbrances upon the Assets, or any of the assets of the Debtor other than the security interest granted under this Agreement. (l) No Conflicts. The execution, delivery and performance of this Agreement by the Debtor and the consummation by the Debtor of the transactions contemplated hereby do not and will not (i) result in a violation of its Articles of Incorporation or ByLaws or (ii) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, patent, patent license, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Debtor is a party, or (iii) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Debtor or by which any property or asset of the Debtor is bound or affected, nor is the Debtor otherwise in violation of, in conflict with, or in default under, any of the foregoing except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The business of the Debtor is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (m) Insurance. The Debtor is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Debtor believes to be prudent and customary in the businesses in which the Debtor is engaged. The Debtor has no notice to believe that the Debtor will not be able to renew its existing insurance coverage as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (n) Taxes. Except for the Debtor 's failure to (i) file its federal and state tax returns for its fiscal year 1998, and (ii) pay any federal or state taxes owed for its fiscal year 1998 (which taxes are not of a material amount), all federal, state, city and other tax returns, reports and declarations required to be filed by or on behalf of the Debtor have been filed and such returns are complete and accurate and disclose all taxes (whether based upon income, operations, 4 5 purchases, sales, payroll, licenses, compensation, business, capital, properties or assets or otherwise) required to be paid in the periods covered thereby. (o) Title to Assets. Debtor has good and marketable title to the Assets, and all properties and material assets as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Debtor. 5. Further Assurances; Covenants (a) Other Documents and Actions. Debtor will, from time to time, promptly execute and deliver all further instruments and documents prepared by Secured Party at Secured Party's expense, and take all further action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Debtor will: (i) execute such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (ii) at any reasonable time, upon demand by Secured Party exhibit the Collateral to allow inspection of the Collateral by Secured Party or persons designated by Secured Party; and (iii) upon Secured Party's request, appear in and defend any action or proceeding that may affect Debtor's title to, or Secured Party's security interest in, the Collateral. (b) Secured Party Authorized. Debtor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of Debtor where permitted by law. (c) Corporate or Name Change. Debtor will notify Secured Party promptly in writing at least 30 days prior to (a) any change in Debtor's name and (b) Debtor's commencing the use of any trade name, assumed name or fictitious name. (d) Business Locations. Debtor will keep the Collateral at the location specified in Section 4(b) above. Debtor shall give Secured Party thirty (30) days' prior written notice of any change in its chief place of business or of any new location of business or any new location for any of the Collateral. With respect to any new location (which in any event shall be within the continental United States), Debtor shall execute such documents and take such actions as Secured Party reasonably deems necessary to perfect and protect the Security Interests. (e) Bailees. No Collateral shall at any time be in the possession or control of any warehouseman, bailee or Debtor's agents or processors without Secured Party's prior written consent and unless Secured Party, if Secured Party has so requested, has received warehouse receipts or bailee letters reasonably satisfactory to Secured Party prior to the commencement of such storage. Debtor shall, upon the request of Secured Party, notify any such warehouseman, bailee, agent or processor of the Security Interests. 5 6 (f) Insurance. Debtor currently does maintain and shall maintain insurance with respect to the Collateral of types and in amounts that are customary for similarly situated businesses. Debtor hereby direct all insurers under such policies of insurance with respect to its assets to pay all material proceeds of such insurance policies to Secured Party. (g) Taxes and Claims. Debtor will pay (i) all taxes, assessments and other governmental charges imposed upon the Collateral before any penalty accrues thereon and (ii) all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a lien upon any of the Collateral before any penalty or fine is incurred with respect thereto; provided that no such tax, charge or claim need be paid if Debtor is contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if Debtor has established such reserve or other appropriate provision, if any, as shall be required in conformity with generally accepted accounting principles consistently applied. (h) Collateral Description. Debtor will furnish to Secured Party, from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (i) Use of Collateral. Debtor will not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statue, regulation or ordinance or any policy of insurance covering any of the Collateral. (j) Records of Collateral. Debtor shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Secured Party may reasonably request indicating that the Collateral is subject to the Security Interests. (k) Other Information. Debtor will, promptly upon request, provide to Secured Party all information and evidence it may reasonably request concerning the Collateral to enable Secured Party to enforce the provisions of this Agreement. (l) Maintenance. The Debtor will maintain the condition of the Collateral in such condition as is customary in the businesses in which the Debtor is engaged, and shall take any and all actions necessary for such maintenance as are customary. 