-----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, OTqZxijHvSY4Svs8BJAo9X4Fk+SReNaVzCXMvlH3j5y0p+Nx4ADdd1Dm13gJNmFj 4GT1szokruUn0DOj+0UnCQ== 0000950150-98-000874.txt : 19980518 0000950150-98-000874.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950150-98-000874 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980515 SROS: NASD 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: S-3 SEC ACT: SEC FILE NUMBER: 333-52863 FILM NUMBER: 98626305 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 134 STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD. #134 CITY: WOODLAND HILLS STATE: CA ZIP: 90034 S-3 1 FORM S-3 1 As filed with the Securities and Exchange Commission on May 15, 1998. Registration No. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 REGISTRATION STATEMENT ON FORM S-3 Under THE SECURITIES ACT OF 1933 SPATIALIZER AUDIO LABORATORIES, INC. (Exact name of registrant as specified in its charter)
Delaware 3698 95-4484725 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or Classification Code Number) Identification No.) organization)
20700 Ventura Boulevard, Suite 134 Woodland Hills, California 91364 (818) 227-3370 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Steven D. Gershick, Chief Executive Officer and President Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 134 Woodland Hills, California 91364 (818) 227-3370 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Margaret G. Graf, Esq. Brand Farrar & Buxbaum LLP 515 South Flower Street, Suite 3500 Los Angeles, California 90071-2201 (213) 228-0288 Direct Dial: (213) 426-6260 Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
Title of Each Amount to be Proposed Maximum Proposed Amount of Class of Registered (1) Offering Price Per Maximum Registration Fee Securities to be Share Aggregate Offering (2) Registered Price - ----------------------- -------------------- ------------------------- ------------------------ --------------------- Common Stock, $.01 par value per 8,339,800 (2) (2) $2,614 share
(1) This Registration Statement relates to the resale of 1,967,250 shares of Common Stock issued prior to the filing date hereof, 4,284,000 shares of Common Stock which are required to be registered in the event they are issuable on conversion of the Series A, 7% convertible Preferred Stock ("Series A Preferred Stock") issued in the 1998 Placement (as hereinafter defined), and the resale of up to 2,088,550 shares of Common Stock issuable on the exercise of currently outstanding Options and Warrants. The number of shares underlying the Series A Preferred Stock is calculated based on a $1.00 per share effective Conversion Price (as hereinafter defined) but subject to registration of the maximum number of shares that is allowable pursuant to Rule 4310(c)(25)(H) of The NASDAQ Stock Market Rules. (2) Pursuant to Rule 457(c), the fee calculation is based on the average of the high and low prices of the Registrant's Shares on the Small Capital Company listings of the National Association of Securities Dealers Automated Quotation system on April 15, 1998. The Registration Fee is calculated based on 8,339,800 shares at a proposed offering price per share of $1.06. THE REGISTRANT HEREBY FILES THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. 2 SPATIALIZER AUDIO LABORATORIES, INC. Cross-Reference Sheet
Item No. Form S-3 Caption -------- ---------------- 1. Forepart of the Registration Statement and Outside Outside Front and Cover Page Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Prospectus Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of The Company; Business; Risk Earnings to Fixed Charges Factors; Capitalization 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Selling Stockholders 8. Plan of Distribution Outside Front Cover; The Company; Plan of Distribution 9. Description of Securities to be Registered Description of Capital Stock 10. Interests of Named Experts and Counsel Legal Matters; Experts 11. Material Changes Not Applicable 12. Incorporation of Certain Information by Reference Incorporation of Certain Information by Reference 13. Disclosure of Commission Position on Indemnification Indemnification and Personal for Securities Act Liabilities Liability of Officers and Directors
3 [Front Cover of Prospectus] 8,339,800 Shares SPATIALIZER AUDIO LABORATORIES, INC. (A Delaware Corporation) The 8,339,800 shares of Common Stock, $.01 U.S. par value ("Common Stock") of Spatializer Audio Laboratories, Inc., a Delaware corporation (the "Company") being offered hereby for resale by certain stockholders of the Company (the "Selling Stockholders"), include 1,967,250 shares of Common Stock which are currently outstanding and 2,088,550 shares of Common Stock reserved for issuance on the exercise of outstanding Options and Warrants and up to 4,284,000 shares of Common Stock reserved for issuance on conversion of the Series A 7% Convertible Preferred Stock ("Series A Preferred Stock") issued in the private placement completed in April 1998 ("April 1998 Placement"). Of these, 336,800 shares of the Common Stock are, or upon exercise of Options and Warrants will be, held by Selling Stockholders who are officers or directors of the Company. The Company's Common Stock is listed on the National Association of Securities Dealers Automated Quotation System SmallCap Market ("NASDAQ") under the symbol "SPAZ." On April 30, 1998 the closing price of the Common Stock on the NASDAQ was $1.00 U.S. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SIMILARLY, NO CANADIAN FEDERAL OR PROVINCIAL COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES NOR HAS ANY CANADIAN FEDERAL OR PROVINCIAL COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ------------------------------------------------- See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered for resale hereby. ------------------------------------------------- CERTAIN MATTERS AND RISKS RELATED TO THE BUSINESS OF THE COMPANY, INCLUDING THE FACT THAT THE COMPANY HAS INCURRED LOSSES FROM ITS INCEPTION THROUGH ITS MOST RECENT FISCAL YEAR AND FISCAL QUARTER, ARE DISCUSSED IN "INVESTMENT CONSIDERATIONS AND RISK FACTORS." ------------------------------------------- The Date of this Prospectus is May ___, 1998 4 ------------------------------------ No person is authorized in connection with this Prospectus to give any information or to make any representations about the Company, the Selling Stockholder, the securities referenced herein, or any matter referenced herein, other than the information and representations contained in this Prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by the Company or any Selling Stockholder. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of such securities in any jurisdiction or to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any distribution of securities in accordance herewith shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. -------------------------------------- 5 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (together with all information incorporated by reference, amendments and exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "1933 Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, part of which has been omitted in accordance with the rules and regulations of the Commission. In addition, the Registration Statement and this Prospectus incorporate by reference certain materials previously filed with the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement the exhibits thereto and the materials incorporated by reference. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to such contract or other document for a more complete description and each such statement is qualified in its entirety by such reference. The Company became subject to the reporting requirements imposed under the Securities Exchange Act of 1934 (the "1934 Act") on August 21, 1995, and has filed all reports required to be filed since such date. The Company furnishes its stockholders with annual reports containing audited financial statements and quarterly or other interim reports containing financial and other information to the extent required under the 1934 Act or by NASDAQ or other applicable authorities. The Registration Statement and the reports, proxy statements and other information may be inspected and copied at the public reference facilities of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048, and at 5760 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Copies of these materials can also be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such documents may also be obtained at the Web site maintained by the Commission (http://www.sec.gov). The Company's Common Stock is quoted on the NASDAQ SmallCap Market and such reports, proxy statements and other information may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C. 20006. Until February, 1997 when the Company terminated its listing on the Vancouver Stock Exchange, the Company and its predecessor, Spatializer Audio Laboratories, Inc., a Yukon corporation ("Spatializer-Yukon"), also were subject, as applicable, to the information and reporting requirements under the Yukon Territory Business Corporations Act and the British Columbia Securities Act. Spatializer-Yukon and the Company, as applicable, filed periodic reports, proxy materials and other reports with the Superintendent of Brokers for British Columbia and the VSE. Such reports can be inspected and copied, at the expense of the person requesting the report, at the VSE offices at 609 Granville Street, 4th Floor, Vancouver, B.C. V7Y 1H1 and at the offices of the Superintendent of Brokers for British Columbia at 865 Hornby Street, Suite 1200, Vancouver, B.C. V6Z 2H4, at prescribed rates. i 6 Upon request, the Company will provide copies of materials on file at the Commission to stockholders, including material incorporated herein by reference. Requests should be made in writing to Spatializer Audio Laboratories, Inc. at 20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364, Attention: Secretary, telephone (818) 227-3370. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed by the Company with the Commission and are incorporated by reference herein: (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 1995, 1996 and 1997; and (ii) Proxy Statement dated April 18, 1997. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus or any Prospectus Supplement to the extent that a statement contained herein, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus or any Prospectus Supplement. This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. Those documents are available without charge upon request from the Company, at the address listed in Additional Information, above. ii 7 THE COMPANY Spatializer Audio Laboratories, Inc. (the "Company") is a leading developer, licensor and marketer of next generation technologies for the consumer electronics, personal computing, enterprise computing and entertainment industries. The Company has two business units (100% wholly owned subsidiaries), Desper Products, Inc. ("DPI") and MultiDisc Technologies, Inc. ("MDT"), both of which are in the business of technology development and licensing. 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. The Company continues to expand its 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, 1997 more than 11 million licensed units had been shipped. 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, Sanyo and Sharp, and in the PC multimedia marketplace, Compaq, Dell, Gateway, Micron, Fujitsu, NEC and AST, among others. In addition to continuing the Company's objective of broadening recognition for the Spatializer brand name through association with these and other globally recognized consumer electronics and multimedia computer brand leaders, the Company has also placed a high priority on broadening its technology base to position itself for continued growth. The Company believes that with the accelerating growth in the digital audio/video marketplace, the market for virtual audio technologies, and therefore for the Company's products, is entering a new phase of opportunity. MultiDisc Technologies, Inc. was formed in June 1996 when the Company acquired development stage optical disc storage and robotics assets and technologies from Home Theater Products, International, Inc. ("HTP"), a debtor in possession (the "MultiDisc transaction"). MDT is currently a development stage enterprise creating a new product category, the MultiDisc Modular Stackable Storage Library ("MSSL"), of 12 cm CD/DVD based scaleable optical disc storage devices, a technology uniquely designed to combine the speed and performance of CD/DVD server arrays, the low cost, flexibility and capacity of CD Jukebox designs and next generation high speed, high volume robotics. The target markets for the MDT technology currently include Internet and Intranet, enterprise networking, backup/archiving, image and document storage, and specialized vertical market applications including medical information technology, data warehousing and video-on-demand. The Company's executive offices are located at 20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364, Telephone (818) 227-3370. World Wide Web sites (http://www.spatializer.com), (http://www.multidisc.com). The Company was incorporated in the State of Delaware in February, 1994. THE OFFERING The Offering relates to the resale of up to 1,967,250 shares of Common Stock which are currently outstanding and 2,088,550 shares of Common Stock reserved for issuance upon exercise 8 of presently outstanding Warrants and Options (both as hereinafter defined), and up to 4,284,000 shares of Common Stock reserved for issuance on conversion of the Series A Preferred Stock issued in the April 1998 Placement. Common Stock offered for resale hereunder is to be offered for resale for the account of the Selling Stockholders who already hold stock, Warrants or Options, including certain officers, directors and affiliates. The Company is not entitled to any of the proceeds of sale of any such securities by the Selling Stockholders, but the Company will pay the expenses of the filing of the Registration Statement. The Company will receive the proceeds, in the ordinary course, from any exercise of outstanding Options and Warrants. If all outstanding Options registered herein are exercised, the Company will receive proceeds of approximately $476,400. If all the Warrants registered herein are fully exercised, the Company will receive a total of up to approximately $2,652,700. The proceeds from the exercise of Options and Warrants, from time to time, will be used to fund general corporate purposes and for strategic acquisitions or alliances. SALES BY SELLING STOCKHOLDERS The shares of Common Stock being offered for resale by the Selling Stockholders pursuant to this Prospectus may be offered by them in varying amounts and transactions so long as this Prospectus is then current under the rules of the Commission and the Registration Statement has not been withdrawn by the Company. The Offering may be through the facilities of NASDAQ, the VSE or such other exchange or reporting system where the Common Stock may be traded. Brokerage commissions may be paid or discounts allowed in connection with such sales; however, it is anticipated that the discounts allowed or commissions paid will be no more than the ordinary brokerage commissions paid on sales effected through brokers or dealers. To the knowledge of the Company, as of the date hereof, no one has made any arrangements with a broker or dealer concerning the offer or sale of the Common Stock. See "Plan of Distribution." OUTSTANDING SECURITIES