6. Secured Party Appointed Attorney-in-Fact. Debtor hereby irrevocably appoints each Secured Party as its attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable after the occurrence and during the continuation of an Event of Default to accomplish the purposes of this Agreement, including, without limitation: (a) to obtain and adjust insurance required to be paid to Secured Party; 6 7 (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for monies due and to become due under or in respect of any of the Collateral; (c) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (d) to pay or discharge taxes or liens, levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, and such payments made by Secured Party to become obligations of Debtor, due and payable immediately without demand and secured by the Security Interests; and (e) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral. Neither Secured Party nor any Person designated by Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than as a result of Secured Party's or such Person's gross negligence or willful misconduct. These powers, being coupled with an interest, is irrevocable so long as this Agreement shall remain in force. 7. Transfers and Other Liens Debtor shall not, without Secured Party's prior written consent: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral other than (i) in the ordinary course of its business, (ii) in connection with the replacement of any Collateral of equivalent use and value, or (iii) with respect to the capital stock of Multidisc Technologies, Inc. (a wholly-owned inactive subsidiary of Debtor) or any of the assets of such subsidiary. (b) Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person except for the security interest created by this Agreement. 8. Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default by Debtor under this Agreement: (a) General Default. Debtor shall fail to observe or perform any covenant, obligation, term or condition contained in the ARI, the Notes or this Agreement. 7 8 (b) Nonpayment. Debtor shall fail to pay any principal, interest or other amount owing under the Notes when and as the same shall be due and payable. (c) Material Misrepresentations. Any representation or warranty by the Debtor set forth herein shall prove to be false in any material respect. (d) Going Concern. Debtor shall terminate its corporate existence or shall cease to operate as a going concern. (e) Judgments. A judgment shall be entered against Debtor or a warrant of execution or similar process shall be issued or levied against its property and within thirty (30) days after such judgment, warrant or process shall not have been paid in full or proper appeal of the same made. (f) Relief - Voluntary. Debtor shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing. (g) Relief - Involuntary. Any involuntary case or other proceeding shall be commenced against Debtor seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of thirty (30) days; or an order for relief shall be entered against Debtor under the federal bankruptcy laws as now or hereafter in effect. (h) Transfer. The Collateral is sold or transferred by the Debtor in violation of Section 7. (i) Other. The occurrence of any "Event of Default" as that term is defined in the Notes. 9. Remedies (a) If any Event of Default shall have occurred and be continuing, Secured Party may declare the entire outstanding principal amount of the Notes immediately due and payable without any notice, demand or other action on the part of Secured Party. (b) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on 8 9 default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (i) require Debtor to, and Debtor hereby agrees that it will, at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (ii) without notice or demand or legal process, enter upon any premises of Debtor and take possession of the Collateral for sale pursuant to this Section 9; (iii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable; (iv) notify the obligors on any Accounts or Instruments to make payments there under directly to Secured Party; (v) without notice to Debtor, renew, modify or extend any of the Accounts and Instruments or grant waivers or indulgences with respect thereto or accept partial payment thereof, or substitute any obligor thereon, in any manner as Secured Party may deem advisable, without affecting or diminishing Debtor's continuing obligations hereunder; and (v) and shall have all applicable remedies set forth in the UCC. Debtor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, Secured Party may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Secured Party. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Debtor hereby specifically waives all rights of redemption, stay or appraisal, which it has or may have under any law now existing or hereafter enacted. (c) Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to enter upon the premises of Debtor where the Collateral is located (or is believed to be located) without any obligation to pay rent to Debtor, or any other place or places where the Collateral is believed to be located and kept, to render the Collateral useable or saleable, to remove the Collateral therefrom to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire in order to effectively collect or liquidate the Collateral, and/or to require Debtor to assemble the Collateral and make it available to Secured Party at a place or places to be designated by Secured Party. Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to take possession of Debtor's original books and records, to obtain access to Debtor's data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner Secured Party deems appropriate; and Secured Party shall have the right to notify postal authorities to change the address for delivery of Debtor's mail to an address designated by Secured Party and to receive, open and dispose of all mail addressed to Debtor. 10. Limitation on Duty of Secured Party with Respect to Collateral. Beyond the safe custody thereof, Secured Party shall have no duty with respect to any Collateral in its possession or control (or in the possession or control of any agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. 9 10 Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. Secured Party shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by Secured Party in good faith. 11. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default as set forth herein, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied (pro rata among each participant in the Secured Party based on the indebtedness then owing): first, to all fees, costs and expenses incurred by Secured Party with respect to the Collateral; and second, to the Secured Obligations. Secured Party shall pay over to Debtor any surplus and Debtor shall remain liable for any deficiency. 12. Expenses. Debtor agrees to pay all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral, or with respect to periodic appraisals and inspections of the Collateral, or with respect to the sale or other disposition thereof. If Debtor fails promptly to pay any portion of the above expenses when due or to perform any other obligation of Debtor under this Agreement, Secured Party may, at its option, but shall not be required to, pay or perform the same, and Debtor agree to reimburse Secured Party therefor on demand, or the Secured Party may deem it to be an Event of Default. All sums so paid or incurred by Secured Party for any of the foregoing, any and all other sums for which Debtor may become liable hereunder and all costs and expenses (including attorneys' fees, legal expenses and court costs) incurred by Secured Party in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Secured Obligations, shall bear interest until paid at the rate provided in the Notes and shall be secured by the Collateral. 13. Termination of Security Interests; Release of Collateral. Upon payment in full of all Secured Obligations or upon the conversion of all principal outstanding under the Notes and all interest accrued thereon into shares of common stock, par value $0.01 per share, of the Debtor, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtor. Upon such termination of the Security Interests or release of any Collateral, Secured Party will, at the expense of, and preparation by, the Debtor, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. 14. Notices. Each notice, communication and delivery under this Agreement: (a) shall be made in writing signed by the party giving it; (b) shall specify the section of this Agreement pursuant to which given; (c) shall either be delivered in person or by telecopier, a nationally recognized next business day courier service or Express Mail; (d) unless delivered in person, shall be given to the address specified below; (e) shall be deemed to be given (i) if delivered in person, on the date delivered, (ii) if sent by telecopier, on the date of telephonic confirmation of receipt, (iii) if sent by a nationally recognized next business day courier service with all costs paid, on the next business day after it is delivered to such courier, or (iv) if sent by 10 11 Express Mail (with postage and other fees paid), on the next business day after it is mailed. Such notice shall not be effective unless copies are provided contemporaneously as specified below, but neither the manner nor the time of giving notice to those to whom copies are to be given (which need not be the same as the addressee) shall control the date notice is given or received. The addresses and requirements for copies are as follows: If to Debtor: at the address set forth in Section 4(d) above. If to Secured Party at their respective addresses set forth in the Notes. Except as otherwise expressly set forth in any particular provision of this Agreement, any consent or approval required or permitted by this Agreement to be given by Secured Party may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by Debtor of any term of this Agreement, the ARI or the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written specific consent of Secured Party. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of Secured Party in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon Debtor shall entitle Debtor to other or further notice or demand in similar or other circumstances. The rights in this Agreement, the ARI and the Notes are cumulative and are not exclusive of any other remedies provided by law. The invalidity, illegality or unenforceability of any provision in or obligation under this Agreement shall not affect or impair the validity, legality or enforceability of the remaining provisions or obligations under this Agreement. 15. Successors and Assigns. This Agreement is for the benefit of Secured Party and its successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the Secured Obligations so assigned, may be transferred with such Secured Obligations. This Agreement shall be binding on Debtor and its successors and assigns, provided that Debtor shall not assign this Agreement without Secured Party's prior written consent. 16. Changes in Writing. No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by Debtor therefrom, shall in any event be effective without the written concurrence of Secured Party and Debtor. 17. Governing Law/Venue/Jurisdiction. This Agreement shall be exclusively governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of law principles thereof. Each of the parties consents to the exclusive jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York sitting in Manhattan in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if the other party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to 11 12 the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. 18. Headings. Cross reference pages and headings contained herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 19. Counterparts. This Agreement may be executed by each party upon a separate copy, and in such case one counterpart of this Agreement shall consist of enough of such copies to reflect the signatures of all of the parties. This Agreement may be executed in two or more counterparts, each of which shall be an original, and each of which shall constitute one and the same agreement. Any party may deliver an executed copy of this Agreement and of any documents contemplated hereby by facsimile transmission to another party and such delivery shall have the same force and effect as any other delivery of a manually signed copy of this Agreement or of such other documents. 