Shares of Common Stock Outstanding at April 15, 1998 21,423,345 Reserved for Issuance - Options 2,010,070 Reserved for Issuance - Warrants 1,759,750 Reserved for Issuance - Conversion of Series A Preferred Stock 4,284,000 Total Shares of Common Stock Outstanding Assuming Exercise of Warrants and Options and Conversion of Series A Preferred Stock: 29,477,165 Shares offered by Selling Stockholders (including 2,088,550 shares reserved for issuance on exercise of Warrants and Options) 8,339,800
2 9 This Prospectus includes references to MultiDisc(TM), Spatializer (R) 3D Stereo, DDP(TM), N-2-2(TM), enCOMPASS(TM), vbx(TM), XNS(TM), eXpandable Network Server(TM), and other trademarks, tradenames, and product names of the Company and of other entities, some of which may not be designated as such. 3 10 RISK FACTORS INVESTMENT IN THE COMPANY'S SECURITIES IS SPECULATIVE. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS, BEFORE MAKING A DECISION TO PURCHASE SECURITIES OF THE COMPANY. A PROSPECTIVE PURCHASER SHOULD NOT CONSIDER AN INVESTMENT IN THE COMPANY UNLESS SUCH PERSON IS CAPABLE OF SUSTAINING AN ECONOMIC LOSS OF THE INVESTMENT. TECHNOLOGY DEVELOPMENT AND NEED TO COMMERCIALIZE MDT TECHNOLOGY MDT is still developing its technologies which have been in development for more than nine years at an aggregate cost of approximately $8 million, $4.6 million of which was expended by the Company on behalf of MDT subsequent to its acquisition in June 1996. It is anticipated that the Company will need to commit substantial capital beyond its current working capital reserves to complete development, begin manufacturing and launch MDT's initial products. There can be no assurance that the Company will be able to raise the needed capital or obtain such capital on terms favorable to the Company. The Company has not yet signed any licenses for its technology, and there can be no assurance that it will be able to enter into licenses on terms and conditions which would be economically viable. In addition, there can be no assurance that the Company will be able to make satisfactory arrangements for the manufacture of its products, or the distribution or the purchase of such products on an OEM basis. The MDT technologies under development consist of a wide spectrum of robotics, motion control, hardware, electronics, and firmware disciplines. There can be no assurance that the Company will be able to attract and retain employees, consultants or form appropriate strategic alliances to obtain the technical expertise necessary to ensure satisfactory completion of all of the hardware and software components needed to implement the MDT technology. Significant engineering challenges unique to the Company's MSSL design exist and there can be no assurance that these challenges will be successfully overcome, or overcome at a cost which will permit the MDT products to be manufactured at a competitive price. In addition, the Company has not yet fully completed development and testing of its Windows NT(R) Changer File System, Drivers, Graphical User Interface (GUI), Database Manager, Control Panel Applet and supporting utilities, nor its initial data interface and robotics interface components. There can be no assurance that MDT's software components can be successfully completed and integrated, or that they can be cost effectively migrated to other operating systems, or next generation data or robotics interfaces as might be demanded by a rapidly changing market. Although the Company has satisfactorily completed a number of MDT proof-of-concept designs, and an initial technology demonstrator [TD Series] prototype which MDT debuted at COMDEX in November, 1997, MDT has yet to have completed a fully integrated device proving the efficacy of its designs, concepts, software and other technologies. There can be no assurance that the Company will be able to successfully complete the required integration for MDT, or that 4 11 the MDT products designed based upon its technologies will be able to be manufactured at costs which will permit competitive pricing when those products would come to market. DEPENDENCE ON NEW TECHNOLOGIES The success of MDT's business plan is largely dependent upon the widespread availability, speed and performance capabilities, low price point, and industry support for re-writeable DVD technologies. There can be no assurance that such technologies will become available on a basis which permits the DVD Library systems to become price and performance competitive with other competing technologies. Furthermore, MDT's Modular Stackable Storage Library (MSSL) concept is untested, and significant time and expense will be required to properly evangelize the category. There can be no assurance that the necessary market need exists, that the Company can successfully evangelize its technology, and that the MSSL concept will be accepted. DEPENDENCE ON LICENSING REVENUES The MDT business model is a hybrid model combining technology licensing and manufacturing on an OEM basis. Although the Company has expertise in audio technology licensing, it has no expertise in hardware licensing, manufacturing, or OEM sales. There can be no assurance that the Company will be able to successfully recruit and retain the necessary internal manufacturing, sales and marketing expertise, or to build the necessary strategic relationships with manufacturers, channel partners, distributors, Value Added Resellers (VAR's) or Independent Software Vendors (ISV's) necessary to insure its success in the OEM business for its MDT plan. The proposed MDT licensing agreements provide for a combination of up-front NonRecurring Engineering (NRE) fees and running royalties based on product shipments by licensees. License negotiations are very lengthy and hardware product development times are long, requiring the Company to be dependent on anticipated NRE fees. The Company has not yet finalized any licensing arrangements with respect to its MDT CD/DVD server technologies, and there can be no assurance that any licenses can be finalized on a basis which provides for satisfactory NRE fees or running unit royalties. In addition, for all Company activities in both audio and MDT enterprises, licensing revenues are dependent on the accuracy of the reporting by the licensee. The audio and disc businesses are subject to the volatility of the PC and consumer electronics industries. In addition, license agreements do not, in general call for minimum orders, and the licenses may be cancelled at any time upon required notice. In addition, the Company's audio technologies may be easily designed out of a product or line without notice to the Company. In large measure, the Company's audio business is dependent on the production, sales and marketing capabilities of its various chip foundries. 5 12 TECHNOLOGY - PENDING PATENT INFRINGEMENT SUIT The Company's success will depend significantly on its ability to obtain and enforce intellectual property protection for its technologies in the United States and in other jurisdictions. The Company holds a U.S. patent comprising forty claims covering major aspects of the Spatializer(R) 3-D audio technologies and holds additional patent applications or rights to other audio enhancement technologies and to the MultiDisc server technologies. However, there is no assurance that these rights will not be challenged, invalidated or circumvented, or that the Company's competitors will not independently develop or patent technologies that are equivalent or superior to the Company's technology. In response to a competitor's claim that the Company's Spatializer(R) 3-D audio technology has infringed patents held by QSound Labs, Inc. ("QSound"), a competitor, the Company initiated a declaratory relief action against the competitor seeking, inter alia, a determination that the Company does not infringe the competitor's patents and for damages. On August 29, 1996, the Court granted the Company's summary judgment motion in its entirety and denying QSound's cross-motion. The ruling confirms the Company's position that its patents and all of the implementations of Spatializer's ICs do not infringe any patents of QSound. While the developments in the litigation have, to date, supported the Company, the existence of the litigation is costly for the Company, has tempered acceptance of the Company's products and is indicative of the business and litigation risks faced by any technology enterprise. 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. If the appeal is denied and the Court's decision is confirmed on appeal, the Company intends to pursue the remaining claims for damages and for a decision that the QSound patent is invalid. If the appeal is granted and the Court's decision on the motion is overruled, a trial on the merits would follow at which time the Company will again assert its current position, which already was adopted in the grant of the Company's summary judgment motion, and will assert its remaining claims against QSound. After submission of papers by the parties, the Court of Appeals for the Federal Circuit heard oral argument on November 5, 1997, with respect to QSound's appeal. The parties are now waiting for the decision of the appellate court. The Company expects that it will ultimately prevail in this case, and therefore, the disposition of this matter is not expected to have a material effect on the financial position or results of operations of the Company. However, the outcome of this litigation cannot be predicted at this time. 6 13 INTELLECTUAL PROPERTY The Company's success will depend significantly on its ability to obtain and enforce intellectual property protection for its technologies in the United States and in other jurisdictions. Desper Products, Inc. holds certain patents in the field of audio signal processing and has a number of additional patent applications on file with the U.S. PTO. MultiDisc Technologies has more than 50 U.S. patent applications on file. There can be no assurance that any U.S. patent will grant on pending applications, or that such patents will provide the breadth of coverage intended. In addition, there is no assurance that any of the rights obtained from the Company's patents will not be challenged, invalidated or circumvented, or that the Company's competitors will not independently develop or patent technologies that are equivalent or superior to the Company's technology. While the Company has attempted to protect its technology and general intellectual property rights, there is no assurance that the Company's efforts will effectively protect against piracy or theft. Monitoring and identifying unauthorized use of such technology may prove difficult, and the cost of litigation may impact the Company's ability to adequately guard against such piracy and infringement. While the Company believes the steps it has taken to guard against such abuses are reasonable, there is no assurance it will be successful in this effort. IMPACT OF POSSIBLE DELAYS It is impossible to predict the timing or the amount, if any, of revenues which the Company will receive from current or future product sales and licensing activities. Any substantial delay in product development or technology introduction on behalf of the Company, its OEMs or IC foundries could result in significant delays in revenues and could allow competitors to reach the market with products before the Company. In view of the emerging nature of the technology involved, the Company's expansion into other technology areas and the uncertainties concerning the ability of the Company's products to achieve meaningful commercial acceptance, there can be no assurance of when or if the Company will achieve or sustain profitability. DEPENDENCE ON MANAGEMENT The future success of the Company primarily depends on the abilities and efforts of a small number of individuals, with particular management obligations. Loss of the services of any of these persons could adversely affect the Company's business prospects. While the Company believes that it will be able to recruit and retain personnel with the skills required for future growth, there can be no assurance that it will be successful in such efforts. Failure to do so could have an adverse impact upon the Company's business, the results of its operations and its prospects. OPERATIONS AND CONTINUED NEED FOR ADDITIONAL CAPITAL During the third and fourth quarters of 1997 the Company's audio licensing subsidiary, DPI, was profitable for the first time in the Company's history; however, the results of operations 7 14 for 1997 do not reflect this profitability because of the Company's commitment to the development of the MDT server technology. The Company has announced various plans to obtain approximately $6 million in separate, independent funding for MDT to cover the costs of further research and development and commercialization of the MDT technology. At December 31, 1997, the Company had $577,000 in cash and cash equivalents as compared to $1,587,000 at December 31, 1996. The decrease in cash and cash equivalents is attributed to cash used for the development of MDT's principal technology demonstrators and