12 13 DULY EXECUTED and delivered by the parties on the date first written above. SPATIALIZER AUDIO LABORATORIES, INC. By: /S/ Henry R. Mandell ------------------------------------- Name: Henry R. Mandell ----------------------------------- Title: Interim Chief Executive Officer ---------------------------------- CPR (USA) INC. By: /S/ Steven S. Rogers --------------------------------- Name: Steven S. Rogers ------------------------------- Title: Managing Director, ------------------------------ CPR (USA), Inc. LIBERTYVIEW FUNDS, L.P. By: /S/ Steven S. Rogers --------------------------------- Name: Steven S. Rogers ------------------------------- Title: Authorized Signatory ------------------------------ LIBERTYVIEW FUND, LLC By: /S/ Steven S. Rogers --------------------------------- Name: Steven S. Rogers ------------------------------- Title: Authorized Signatory ------------------------------ 13 14 ATTACHMENT A DESCRIPTION OF COLLATERAL The Collateral consists of all Assets (as such term is defined in Section 1(a) of this Agreement) of the Debtor. 14 EX-10.6 26 MATERIAL CONTRACT 1 EXHIBIT 10.6 THIS FINDER'S FEE AGREEMENT is made as of the 27th day of December, 1999 BETWEEN: SPATIALIZER AUDIO LABORATORIES, INC. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 (the "Company") OF THE FIRST PART AND: BRISTOL CAPITAL, L.L.C. 11777 San Vicente Blvd., Suite 702 Los Angeles, California 90049 (the "Finder") OF THE SECOND PART WHEREAS: A. The Company has entered into a subscription agreement with Bank Insinger de Beaufort ("Insinger") of The Netherland, in connection with a non-brokered private placement of Two Hundred and Fifty Thousand United States Dollars ($250,000) worth of common stock of the Company priced pursuant to the Common Stock Subscription Agreement ("Subscription Agreement") between Insinger and the Company dated December 29, 1999 and warrants to purchase 500,000 shares of common stock of the Company (the "Private Placement"); B. The Finder introduced the Company to Insinger and assisted the Company in the conclusion of the Private Placement; C. The Company wishes to reward the Finder for its services in the manner as hereinafter set out; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants, promises, conditions, warranties and representations hereinafter set forth, the parties hereto agree as follows: 1. The Finder hereby represents and warrants that: a) it is at arm's length with the Company; b) has acted in good faith at all times in connection with the introduction of the Company to Insinger and its assistance in the conclusion of the Private Placement; c) it has not advertised the Private Placement to the general public; and 2 -2- d) the execution and delivery of this Agreement and the consideration provided for herein will not violate or result in the breach of the laws of California. 2. The Company agrees to compensate the Finder by paying to Finder Twenty-Five Thousand United States Dollars ($25,000) concurrent with Closing Date (as that term is defined in the Subscription Agreement). 6. The parties hereto and each of them covenant and agree that each of them shall and will upon reasonable request by the other party, make, do, execute or cause to be made, done or executed all such further and other lawful acts, deeds, things, devices and assurances whatsoever for the better or more perfect and absolute performance of the terms and conditions of this Agreement. 7. Neither finder nor its representatives are presently registered as a broker or dealer under the Securities Exchange Act of 1934, as amended. As a result, Finder is prohibited from participating in any activities or services that would result in Finder effecting transactions in securities for the account of others. However, Finder may act as a "finder" of potential investors that may be suitable to the needs of Client. Finder is in the business of providing strategic financial advice for corporate issuers. Finder does not provide investment advice or financial planning services. In that regard, Finder is not yet registered as an investment adviser under the Investment Adviser's Act of 1940, as amended, and cannot therefore provide any advice regarding the desirability or value of purchasing, selling, transacting in, investing in, or holding any security. Rather, Finder's services will be limited to general strategic and financial consulting services (unrelated to the value of securities and/or the desirability of transacting in securities), including advising Client as to the structuring of its financing. 8. This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns. 9. This Agreement constitutes the entire agreement between Finder and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. [space left intentionally blank] 3 -3- 10. This Agreement will be governed by and construed according to the laws of California, excluding any choice of law rules that would render California laws inapplicable. The parties agree that in any action for the enforcement of the terms of this Agreement, the prevailing party shall be entitled to reimbursement of reasonable attorney fees from the non-prevailing party. 11. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. IN WITNESS WHEREOF the parties hereto have hereunto executed this Agreement as of and from the day first above written. SPATIALIZER AUDIO LABORATORIES, INC. Signature: /s/ HENRY R. MANDELL ---------------------------- Name: BRISTOL CAPITAL, L.L.C. Signature: /s/ PAUL KESSLER ------------------------- Paul Kessler EX-21.1 27 SUBSIDIARIES 1 EXHIBIT 21.1 SCHEDULE OF SUBSIDIARIES Spatializer Audio Laboratories, Inc. (Delaware) 20700 Ventura Boulevard, Suite 140 Woodland Hills, California 91364 Wholly owned subsidiaries: 1. Desper Products, Inc. (California) 900 Lafayette Street, Suite 710 Santa Clara, California 95050 2. MultiDisc Technologies, Inc. (Delaware) 20700 Ventura Boulevard, Suite 140 Woodland Hills, California 91364 EX-27 28 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 DEC-31-1999 1,021,988 0 687,595 0 12,993 1,745,226 491,945 (359,142) 2,117,999 1,349,861 0 0 1,030 461,750 45,913,503 2,117,999 1,660,371 1,660,371 48,750 48,750 1,156,036 0 102,468 361,292 6,500 354,792 0 0 0 354,792 0.01 0.01
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