cash used in other operating activities. The Company had working capital of $283,000 at December 31, 1997 as compared with $2,092,000 at December 31, 1996. The Company's 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, 1997 the Company had five Foundry licensees, sixty-two OEM Licensees and fourteen authorized customers for its audio signal processing business as compared with three Foundry licensees and forty-eight OEM Licensees at December 31, 1996. The Company is actively engaged in negotiations for additional audio signal processing licensing arrangements which will generate additional cash flow without imposing any substantial costs on the Company. The Company continues to have no material long-term obligations and has no present commitments or agreements which would require any long-term debt or obligations to be incurred. The Company owed $112,500 to related parties as of December 31, 1997 and at December 31, 1996. On October 31, 1997, the Company entered into a line of credit agreement with Silicon Valley Bank to provide up to $750,000 in short term financing based upon the Company's accounts receivable base. As of December 31, 1997, there were borrowings against this line of credit in the amount of $400,000, which were repaid in January 1998. On April 14, 1998, the Company entered into a $5 million private placement of which $3 million has been funded. In connection with the private placement, the Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and issued 60,000 shares for the $3 million investment. Of the balance of the $5 million, $1 million will be funded within 45 days of the closing and $1 million will be funded between 60 and 120 days after the effective date of a registration statement covering the common stock into which the Preferred Stock is convertible. In connection with the private placement, the Company agreed to issue 1,000,000 common stock purchase warrants, exercisable for three years and entitling the holders to acquire one share of the Company's common stock for each warrant. Of the warrants, 750,000 are being issued to investors (of which 450,000 were issued) and 250,000 warrants are being issued to placement agents (of which 150,000 were issued). The investor warrants are exercisable at 140% and the placement warrants are exercisable at 120%, respectively, of the average closing bid price of the Company's common stock for the 10 days preceding the closing. In addition, cash placement fees of 10% will be paid. A related party of the Company received 50,000 of the placement agent warrants and $100,000 of the placement agent cash fee for 8 15 arranging $1 million of the current investment. In addition to the private placement, during the first quarter of 1998 the Company received short term unsecured advances of $650,000 from a related party, all of which are intended to be repaid with interest at 10% per annum on or before December 31, 1998. In the private placement, the participants were granted certain rights to participate in the separate financing described above which is currently being pursued by the Company to fund the commercial introduction of its MultiDisc CD/DVD server technology. Funds generated by these financing activities as well as cash generated from the Company's existing operations is expected to be sufficient for the Company to meet its operating obligations and the anticipated additional research, development, and commercial prototype cost for the MultiDisc business during the next twelve months. However, if the MultiDisc funding is not completed, the Company will require additional capital, and need to identify other debt, equity or strategic investment sources to complete the research development and commercial introduction of the MultiDisc CD/DVD server technology and for marketing costs related to such activities. If the Company is unsuccessful in completing the MultiDisc funding, management will be required to modify or delay the timing of the additional MultiDisc development and marketing activities. COMPETITION The Company is seeking commercial acceptance of its products in highly competitive markets. The Company's future success is dependent on establishing and maintaining the technological superiority of its products over those of competitors and its ability to successfully identify and bring other compatible technologies and products to market. Certain of the Company's current competitors have access to greater financial resources than the Company. There is no assurance that the Company's present or contemplated future products will achieve or maintain sufficient commercial acceptance, or if they do, that functionally equivalent products will not be developed by current or future competitors with access to significantly greater resources. DPI - 3-D AUDIO SIGNAL PROCESSING MARKETPLACE The market for 3D Virtual Audio technologies is characterized by intense competition and commodity pricing pressures. The Company competes with a number of entities that produce various stereo audio enhancement processes, technologies and products in both traditional two- speaker environments such as consumer electronics and multimedia computing, and in multi-channel, multi-speaker applications such as Home Theater. In the field of 3-D or Virtual Audio, the Company's principal competitors are SRS Labs, Inc., QSound Labs, Inc., Aureal Semiconductor, Inc., and Harman International, some of which have considerably greater capitalization and resources than the Company. In the future, the Company's products and technologies may also compete with audio technologies and products developed by other companies, including entities that have business relationships with the Company. There can be no assurance that the Company will be able to favorably compete in this market in the future. 9 16 MDT - OPTICAL DISC SERVER/JUKEBOX MARKETPLACE The overall data storage market, the market in which MDT competes, includes not only compact disc, but also magnetic disk and tape technologies, magneto-optical disks, disk and tape arrays, micrographic technologies, and hardcopy. The compact disc library or "jukebox" industry is limited at present and is currently characterized by the market leader NSM, a German based entity which has adapted its audio jukebox expertise to CD-ROM. NSM sells products under its own label and as an OEM for other manufacturers. As is traditional in this marketplace, NSM offers hardware only and is dependent on third parties for control and interface software, and on system integrators and value added resellers (VARs) to implement the hardware for individual solutions. Also in this marketplace is Pioneer, Panasonic, JVC, Sony and others. Other directly competitive technologies include M-O Optical Library management systems. Hewlett Packard and Plasmon are the leaders in this business segment. In addition to magnetic and optical disc technologies, the Company will be subject to new competitive mass storage technologies which may be introduced in the future. Typical of such new technology is "Near Field Recording" under development by Terastor in San Jose. NO ASSURED MARKET FOR STOCK The Common Stock of the Company trades on the NASDAQ SmallCap market under the symbol "SPAZ." To the extent the market price of the Company's Common Stock continues to trade below U.S. $5.00 per share, additional requirements imposed on broker-dealers by the Penny Stock Reform Act of 1990 are applicable. Compliance with those requirements could impact the Company's trading market. There is no assurance that the Company's current trading will be sustained or expanded as to correspond with an investor's desire for a ready market for shares owned in the Company. POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of preferred stock ("Preferred Stock") in one or more series, the terms of which are to be determined by the Board of Directors, without further action by shareholders, and may include voting rights (including the right to vote as a class on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. Of the 1,000,000 shares of Preferred Stock, 60,000 shares of Series A, 7% Convertible Preferred Stock ("Series A Preferred Stock") are issued and outstanding and the issuance of additional shares of Series A Preferred Stock or any other Preferred Stock could affect the rights of the holders of Common Stock and the value of the Common Stock, and could also make it more difficult for the holders of the Common Stock to control voting with respect to significant corporate transactions. See "Description of Capital Stock." 10 17 CONTROL BY OFFICERS AND DIRECTORS Current directors and officers of the Company and the executive officers of its subsidiaries beneficially own or control or have rights to acquire 8,688,891 shares of Common Stock or approximately 35% of the fully diluted Common Stock of the Company. As a result, in addition to their influence as officers and directors, if such persons act together as stockholders, they can substantially control actions by the stockholders with respect to the business and affairs of the Company. SHARES ELIGIBLE FOR FUTURE SALE - MARKET OVERHANG - ESCROWED PERFORMANCE SHARES Virtually all of the Company's currently outstanding Common Stock, including the Common Stock held by affiliates of the Company, will be tradeable currently or in the near future, either under this Prospectus, pursuant to Rule 144. Of the issued and outstanding shares of Common Stock, 5,445,115 are held by officers, directors and other founders or employees as Escrowed Performance Shares. Under the currently effective Performance Share Modification Agreements dated December 30, 1996, 5% of the original 5,776,700 Performance Shares were released on June 22, 1997 and the remainder of the Performance Shares are scheduled to be released automatically as follows: 5% on June 22, 1998; 10% on June 22, 1999; 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. In addition, under the revised arrangement the performance shares will vest if the individual holder has not voluntarily terminated his or her service to the Company prior to the applicable vesting dates. Any individual who is involuntarily terminated by the Company will be entitled to an automatic acceleration of the unvested performance shares. The Board, in its discretion, may allow an individual who has voluntarily terminated his or her services to the Company to retain a portion or all of any unvested performance shares. DIVIDEND POLICY The Company has not paid any cash dividends on its Common Stock and has no present intention of paying any dividends. The current policy of the Company is to retain earnings, if any, for use in operations and in the development of its business. The future dividend policy of the Company will be determined from time to time by the Board of Directors. NASDAQ LISTING The Company's Common Stock is listed on the NASDAQ SmallCap Market. The Company is required to maintain net tangible assets of at least $2 million and a $1.00 stock price and to comply with certain other governance and regulatory requirements to assure the continued listing of its Common Stock. On April 23, 1998 the Company received an informal inquiry from NASDAQ with respect to its maintenance and compliance with certain of these requirements. It 11 18 has responded to such inquiries and, as of the date hereof, the Company believes it is in compliance with these requirements and intends to take all reasonable actions to maintain such listing. However, there is no assurance that it will continue to comply and in such event there would be no public market for its securities. 12 19 USE OF PROCEEDS Securities offered for resale hereunder are to be offered for the account of the Selling Stockholders. The Company is not entitled to any of the proceeds of sale of any such securities, but the Company will pay the expenses of the filing of the Registration Statement. The Company will receive the proceeds, in the ordinary course, from any exercise of outstanding Options and Warrants and will apply those proceeds to general corporate purposes. If all outstanding Options registered herein are exercised, the Company will receive proceeds of approximately $476,400. If all the Warrants registered herein are fully exercised, the Company will receive proceeds of up to approximately $2,652,700. 13 20 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1997 (assuming none of the currently outstanding Options or Warrants are exercised) and on a pro forma basis to reflect the April 1998 Placement.
PRO FORMA DEBT DECEMBER 31, 1997 (UNAUDITED)1 - ---- ----------------- ------------ Bank Line of Credit Payable $400,000 $400,000 Notes Payable 64,272 64,272 Advanced from Related Parties 112,500 112,500 -------- -------- Total Debt $576,772 $576,772 -------- -------- STOCKHOLDERS' EQUITY Preferred shares, $.01 par value, 1,000,000 $ -- $ 600 shares authorized, no shares issued or outstanding at December 31, 1997; 60,000 shares Series A, 7% Convertible Preferred Stock issued on April 14, 1998 Common Stock, $.01 par value, 50,000,000 214,100 214,100 shares authorized 21,410,012 shares issued and outstanding at December 31, 1997 Additional Paid-In Capital 41,481,890 44,111,290 Accumulated Deficit (40,170,877) (40,170,877) ------------ ------------ Total Stockholders' Equity $1,525,113 $4,155,113 ---------- ---------- Total Capitalization $2,101,885 $4,731,885 ========== ==========
1 Giving effect to the issuance of 60,000 shares of Series A Preferred Stock in the April 1998 Placement, net of $370,000 in issuance costs. 14 21 BUSINESS This Prospectus incorporates by reference the documents listed herein, including the business descriptions contained therein and, in particular, the description of "Business" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 15 22 SELLING STOCKHOLDERS The shares of Common Stock offered hereunder are to be offered for sale, from time to time, by persons acquiring them in private placements since the Domestication Transaction or who have or may acquire the shares on exercise, from time to time, of Warrants or Options held by them. The following tables set forth the names and addresses of each of the Listed Selling Stockholders (other than officers and directors), indicates their relationship to the Company or its predecessors and specifies security ownership at April 15, 1998 before and after giving effect to the sale of common stock registered hereunder.
Percentage Securities Ownership To Be After Retained, Offering, if Percentage if all all Ownership Registered Registered Category of Shares Before Securities Securities Beneficially Owned Shares Offering are are Sold NAME AND RELATIONSHIP (1) Offered (2) Sold (2) - ---------------------------------- ------------------------ --------------- --------------- -------------- -------------- Carlo Civelli Shares - 2,499,622 0 14.1 2,499,622 13.6 Director (3) Escrow - 1,321,336 0 1,321,336 Warrants - 50,000 50,000 0 Options - 200,000 100,000 100,000 Total - 4,070,958 150,000 3,920,958 Stephen W. Desper Shares - 5,369 0 6.9 5,369 6.8 Director Escrow - 1,851,676 0 1,851,676 Options - 123,800 23,800 100,000 Total - 1,980,845 23,800 1,957,045 Steven D. Gershick Shares - 42,157 0 3.9 42,157 3.6 Director, Escrow - 800,987 0 800,987 Chief Executive Officer Options - 283,000 83,000 200,000 Total - 1,126,144 83,000 1,043,144 James D. Pace Shares - 76,350 30,000 1.1 46,350 * Director Escrow - 120,647 0 120,647 Options - 130,000 50,000 80,000 Total - 326,997 80,000 246,997 Wendy Marie Guerrero Shares - 20,000 20,000 * 0 * Escrow - 47,500 0 47,500 Options - 21,667 0 21,667 Total - 89,167 20,000 69,167 William E. Whitlock Shares - 7,875 0 * 7,875 * Escrow - 149,620 0 149,620 Options - 22,000 22,000 0 Total - 179,495 22,000 157,495
16 23
Percentage Securities Ownership To Be After Retained, Offering, if Percentage if all all Ownership Registered Registered Category of Shares Before Securities Securities Beneficially Owned Shares Offering are are Sold NAME AND RELATIONSHIP (1) Offered (2) Sold (2) - ---------------------------------- ------------------------ --------------- --------------- -------------- --------------- Jeffrey C. Evans Shares - 54,225 30,000 * 24,225 * Escrow - 80,272 0 80,272 Options - 0 0 0 Total - 134,497 30,000 104,497 Gerald E. Mullen Shares - 9,656 0 * 9,656 * Escrow - 183,456 0 183,456 Options - 50,000 50,000 0 Total - 243,112 50,000 193,112 Union Bank of Switzerland Shares - 50,000 0 * 50,000 * 8021 Zurich, Switzerland Warrant - 25,000 25,000 0 Total - 75,000 25,000 50,000 Romofin AG Shares - 92,500 12,500 * 80,000 * Burglestrasse 6 Warrant - 27,500 27.500 0 8027 Zurich, Switzerland Total - 120,000 40,000 80,000 Bank Sarasin & CIE Shares - 88,000 50,000 * 38,000 * Loewenstrasse 11 Warrant - 44,000 44,000 0 8001 Zurich, Switzerland Total - 132,000 94,000 38,000 Yorkton Securities, Inc. Shares - 370,000 370,000 1.3 None None 1000-1055 Dunsmuir St. Warrant - 5,000 5,000 Vancouver, BC Total - 375,000 375,000 Canada V7X 1L4 Roycan & Co. Shares - 150,000 150,000 * None None Warrant - 0 0 Total - 150,000 150,000 Coop Bank Basel Shares - 148,750 98,750 * 50,000 * Aerschenplatz 3 Warrant - 1,250 1,250 0 8002 Basel, Switzerland Total - 150,000 100,000 50,000 Maerki Baumann & Co., AG Shares - 125,250 91,750 * 33,500 * Drekonigstrasse 8 Warrant - 0 0 0 8022 Zurich, Switzerland Total - 125,250 91,750 33,500 Affida Bank Shares - 42,750 14,250 * 28,500 * Post Fach 5274 Warrant -0 0 0 8022 Zurich, Switzerland Total - 42,750 14,250 28,500
17 24
Percentage Securities Ownership To Be After Retained, Offering, if Percentage if all all Ownership Registered Registered Category of Shares Before Securities Securities Beneficially Owned Shares Offering are are Sold NAME AND RELATIONSHIP (1) Offered (2) Sold (2) - ---------------------------------- ------------------------ --------------- --------------- -------------- --------------- Eagle Capital Ltd. Shares - 150,000 0 * 150,000 * Leonhardshalde 21 Warrant - 75,000 75,000 0 8025 Zurich, Switzerland Total - 225,000 75,000 150,000 Finsbury Technology Shares - 50,000 0 * 50,000 * Trust PLC Warrant - 25,000 25,000 0 Alderman's House Total - 75,000 25,000 50,000 Alderman's Walk London, England ECZM SXR Henry Platt Shares - 45,000 10,000 * 35,000 * 825 Fifth Avenue Warrant - 22,500 22,500 0 New York, NY 10021 Total - 67,500 32,500 35,000 William Pitt Living Trust Shares - 35,000 0 * 35,000 * 920 Tangier Avenue Warrant - 17,500 17,500 0 Palm Beach, FL Total - 52,500 17,500 35,000 A. Alfred Taubman Restated Shares - 70,000 0 * 70,000 * Revocable Trust Warrant - 35,000 35,000 0 200 E. Longlake Road Total - 105,000 35,000 70,000 P.O. Box 200 Bloomfield Hills, MI 48303-0200 Jonathon Armstrong Shares - 240,000 240,000 1.2 None None 220 Bush, #660 Warrant - 120,000 120,000 San Francisco, CA 94104 Total - 360,000 360,000 Centrum Bank AG Shares - 370,000 370,000 1.9 None None Heiligkreuz 8, FL-9490 Warrant - 185,000 185,000 Vaduz, Switzerland Total - 555,000 555,000 Rush & Co. Shares - 60,000 60,000 * None None New York, NY Warrant - 30,000 30,000 Total - 90,000 90,000 Egger & Co. Shares - 40,000 40,000 * None None Warrant - 20,000 20,000 Total - 60,000 60,000 Hare & Co. Shares - 150,000 150,000 * None None P.O. Box 11203 Warrant - 75,000 75,00 New York, NY 10249 Total - 225,000 225,000
18 25
Percentage Securities Ownership To Be After Retained, Offering, if Percentage if all all Ownership Registered Registered Category of Shares Before Securities Securities Beneficially Owned Shares Offering are are Sold NAME AND RELATIONSHIP (1) Offered (2) Sold (2) - ---------------------------------- ------------------------ --------------- --------------- -------------- --------------- Roland Inderbizin Shares - 15,000 15,000 * None None Chliwisstrasse 30 Warrant - 7,500 7,500 8142 Uitikon, Switzerland Total - 22,500 22,500 Rolf Albrecht Shares - 15,000 15,000 * None None Hoehenstrasse 9 Warrant - 7,500 7,500 8954 Geroldswil, Switzerland Total - 22,500 22,500 Cudd & Co. Shares - 185,000 185,000 1.0 None None 1 Chase Manhattan Plz Warrant - 92,500 92,500 New York, NY Total - 277,500 277,500 Brown Brothers Harriman & Shares - 15,000 15,000 * None None Co. Warrant - 0 0 Securities Dept. Total - 15,000 15,000 59 Wall Street New York, NY 10005 Royal Bank of Scotland Shares - 0 0 * None None Trust Co. (Jersey) Limited Warrant - 7,500 7,500 Total - 7,500 7,500 Preferred Technology, Inc. Shares - 0 0 * None None 220 Montgomery St., Suite Warrant - 9,600 9,600 777 Total - 9,600 9,600 San Francisco, CA 94104 Brian Alger Shares - 0 0 * None None Warrant - 2,400 2,400 Total - 2,400 2,400 I.N. Inc. Shares - 0 0 * None None Warrant - 125,000 125,000 Total - 125,000 125,000 CPR (USA) Inc. Shares - 2,856,000 2,856,000 10.9 None None 101 Hudson St., 37th Floor Warrant - 300,000 300,000 Jersey City, NJ 07302 Total - 3,156,000 3,156,000 LibertyView Plus Fund Shares - 1,142,400 1,142,400 4.4 None None Hemisphere House Warrant - 120,000 120,000 9 Church Street Total - 1,262,400 1,262,400 Hamilton, Bermuda HMDX
19 26
Percentage Securities Ownership To Be After Retained, Offering, if Percentage if all all Ownership Registered Registered Category of Shares Before Securities Securities Beneficially Owned Shares Offering are are Sold NAME AND RELATIONSHIP (1) Offered (2) Sold (2) - ---------------------------------- ------------------------ --------------- --------------- -------------- --------------- LibertyView Fund, LLC Shares - 285,600 285,600 1.1 None None 101 Hudson St., 37th Floor Warrant - 30,000 30,000 Jersey City, NJ 07302 Total - 315,600 315,600 Aton Select Fund, Ltd. Shares - 0 0 * None None c/o Clarion Finanz AG Warrant - 150,000 150,000 Seefeldstrasse 214 Total - 150,000 150,000 8034 Zurich, Switzerland Attn: Jan Barcikowski Cardinal Capital Mgmt, Inc. Shares - 0 0 * None None 3340 Peachtree Road N.E. Warrant - 150,000 150,000 Suite 620 Total - 150,000 150,000 Atlanta, GA 30326 Totals - 16,652,215 8,339,800 57.8% 8,312,415 28.8% ========== ========= ===== ========= =====
----------------- (1) Includes Escrowed Performance Shares of Common Stock. (2) Denominator includes all shares reserved for issuance on exercise of Options and Warrants, and shares issuable upon conversion of Series A Preferred Stock. (3) Clarion Finanz AG is a non-reporting investment company controlled by Carlo Civelli. Holdings of Mr. Civelli and Clarion Finanz AG are combined, and include all shares of the Company held of record or beneficially by either, and all additional shares over which either currently exercises full or partial control, without duplication through attribution. * Denotes less than 1% ownership. 20 27 PLAN OF DISTRIBUTION The shares of Common Stock held by the Selling Stockholders may be offered by them in varying amounts and transactions, from time to time, including through the facilities of the NASDAQ SmallCap Market or such other exchange or reporting system where the Common Stock may be traded, at prices then obtainable and satisfactory to them so long as this Prospectus is then current under the rules of the Commission and the Registration Statement has not been withdrawn by the Company. Brokerage commissions may be paid or discounts allowed in connection with such sales; however, it is anticipated that the discounts allowed or commissions paid will be no more than the ordinary brokerage commissions paid on sales effected through brokers or dealers. To the knowledge of the Company, none of the Selling Stockholders has made any arrangements with a broker or dealer concerning the offer or sale of the Common Stock as of the date of this Prospectus. The Company will receive the proceeds from the exercise of Options and Warrants but the Selling Stockholders, not the Company, will receive the net proceeds of any sales of their Common Stock hereunder after payment of any discounts and commissions. The Company has paid the professional fees and related costs of this Registration Statement from its general funds. REGISTRATION RIGHTS OF CERTAIN SELLING STOCKHOLDERS The Company has granted certain registration rights with respect to Common Stock to the Selling Stockholders who are not affiliates of the Company and who acquired 1,887,250 shares of Common Stock (in various private placements since July 27, 1994), or who have or who could acquire 4,284,000 shares of Common Stock on conversion of the Series A Preferred Stock in the April 1998 Placement, or who could acquire 1,709,750 shares issuable on exercise of Warrants issued in such private placements (the "Registrable Shares"). The Company also has agreed that if the Company proposes to register any of its securities under the 1933 Act in connection with the public offering of such securities for cash (other than a registration relating solely to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan, or pursuant to a Rule 145 transaction) it will allow those holders to have their Registrable Securities included in such Registration Statement. The Company has agreed to bear all registration expenses in connection with the registration of the Registrable Securities other than underwriting commissions. DESCRIPTION OF CAPITAL STOCK The authorized capital of the Company consists of 50,000,000 shares of Common Stock (par value U.S. $.01) of which 21,423,345 were outstanding at April 15, 1998 and 1,000,000 shares of Preferred Stock (par value U.S. $.01) of which 60,000 shares of Series A Preferred Stock were issued and outstanding at April 15, 1998. All of the issued shares of Common Stock of the Company are fully paid and non-assessable. Subject to the release and performance conditions relating to Escrowed Performance Shares, all of the shares of Common Stock rank equally as to voting rights, 21 28 participation in the distribution of the assets of the Company on a liquidation, dissolution or winding-up and the entitlement to dividends. Each share of Common Stock entitles the holder to one vote. In the event of the liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company, the holders of the Common Stock will be entitled to receive, on a pro-rata basis, all of the assets remaining after the Company has paid its liabilities. Subject to the rights granted to holders of Preferred Stock, and the limitations on Escrowed Performance Shares, holders of the Common Stock are entitled to dividends only when and to the extent declared by the Board of Directors. Of the 21,423,345 shares of Common Stock currently issued and outstanding, 5,445,115 are classified as Escrowed Performance Shares, are held in escrow by the Company's transfer agent, Harris Trust Company of California, and will vest under the modification arrangements. The Company has Options outstanding which could result in the issuance of up to 2,010,070 additional common shares of the Company and has Warrants outstanding which could result in the issuance of up to 1,759,750 additional shares of Common Stock of the Company. The Options have been granted to officers, directors and employees and the Warrants have been issued in private placements and as payment for services rendered. Warrants are non-transferable and adjusted in the event of a share consolidation or subdivision or other similar change to the Company's capital. See "Executive Compensation" in the Company's Annual Report on Form 10-K or in its Proxy materials for further information with respect to the Options. The Board of Directors is authorized to issue, without stockholder action, up to 1,000,000 shares of Preferred Stock. Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. In connection with the April 1998 Placement, the Board of Directors authorized the issuance of up to 100,000 shares of Series A, 7% Convertible Preferred Stock ("Series A Preferred Stock") with a par value of $.01 per share and a stated value of $50.00 per share, with a 7% per annum dividend. In the April 1998 Placement, 60,000 shares were issued. Under the terms of the April 1998 Placement, the holders or their designees may acquire up to 40,000 additional shares of Series A Preferred Stock based on the requirement that Clarion Finanz AG or its designee invest an additional $1 million and, at the option of if the Company, the other holders also may be required to invest an additional $1 million. The Series A Preferred Stock ranks: (i) prior to all of the Company's Common Stock, par value $.01 per share ("Common Stock") and (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 A Preferred Stock), 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"). The Series A Preferred Stock will bear a 7% 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 22 29 Conversion Price (as defined below), at the Company's option. No dividends shall be paid on the Common Stock or any other subsequently issued stock. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive a liquidation preference of $50.00 per share plus any accrued and unpaid dividends, subject to adjustments for certain change of control and normal corporate reclassifications and to pro rata distributions in the event that assets are insufficient to fully fund the liquidation preference. Holders of the Series A Preferred Stock have a right to convert their shares, at their option on the earlier of (x) ninety (90) days after issuance or (y) on the effective date of this Registration (the "Conversion Date") with such conversion to be based on a per share conversion price ("Conversion Price") equal to the lesser of a price that reflects a discount (the "Conversion Discount") to the average of any three (3) consecutive closing bid prices for the Company's Common Stock within twenty (20) trading days immediately prior to the conversion date (the "Floating Conversion Price") or a price which is equal to one hundred thirty percent (130%) of the closing bid prices of the Company's Common Stock for the ten (10) trading days immediately preceding the date of issuance (the "Fixed Conversion Price") provided that in determining the Conversion Price, the holder shall not count any day on which its sales account for greater than twenty percent (20%) of the volume of the Company's Common Stock and on which the holder has sales in the last hour of trading. The Conversion Discount shall be equal to fifteen percent (15%) if the Conversion Rights are exercised within one hundred twenty (120) days of first issuance of the Series A Preferred Stock, shall be equal to seventeen and one-half percent (17.5%) if the Conversion Rights are exercised after one hundred twenty (120) days and prior to one hundred forty-nine days of first issuance of the Series A Preferred Stock; and shall be equal to twenty percent (20%) if the Conversion Rights are exercised after one hundred fifty (150) days from first issuance of the Series A Preferred Stock. The time periods are adjusted in the event that a Registration Statement becomes effective prior to the 90th day and the applicable Conversion Discount shall increase by five percent (5%) if the Company is de-listed on NASDAQ. In addition, the percentage of shares that can be converted at any one time is limited during such time periods and the holders cannot own more than 4.99% of the equity of the Company after the Conversion. The Company is obligated to file this Registration Statement to cover the maximum number of shares that is allowable pursuant to Rule 4310(c)(25)(H) of The NASDAQ Stock Market Rules, based on the Company's calculations of the number of shares of Common Stock which are required to accommodate the conversion rights of the Series A Preferred Stock and the shares that underlie Warrants issued in connection with the April 1998 Placement. Unless sooner converted, and subject to certain conditions, the Series A Preferred Stock is subject to mandatory conversion after three (3) years from the Closing Date, at which time all shares of Series A Preferred Stock will automatically be converted at the Conversion Price. In addition, to accommodate the NASDAQ requirements, the holders have agreed that they will not convert Series A Preferred Stock until required stockholder approval has been received to meet the applicable NASDAQ requirement. After giving effect to the Series A Preferred Stock, the Company has 900,000 shares of Preferred Stock remaining reserved for issuance all of which shares which could be issued 23 30 quickly with terms calculated to delay or prevent a change in control of the Company or to make removal of management more difficult. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of the Company without any further action by the stockholders or discouraging bids for the Company's Common Stock at a premium. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. APPLICATION OF CALIFORNIA CORPORATIONS CODE Although incorporated in Delaware, the business of the Company has been conducted through its operating subsidiaries in the State of California. Section 2115 of the California Corporations Code ("Section 2115") provides that certain provisions of the California Corporations Code shall be applicable to a corporation organized under the laws of another state to the exclusion of the law of the state in which it is incorporated, if the corporation meets certain tests regarding the business done in California and the number of its California shareholders. An entity such as the Company can be subject to Section 2115 even though it does not itself transact business in California if, on a consolidated basis, the average of the property factor, payroll factor and sales factor is more than fifty percent (50%) deemed to be in California during its latest full income year and more than one-half of its outstanding voting securities are held of record by persons having addresses in California. Section 2115 does not apply to corporations with outstanding securities listed on the New York or American Stock Exchange, or with outstanding securities designated as qualified for trading as a national market security on NASDAQ, if such corporation has at least 800 beneficial holders of its equity securities. Since the Company currently would be deemed not to meet these factors, it is not subject to Section 2115. DELAWARE CORPORATE GOVERNANCE ISSUES As a Delaware corporation, the Company is subject to Section 203 of the Delaware General Corporation Law, an anti-takeover provision which generally prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination has been approved by the directors and shareholders as provided in the Company's Certificate of Incorporation and Bylaws. The Company's Certificate of Incorporation and Bylaws incorporate the provisions of Section 203. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock and approval of the holders of at least two-thirds of the voting stock is required to alter, amend or repeal the foregoing provisions. The Company has adopted certain provisions to limit the ability of stockholders to change corporate management. The Company's Certificate of Incorporation contains provisions which 24 31 classifies the Board of Directors and provides that Board members may only be removed for cause and with the approval of the holders of two-thirds of the voting stock. The Certificate of Incorporation adopts the interested stockholder provisions described above. While these or similar provisions are commonly adopted by public corporations formed under Delaware law, such provisions may allow management to retain their positions in the Company and may discourage third parties from attempting to acquire control of the Company. As a result, stockholders of the Company may have reduced opportunities to sell their stock in transactions where third parties are seeking an interest in the Company and such third parties may be discouraged from undertaking transactions to acquire a significant interest in the Company. SHARES ELIGIBLE FOR FUTURE SALE As of April 15, 1998, there were 21,423,345 shares of Common Stock outstanding and 4,284,000 shares reserved for issuance on conversion of the Series A Preferred Stock based on the Estimated Conversion Ratios and 1,759,750 shares reserved for issuance on exercise of outstanding Warrants and 2,010,070 shares reserved for issuance on exercise of outstanding Options, representing in the aggregate a fully diluted total of 29,477,165 shares (assuming the Series A Preferred is converted based on the Estimated Conversion Ratios). Of that total, 8,460,094 or 39.5%, were held by persons who are officers, directors or holders of more than 5% of the Company's securities, or other persons deemed to be "affiliates" (together, "Affiliates"). Of the 8,460,094 shares held by Affiliates, 5,445,115 are Escrowed Performance Shares. All of the shares of Common Stock received by the Company's stockholders in exchange for their Spatializer-Yukon shares in the Domestication Transaction are currently eligible for sale in the U.S. except shares which were then held by Affiliates of the Company. Those shares, other than the Escrowed Performance Shares which are subject to the escrow limitations, are eligible for resale in the U.S., subject to the volume limitation, manner of sale and available public information requirement of Rule 144. INDEMNIFICATION AND PERSONAL LIABILITY OF OFFICERS AND DIRECTORS The Company's Certificate of Incorporation contains a provision authorized by Delaware law which eliminates the personal liability of a director to the Company, or to any of its stockholders, for monetary damages for a breach of his fiduciary duty as a director, except in the case where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law, or obtained an improper personal benefit. This provision has no effect on the availability of equitable remedies, such as an injunction or rescission for breach of fiduciary duty, including the duty of care. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Company's bylaws obligate it to indemnify its directors, officers, employees and other agents to the fullest extent permitted by Delaware law, in respect of expenses, judgments, 25 32 penalties, fines, and settlement of claims paid or incurred, including those resulting from liability under the 1933 Act, if the indemnitee acted in good faith and in what he or she reasonably believed to be in, or not opposed to, the best interest of the Company, and, in the case of criminal action, if the indemnitee had no reasonable cause to believe his or her conduct was unlawful. The right to indemnity conferred by the Bylaws is a contractual right. Such indemnification may be made against (a) expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding (other than an action by, or in the right of, the Company) arising out of a position with the Company (or with some other entity at the Company's request), and (b) expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action or suit by, or in the right of, the Company, unless the director or officer is found liable to the Company and an appropriate court does not determine that he or she is nevertheless fairly and reasonably entitled to indemnification. In certain circumstances, Delaware law permits advances to cover such expenses before a final determination that indemnification is permissible. Delaware law requires indemnification for expenses in certain circumstances and, in others, requires that the indemnification be approved by a majority vote of directors not involved in the event. In certain actions brought by or on behalf of the Company against a person, indemnification of that person is available only after a judicial determination by the Court in which the matter was heard. To the extent that an indemnitee is successful in the defense of any proceeding, he or she is entitled to be indemnified against actual and reasonable expenses incurred in connection with such defense. The Company's bylaws establish procedures pursuant to which such a determination may be made. Delaware law permits the Company to enter into written agreements confirming (and in certain cases, extending its obligations to) the purchase of insurance on behalf of any director, officer, employee or agent of the Company or other corporation, partnership, joint venture, trust or other enterprise whether or not the Company would have the power to indemnify such insured under Delaware law, against liabilities arising out of their positions with the Company. To date, the Company has not obtained any such insurance. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the 1933 Act and is therefore unenforceable. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brand Farrar & Buxbaum LLP. 26 33 EXPERTS The consolidated financial statements of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1996, and for each of the years in the three-year period ended December 31, 1997 have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. 27 34 No person is authorized in connection with this Prospectus to give any information or to make any representations about the Company, the Selling Stockholders, the securities referenced herein or any matter referenced herein, other than the information and representations contained in this Prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by the Company or any Selling Stockholder. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of such securities in any jurisdiction or to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any distribution of securities in accordance herewith shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein or therein is correct as of any time subsequent to the date of such information. TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION..........................................................i INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................................ii THE COMPANY....................................................................1 RISK FACTORS...................................................................4 USE OF PROCEEDS...............................................................13 CAPITALIZATION................................................................14 BUSINESS......................................................................15 SELLING STOCKHOLDERS..........................................................16 PLAN OF DISTRIBUTION..........................................................21 DESCRIPTION OF CAPITAL STOCK..................................................21 SHARES ELIGIBLE FOR FUTURE SALE...............................................25 INDEMNIFICATION AND PERSONAL LIABILITY OF OFFICERS AND DIRECTORS................................................25 LEGAL MATTERS.................................................................26 EXPERTS.......................................................................27
SPATIALIZER AUDIO LABORATORIES, INC. The Date of this Prospectus is ______________, 1998. 35 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following list itemizes all estimated expenses incurred by the Registrant in connection with this Registration Statement. The fees and expenses of the Selling Stockholders are being paid by the Company.
Registration Fees $ 2,614.00 Transfer Agent Fees $ 500.00* Printing and Engraving $ 3,000.00* Costs Legal Fees $ 10,000.00* Accounting Fees $ 10,000.00* Miscellaneous $ 5,000.00* TOTAL $ 31,114.00*
-------------------- * Estimated. II-1 36 ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is incorporated in Delaware. Under Section 145 of the General Corporation Law of the State of Delaware (the "DGCL"), a Delaware corporation generally has the power to indemnify its present and former directors and officers against expenses and liabilities incurred by them in connection with any suit to which they are, or are threatened to be made, a party by reason of their serving in those positions so long as they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the Company, and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The statute expressly provides that the power to indemnify authorized thereby is not exclusive of any rights granted under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Company's Certificate of Incorporation contains the following provision: "ARTICLE IX INDEMNIFICATION SECTION 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or an officer of the corporation, against expenses (including, but not limited to, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in and permitted by Delaware law and any other applicable law as from time to time in effect. Such right of indemnification shall not be deemed to be exclusive of any other rights to which such director or officer may be entitled apart from the foregoing provisions. The foregoing provisions of this Section 1 shall be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while this Section 1 and the relevant provisions of Delaware law and other applicable law, if any, are in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. SECTION 2. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including, but not limited to, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the extent and in the manner set forth in and permitted by Delaware law and any other applicable law as from time to time in effect. Such right of indemnification shall not be deemed to be II-2 37 exclusive of any other rights to which any such person may be entitled apart from the foregoing provisions." Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director (i) for such breach of the director's duty of loyalty to the corporation or its stockholder, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) of the DGCL, or (iv) for any transactions from which the director derived an improper personal benefit. The Company's Certificate of Incorporation contains the following relevant provision: "ARTICLE X LIABILITY FOR BREACH OF FIDUCIARY DUTY To the fullest extent permitted by Delaware law, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. In furtherance thereof, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of directors shall be eliminated or limited to the full extent authorized by the General Corporation Law of the State of Delaware, as so amended." The Company's Bylaws obligate it to indemnify the Corporation to indemnify its directors, officers, employees and other agents to the fullest extent permitted by Delaware law, in respect of expenses, judgments, penalties, fines, and settlement of claims paid or incurred, including those resulting from liability under the Act, if the indemnitee acted in good faith and in what he or she reasonably believed to be in, or not opposed to, the best interest of the corporation, and, in the case of criminal action, if the indemnitee had no reasonable cause to believe his or her conduct was unlawful. The Bylaws provide: II-3 38 "ARTICLE VI INDEMNIFICATION SECTION 1. Directors and Officers. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or an officer of the Corporation, against expenses (including, but not limited to, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. Such right of indemnification shall not be deemed to be exclusive of any right to which such director or officer may be entitled apart from the foregoing provisions. The foregoing provisions of this Section 1 shall be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while this Section 1 and the relevant provisions of the General Corporation Law of the State of Delaware and other applicable law, if any, are in effect, and any repeal or modification thereof shall not affect any right or obligation then existing, with respect to any state of facts then or theretofore existing, or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. SECTION 2. Agents and Employees. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including, but not limited to, attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. Such right of indemnification shall not be deemed to be exclusive of any other right to which any such person may be entitled apart from the foregoing provisions." * * * Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is therefore unenforceable. The preceding discussion of the Company's Certificate of Incorporation, Bylaws and Section 145 of the DGCL is qualified in its entirety by reference to the complete text of the Company's Certificate of Incorporation and Bylaws which are incorporated by reference as Exhibits to this Registration Statement. II-4 39 ITEM 14. EXHIBITS 2.1* Desper-Spatializer Reorganization Agreement dated January 29, 1992. (Incorporated by reference to the Registrant'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 Registrant'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 Registrant'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 Registrant's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 3.3* Amended Certificate of Designation of Series A Preferred Stock (Incorporated by reference to the Registrant's Preliminary Proxy Statement filed with the Commission on May 14, 1998.) 4.1* Form of Subscription Agreement for August 1994 Private Placement. (Incorporated by reference to the Registrant'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 Registrant'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 Registrant'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 Registrant'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 Registrant'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 Registrant's Proxy Statement dated June 25, 1996 and previously filed with the Commission.) 4.7* Form of Subscription Agreement for 1995 Private Placements. 4.8* Form of Subscription Agreement and Warrant Agreement for March 7, 1997 Private Placement. 4.9* Modification Agreement for Escrowed Performance Shares.
II-5 40 4.10 Form of 7% Convertible Series A Preferred Stock Subscription Agreement, Warrant Agreement and Registration Rights Agreement (with Form of Amendment) for April 14, 1998 Private Placement. 5.1 Opinion of Brand Farrar & Buxbaum, LLP concerning legality of unissued securities subject to registration. 10.1*** License Agreement dated June 29, 1994 between DPI and MEC. (Incorporated by Reference to the Registrant'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 Registrant'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 Registrant's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.4* Real Property Lease for executive offices in Woodland Hills, California (effective April 7, 1995). (Incorporated by reference to the Registrant's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 10.5* Employment Agreement between DPI and Steven Gershick dated December 16, 1991. (Incorporated by reference to the Registrant's Registration Statement on Form S-1, Registration No. 33-90532, effective August 21, 1995.) 11.1* Computation of Loss Per Common Share. 21.1* Schedule of Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants. 23.2 Consent of Brand Farrar & Buxbaum, LLP (included in Exhibit 5.1).
- ------------------ * Previously filed. ** To be filed by amendment. *** Portions subject to request for confidential treatment. The confidential portions omitted have been filed separately with the Commission. II-6 41 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Los Angeles, State of California on May 13, 1998. SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ STEVEN D. GERSHICK ---------------------------------------- Name: Steven D. Gershick Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Steven D. Gershick Director, Chairman of the May 13, 1998 - --------------------------- Board, President and Chief Steven D. Gershick Executive Officer /s/ Henry R. Mandell - --------------------------- Chief Financial Officer/Senior May 13, 1998 Henry R. Mandell Vice President of Finance/Secretary /s/ Carlo Civelli - --------------------------- Director May 14, 1998 Carlo Civelli /s/ Scot E. Land - --------------------------- Director May 13, 1998 Scot E. Land - --------------------------- Director May __, 1998 James D. Pace - --------------------------- Director May __, 1998 Jerold H. Rubinstein /s/ Gilbert N. Segel - --------------------------- Director May 13, 1998 Gilbert N. Segel /s/ Stephen W. Desper Director, Vice Chairman of the May 13, 1998 - --------------------------- Board Stephen W. Desper
*By: ------------------------------------ Steven D. Gershick, Attorney-in-Fact 42 POWER OF ATTORNEY We, the undersigned officers and directors of SPATIALIZER AUDIO LABORATORIES, INC., hereby severally constitute and appoint Steven D. Gershick and Henry R. Mandell and each of them (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for us and in our stead, to sign any and all amendments (including post-effective amendments) to this Registration Statement and all documents relating thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing necessary or advisable to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we have executed this instrument on the dates set forth below.
Signature Title Date - --------- ----- ---- /s/ Steven D. Gershick Director, Chairman of the May 13, 1998 - --------------------------- Board, President and Chief Steven D. Gershick Executive Officer /s/ Henry R. Mandell - --------------------------- Chief Financial Officer/Senior May 13, 1998 Henry R. Mandell Vice President of Finance/Secretary /s/ Carlo Civelli - --------------------------- Director May 14, 1998 Carlo Civelli /s/ Scot E. Land - --------------------------- Director May 13, 1998 Scot E. Land - --------------------------- Director May __, 1998 James D. Pace - --------------------------- Director May __, 1998 Jerold H. Rubinstein /s/ Gilbert N. Segel - --------------------------- Director May 13, 1998 Gilbert N. Segel /s/ Stephen W. Desper Director, Vice Chairman of the May 13, 1998 - --------------------------- Board Stephen W. Desper
EX-4.10 2 FORM OF PREFERRED STK SUB AGRMNTS & WARRANT AGRMNT 1 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") 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 SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. 7% CONVERTIBLE SERIES A PREFERRED STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. 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 7% Convertible Series A Preferred Stock (hereinafter referred to as the "Preferred Stock") of SPATIALIZER AUDIO LABORATORIES, INC. (Nasdaq Small Cap Stock Market symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). The terms on which the Preferred Stock may be converted into common stock of the Company, $0.01 par value per share,(the "Common Stock") and the other terms of the Preferred Stock are set forth in the Certificate of Designation of the 7% Convertible Preferred Stock Series A (Exhibit A annexed hereto). In addition, the Company will sell to the Subscribers listed on Schedule A annexed hereto (the "Subscribers" or "Purchasers"), a warrant (the "Warrant") to purchase One Hundred Fifty Thousand (150,000) shares of Common Stock of the Company for each One Million ($1,000,000) Dollars funded hereunder (such number of shares of Common Stock underlying the Warrants shall be pro rated for each subscription amount) 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 B annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Preferred Stock, Warrants and the Common Stock underlying the Warrant and Preferred Stock (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. 2 The Closing Date shall be determined in accordance with Sections 1.1 and 15 herein. The Subscribers listed on Schedule A annexed hereto each hereby represent and warrant to, and agree with the Company as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and the Subscribers will buy, in reliance upon the representations and warranties of the Company and Subscribers contained in this Agreement, upon the terms and conditions hereinafter set forth, that number of shares of Preferred Stock set forth next to their names on Schedule A for an aggregate purchase price of Two Million ($2,000,000) U.S. Dollars based on U.S. $50.00 per share (the "Purchase Price"). Dividends will accrue and be paid at the rate of seven (7%) percent 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. Dividends shall be calculated at the Conversion Price (as hereinafter defined) on the Conversion Date (as hereinafter defined) when converted. 1.2 Form of Payment. The Subscribers shall pay the Purchase Price by delivering good funds in United States Dollars by wire transfer to Goldstein, Goldstein & Reis, LLP, the Escrow Agent, against delivery of the original Preferred Stock and Warrants as per a separate Escrow Agreement, annexed hereto as Exhibit C, as payment in full for their portion of the Securities. 1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein & Reis, LLP are as follows: Chase Manhattan Bank, N.A. ABA No. 021000021 For the Account of: United States Trust Company of New York Account No. 920-1-073195 In favor of: Goldstein, Goldstein & Reis, LLP Attorney Escrow Account Account No. 59-01383 Section 2. Representations and Warranties of the Subscribers. Subscribers each acknowledge, represent, warrant and agree as follows: 2.1 Organization and Authorization. The Subscribers are duly incorporated or organized and validly existing in the state or country of their incorporation or organization and have all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by the Subscribers, the performance by 2 3 the Subscribers of their obligations hereunder and the consummation by the Subscribers of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Subscribers. The undersigned signatories have all right, power and authority to execute and deliver this Agreement on behalf of the Subscribers. This Agreement has been duly executed and delivered by the Subscribers and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Subscribers, enforceable against the Subscribers in accordance with its terms. 2.2 Evaluation of Risks. Subscribers each have 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. They each recognize that their investment in the Company involves a high degree of risk and can afford the complete loss of their investment. 2.3 Independent Counsel. Subscribers acknowledge that they each have been advised to consult with their own attorney regarding legal matters concerning the Company and to consult with their tax advisor regarding the tax consequences of acquiring the Securities. 2.4 Disclosure Documentation. Subscribers each have each 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-K's, and registration statements, filed by the Company since March 1, 1997, and the draft of the Company's Form 10-K for the period ended December 31, 1998 (which the Company represents will be filed on April 15, 1998) (collectively, the "Reports"). Except for the Reports, the Subscribers are not relying on any other information relating to the offer and sale of the Securities. Subscribers acknowledge that the Company has offered to make available any additional public information that the Subscribers may reasonably request, including technical information, and other material information about the Company and Subscribers have been offered Company's full and unconditional cooperation in making such information available to Subscribers and acknowledges that the Company has recommended that the Subscribers request and review such information prior to making an investment decision. No oral or written representations have been made, or oral or written information furnished to the undersigned or its advisors, if any, in connection with the offering of the Securities which were or are in any way inconsistent with the Reports. 2.5 Opportunity to Ask Questions. Subscribers each have 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 each of the Subscribers. 2.6 Reports Constitute Sole Representations. Except as set forth in the Reports, no representations or warranties have been made to Subscribers by (a) the Company or any agent, employee or affiliate of the Company or (b) any other person, and in entering into this transaction Subscribers are not relying upon any information, other than that contained in the Reports and the results of independent investigation by Subscribers. 3 4 2.7 Each of the Subscribers is Accredited Investor. The Subscribers are each "Accredited Investors" as defined below who 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; (i)Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (i)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; (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 4 5 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; and (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. 2.8 No Registration, Review or Approval. Subscribers acknowledge and understand 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. Subscribers acknowledge, understand and agree 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. Subscribers understand that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Subscribers set forth herein in order to determine the applicability of such exemptions and the suitability of the Subscribers to acquire the Securities. Subscribers will advise Company of the state of its residence prior to executing this or any other agreement to enable the Company to comply with applicable "blue sky" laws. 2.9 Investment Intent. Without limiting their ability to resell the Securities pursuant to an effective registration statement, Subscribers are acquiring the Securities solely for their own account and not with a view to the distribution, assignment or resale to others. Subscribers understand and agree that they may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.10 No Advertisements. The Subscribers are 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. 2.11 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit E). Section 3. Representations and Warranties of the Company. For so long as any Securities held by any of the Subscribers remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized 5 6 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 Nasdaq Small Cap Stock Market. 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 this offer and sale, or such shorter period that the Company has been required to file such Reports as defined herein, to the best of the Company's knowledge (i) none of the Company's filings with the Securities and Exchange Commission 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 filed all requisite forms, reports and exhibits thereto with the Securities and Exchange Commission. 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 the 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 6 7 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 nonassessable 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, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit, under, any provision of the Articles of Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and any amendments thereto of the Company or any material mortgage, 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 and 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 March 1, 1997, 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 circumstances 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. 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 by-laws 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 the Reports and this Agreement, 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 7 8 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 Nasdaq Small Cap Stock Market or other organized United States 9 10 market or quotation system with exception to the provisions of Section 10 below. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Preferred 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. The Company represents that prior to the Closing Date it does not meet the net asset value or market capitalization requirements of the Nasdaq Stock Market, but that upon the completion of this transaction it will be in compliance with the net asset value requirements of the Nasdaq Stock Market. 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 conversion of the Preferred Stock or 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 the Subscriber shall provide the Transfer Agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to the 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 21,423,345 were outstanding as of March 20, 1998, 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which were outstanding prior to the date of this Agreement. 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 conversion of the Preferred Stock, and/or exercise of the Warrant, would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. Section 4. Further Representations and Warranties of the Company. For so long as any Securities held by any of the Subscribers remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) It will 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 of the outstanding Securities. (ii) It will maintain the listing of its Common Stock on either the Nasdaq Small Cap Stock Market or Nadsaq National Market, or the successors thereto. 10 11 (iii) It will permit the Subscribers to exercise their right to convert the Preferred Stock and/or exercise the Warrants by telecopying an executed and completed Notice of Conversion and/or Notice of Exercise to the Company and delivering the original Notice of Conversion and/or original Notice of Exercise and the certificate representing the Preferred Stock and/or the original Warrant to the Company by express courier. Each business date on which a Notice of Conversion and/or Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date" and/or "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon conversion of any Preferred Stock and/or exercise of any Warrants (together with the certificates representing the Preferred Stock not so converted and/or Warrants not so exercised) to the Subscriber via express courier, by electronic transfer or otherwise within three business days after the Conversion Date and/or Exercise Date if the Company has received the original Notice of Conversion and Preferred Stock certificate being so converted and/or the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to the Subscribers, in the event that the Company fails to effect delivery of such shares of Common Stock within such three business day period, the Subscribers will be entitled to revoke the relevant Notice of Conversion and/or Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and the Subscribers shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion and/or Notice of Exercise. The Notice of Conversion and Preferred Stock and/or the Notice of Exercise and Warrant representing the portion of the Preferred Stock converted and/or Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 134 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: President In the event that the Common Stock issuable upon conversion of the Preferred Stock and/or exercise of the Warrants is not delivered within five (5) business days of receipt by the Company of a valid Notice of Conversion and the Preferred Stock to be converted and/or Notice of Exercise and Warrant to be exercised, the Company shall pay to the Subscriber(s), in immediately available funds, upon demand, as liquidated damages for such failure and not as a penalty, for each $100,000 of Preferred Stock sought to be converted, $500 for each of the first ten (10) days and $1,000 per day thereafter that the Conversion Shares are not delivered, and for each thousand (1,000) shares of Common Stock sought to be exercised under the Warrant, $7.50 for each of the first ten (10) days and $15 per day thereafter that the shares of Common 11 12 Stock underlying the Warrant are not delivered, which liquidated damages shall run from the sixth business day after the Conversion Date and/or Exercise Date. Any and all payments required pursuant to this paragraph shall be payable only in shares of Common Stock and not in cash. The number of such shares shall be determined by dividing the total sum payable by the Conversion Price and/or Exercise Price. Section 5. Opinion of Counsel. Subscribers shall, upon the Closing, receive an opinion from counsel to the Company subject to reasonable and customary limitations and qualifications to the effect that: (i) The Company is duly incorporated and validly existing under the laws and jurisdiction of its incorporation. The Company and/or its subsidiaries are duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the Company and/or its subsidiaries owns or leases properties, maintains employees or conducts business, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company, and has all requisite corporate power and authority to own its properties and conduct its business. (ii) Except as set forth in the Reports, there is no action, proceeding or investigation pending, or threatened against the Company which might result, either individually or in the aggregate, in any material adverse change in the business or financial condition of the Company. (iii) Except as set forth in the Reports, and without an independent investigation, 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. (iv) Except as set forth in the Reports, there is no action, suit, proceeding or investigation by the Company currently pending, other than licensing agreement audits performed in the ordinary course of business. (v) The Preferred Stock, which shall be issued at the Closing, will be duly authorized and validly issued under the laws of the Company's State of Incorporation. (vi) This Subscription Agreement, the issuance of the Preferred Stock and Warrants, and the issuance of Common Stock, upon conversion of the Preferred Stock and/or exercise of the Warrants, have been duly approved by all required corporate action and that all such securities, upon delivery, shall be validly issued and outstanding, fully paid and nonassessable. (vii) The issuance of the Securities will not violate the applicable listing agreement between the Company and any securities exchange or market on which the 12 13 Company's securities are listed, except that the parties acknowledge that the issuance of more than 4,284,669 shares of Common Stock to the Subscribers pursuant to this Agreement may require stockholder approval under the governance standards of Nasdaq. (viii) Assuming the accuracy of the representation and warranties of the Company and the Subscribers set forth in this Subscription Agreement, the offer, issuance and sale of the Preferred Stock, Warrants and shares of Common Stock to be issued upon exercise and/or conversion to the Subscriber pursuant to this Agreement are exempt from the registration requirements of the Act. (ix) As more specifically described in the Reports, and as certified by the Company's transfer agent, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 21,423,345 were outstanding as of March 20, 1998, 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which were outstanding prior to the date of this Agreement. (x) The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the 1934 Act and to the best of Counsel's knowledge without an independent investigation the Company has timely filed all the material required to be filed pursuant to Sections 13(a) or 15(d) of such Act for a period of at least twelve months preceding the date hereof. (xi) The Company has the requisite corporate power and authority to enter into the Agreements and to sell and deliver the Securities and the Common Stock to be issued upon the conversion of the Securities as described in this Agreement; the Agreement has been duly and validly authorized by all necessary corporate action by the Company, to the best of our knowledge, no approval of any governmental or other body is required for the execution and delivery of each of the Agreements by the Company or the consummation of the transactions contemplated thereby; the Agreement has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors rights generally, and except as to compliance with federal, state and foreign securities laws, as to which no opinion is expressed. (xii) After due inquiry, the execution, delivery and performance of the Agreements by the Company and the performance of its obligations thereunder do not and will not constitute a breach or violation of any of the terms and provisions of, or constitute a default under or conflict with or violate any provision of (i) the Company's Certificate of Incorporation or By-Laws, (ii) any indenture, mortgage, deed of trust, agreement or other instrument to which the Company is a party or by which it or any of its property is bound, (iii) any applicable statute or regulation, (iv) or any judgment, decree or other of any court or governmental body having jurisdiction over the Company 13 14 or any of its property. Section 6. Opinion of Counsel Upon Conversion. The Company will obtain for each Subscriber, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to convert the Preferred Stock, including, but not limited to, obtaining for each Subscriber an opinion of counsel, subject only to receipt of a Notice of Conversion in the form of Exhibit D and receipt by Counsel of such representations, warranties, and documents as are determined to be necessary to comply with applicable securities laws, duly executed by the Subscriber which shall be satisfactory to the Transfer Agent, directing the Transfer Agent to remove the legend from the certificate. Section 7. 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 each 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 each Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing any Subscriber to sell any such Securities without registration. Section 8. Representations and Warranties of the Company and Subscribers. Each of the Subscribers and the Company represent to the other the following with respect to itself: 8.1 Subscription Agreement. The Subscription Agreement has been duly authorized, validly executed and delivered on behalf of the Company and each of the Subscribers and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy or other laws affecting the enforcement of creditors' rights generally. 8.2 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 (with or without notice or lapse of time, or both), or give rise to a right 14 15 of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation, and any amendments thereto, Bylaws and any amendments thereto of the Company or any material mortgage, 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. 8.3 Approvals. Neither the Company nor any Subscriber is aware of any authorization, approval or consent of any governmental body which is legally required for the issuance and sale of the Securities. 8.4 Indemnification. Each of the Company and each of the Subscribers agrees 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) 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. 8.5 Transfer Restrictions/Conversion Holding Period. Refer to Certificate of Designation (Exhibit A). 8.6 Right of First Refusal. In the event the Company wishes to obtain further financing in the form of any discounted or reset convertible securities convertible into Common Stock within one (1) year following the Closing Date, the Subscribers shall have the right of first refusal to participate in such offering and shall have ten (10) business days to reply in writing after receipt of written notice of such offering from the Company. Provided, however, that this restriction does not apply with respect to the Company obtaining up to Two Million ($2,000,000) Dollars in financing (in the form of convertible securities) from Clarion Finanz, A.G., Aton Select Fund, Ltd, or its designees within forty five (45) days after the Closing Date. The Company agrees that any securities issued to Clarion Finanz, A.G., Aton Select Fund, Ltd, or its designees, will not be convertible into shares of Common Stock at any time prior to six (6) months after the effective date of the Registration Statement (as more fully set forth in the Registration Rights Agreement). 8.7 Subsidiary Financing. The Subscribers shall have the right to invest up to Two Million ($2,000,000) Dollars (pro rata) in the Company's subsidiary, MultiDisc Technologies, Inc. ("MultiDisc"), as follows: (i) for a period of ninety (90) days following the Closing Date assuming a pre-investment valuation of MultiDisc of Twelve Million ($12,000,000) Dollars; or (ii) in the event MultiDisc wishes to obtain debt or equity financing within one (1) year following the Closing Date, the Subscribers shall have the right to participate in such offering (up to Two Million ($2,000,000) Dollars) and shall have ten (10) business days to reply in writing after receipt of written notice of such offering from the 15 16 Company. 8.8 Put/Call Option. The Company shall have the option to make one "Put", and the Subscribers shall have the option to make one "Call", to fund up to an additional One Million ($1,000,000) Dollars in Preferred Stock pursuant to the terms of this Agreement and the Certificate of Designation. The Put, or Call may be made by either party at any time following sixty (60) days after the effective date of the registration statement (as set forth in the Registration Rights Agreement), or prior to one hundred twenty (120) days after the effective date of the registration statement. The closing for the Put or Call shall be fifteen (15) days after receipt of a written notice stating the applicable party's intention to Put or Call, and the completion of each of the following conditions: (i) the Registration Statement must be effective; (ii) the Company has not received any notice from Nasdaq which has not been cured pertaining to noncompliance with the listing requirements of the Common Stock as listed on the Nasdaq Small Cap Stock Market; (iii) the Common Stock must be listed on the Nasdaq Small Cap Stock Market; (iv) as a result of the Put or Call, the Company, assuming the conversion of all Preferred Stock and Warrants by the Subscribers, must remain in compliance with Nasdaq listing requirements; (v) the Subscribers receive a legal opinion from counsel to the Company that there has been no material adverse change to the Company since the Closing Date and that all of the representations and warranties of the Company in this Agreement are true and correct as of the date thereof; and (vi) the Subscribers receive a certification from an executive officer of the Company that that there has been no material adverse change to the Company since the Closing Date and that all of the representations and warranties of the Company in this Agreement are true and correct as of the date thereof. Section 9. Restrictions on Conversion of Preferred Stock. Each Subscriber or any subsequent holder of the Preferred Stock (the "Holder") shall be prohibited from converting any portion of the Preferred Stock which would result in any Subscriber or Holder being deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of the 1934 Act, as amended, of 4.99% or more of the then issued and outstanding Common Stock of the Company. Section 10. 20% Limitation. At such time as the number of shares of Common Stock issuable to the Subscribers in the aggregate pursuant to the terms of this Agreement through the conversion of the Preferred Stock reaches 3,200,000 shares of Common Stock, the Company agrees that it will call a stockholders' meeting within sixty (60) days thereafter for the purpose of approving below market price issuances of Common Stock to the Subscribers in 16 17 excess of 4,284,669 shares of Common Stock to enable the Subscribers to convert all of the Preferred Stock issued hereunder. In the event that the aforementioned proposal is not ratified by the stockholders, the Company agrees that it shall seek a waiver from the Nasdaq Stock Market for such issuance. In the event the Company does not get such a waiver within ten (10) days after the stockholder meeting, the Company agrees that it will withdraw its listing from the Nasdaq Small Cap Stock Market for the sole purpose of issuing any and all shares of Common Stock due to the Subscribers under this Agreement. Section 11. Mandatory Conversion. In the event the Preferred Stock has not been converted three (3) years from the Closing Date, the Preferred Stock shall automatically be converted (and all dividends owed thereon shall be paid by the Company) as if the Subscribers voluntarily elected such conversion in accordance with the procedure, terms and conditions set forth in this Agreement. Section 12. 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 13. Legend. The certificates representing the Securities shall be subject to 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 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 certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 14. Stock Delivery Instructions. The Preferred Stock Certificate shall be delivered to Subscribers on a delivery versus payment basis as set forth in the Escrow Agreement. Section 15. Closing Date. The date the Escrow Agent receives the Securities and 17 18 the Purchase Price, and both the conditions set forth in Sections 16 and 17 and the terms and conditions of the Escrow Agreement (Exhibit C) herein are satisfied or waived shall be the Closing (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 upon the occurrence of the last act, delivery, or confirmation of the Closing Date, 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 16. Conditions to the Company's Obligation to Sell. Subscribers understand that the Company's obligation to sell the Preferred Stock and Warrants are conditioned upon: 18 19 (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 into escrow by Subscribers of good cleared funds as payment in full for the purchase of the Securities; (iii) All representations and warranties of the Subscribers contain herein shall remain true and correct as of the Closing Date; (iv) The Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Preferred Stock and Warrants, or shall have the availability of exemptions therefrom. At the Closing Date, the sale and issuance of the Preferred Stock, Warrants, and the proposed issuance of the Common Stock underlying the Preferred Stock, and Warrants shall be legally permitted by all laws and regulations to which the Subscribers and the Company are subject; and (v) The Certificate of Designation for the Preferred Stock shall have been filed with the Delaware Secretary of State. Section 17. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Preferred Stock, and Warrant is conditioned upon: (i) Acceptance by each of the Subscribers of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Securities as described herein; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; (iv) Receipt of opinion of counsel and proof of a filed Certificate of Designation; (v) The Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Preferred Stock, and Warrants, or shall have the availability of exemptions therefrom. At the Closing Date, the sale and issuance of the Preferred Stock, and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscribers are subject; (vi) The Company shall have obtained One Million ($1,000,000) Dollars in financing, and an unconditional binding commitment for an additional One 19 20 Million ($1,000,000) Dollars in financing from Clarion Finanz, AG, Aton Select Fund, Ltd, or its designees, due in no more than forty (45) days after the Closing Date; and (vii) The Company shall have received an unqualified opinion from its auditors for the fiscal year ended December 31, 1997. Section 18. Miscellaneous. 18.1 Governing Law/Jurisdiction. 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 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 New York or the state courts 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. 18.2 Confidentiality. The Company and each of the Subscribers agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement (including the names of the Subscribers) 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, including the names of the Subscribers (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. 18.3 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 20 21 complete document. This Agreement and Exhibits hereto constitute the entire agreement between the Subscriber and 21 22 the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 18.4 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. 18.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between the Subscribers and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 18.6 Reliance by Company. The Subscribers represent to the Company that the representations and warranties of the 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. 18.7 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 except that the Company agrees to pay legal, escrow, and administrative fees of Twenty Five Thousand ($25,000) Dollars to Goldstein, Goldstein, & Reis, LLP. 18.8 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] [Signature Page Follows] 22 23 IN WITNESS WHEREOF, this Agreement was duly executed on the date first written below. Agreed to and Accepted on this 14th day of April 1998 SPATIALIZER AUDIO LABORATORIES, INC. By /s/ ---------------------------------- Title: CEO CPR (USA) INC. By /s/ ----------------------------------- Name: Title: Executed this 14th day of April, 1998 LIBERTYVIEW FUND, LLC By /s/ ----------------------------------- Name: Title: Executed this 14th day of April, 1998 LIBERTYVIEW PLUS FUND By /s/ ----------------------------------- Name: Title: Executed this 14th day of April, 1998 23 24 SCHEDULE A LIST OF SUBSCRIBERS
Subscriber Number of Number of State of Name and Address Purchase Price Preferred Shares Warrant Shares Origination - ---------------- -------------- ---------------- -------------- ----------- CPR (USA) Inc. $1,000,000 20,000 150,000 Delaware Corp. 101 Hudson St., 37th Fl. Jersey City, NJ 07302 LibertyView Plus Fund 800,000 16,000 120,000 Bermuda Corp. Hemisphere House 9 Church Street Hamilton, Bermuda HMDX The LibertyView 200,000 4,000 30,000 Delaware LLC Fund, LLC 101 Hudson St., 37th Fl. Jersey City, NJ 07302
24 25 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. FORM OF STOCK PURCHASE WARRANT To Purchase 450,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS CERTIFIES that, for value received, _________ (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 April 15, 2001 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), _____ (___) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be One Hundred Forty (140%) percent of the average closing bid prices of the Common Stock as quoted by Bloomberg, LP for the ten (10) trading days immediately preceding the Closing Date (as defined in the 7% Convertible Preferred Stock Series A Subscription Agreement dated April 15, 1998). 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 7% Convertible Preferred Stock Series A Subscription Agreement dated April 15, 1998, in the amount of Two Million ($2,000,000) Dollars (the "Agreement") between the Company and the Investors listed on Schedule A to 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. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder may be assigned, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 26 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 paragraph 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 registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the holder of this Warrant 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 holder hereof 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 holder hereof 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 holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 1. Restrictions on Transfer. (a) This Warrant and any 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 this Warrant or the Warrant Shares may legally be transferred without registration and without the delivery of a current prospectus 2 27 under the Act with respect thereto, and then only against receipt of a duly executed Assignment for and 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 delivery of a duly executed Assignment Form and a prospectus then meeting the requirements of the Act relating to such securities and the offering thereof for such sale or disposition, and thereafter to all successive assignees. (b) Unless the Warrant Shares have been registered under the Act, or exempt from registration, upon exercise of any of the Warrant and the issuance of any of the 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 holder of the Warrant agrees and acknowledges that the Warrant is being purchased for the holder's 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 holder 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 holder 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 holder 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 shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder 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. Assignment and Transfer of Warrant. This Warrant may be assigned by the surrender of this Warrant and the Assignment Form annexed hereto duly executed at the office of the Company (or such other office or agency of the Company as it may designate by 3 28 notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company); provided, however, that this Warrant may not be resold or otherwise transferred except (i) in a transaction registered under the Act, or (ii) in a transaction pursuant to an exemption, if available, from such registration and whereby, if requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Warrant to the effect that the transaction is so exempt. 10. 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 or stock certificate, 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 or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 11. 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 legal holiday. 12. 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 shareholders consists solely of cash, the Company shall give the holder of this Warrant 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 a Sale or Merger Transaction in which the consideration to be received by the Company or its shareholders consists in part of consideration other than cash, the holder of this Warrant 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) Registration Rights. The holder of this Warrant shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated April 15, 1998. 13. 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 4 29 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 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 holder of this Warrant 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. 14. 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. 15. 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 holder of this Warrant 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. 16. Authorized Shares. The Company covenants that during 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. 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 Nasdaq Small Cap Market or any domestic securities exchange upon which the Common Stock may be listed. 17. Miscellaneous. 5 30 (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 Company. This Warrant shall constitute a contract under the laws and jurisdictions of New York 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 holder hereof 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 holders hereof of the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: April 15, 1998 SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Steven D. Gershick ----------------------------------- Title: President and CEO 6 31 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 or in such other name as is specified below: ------------------------------- (Name) ------------------------------- (Address) ------------------------------- Dated: ------------------------------ Signature NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 32 ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is - ----------------------------------------------------------------------. - ---------------------------------------------------------------------- Dated: ______________, 1998 Holder's Signature: _____________________________ Holder's Address: _____________________________ ----------------------------- Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 1 33 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") 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 SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. 7% CONVERTIBLE SERIES A PREFERRED STOCK SUBSCRIPTION AGREEMENT SPATIALIZER AUDIO LABORATORIES, INC. 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 7% Convertible Series A Preferred Stock (hereinafter referred to as the "Preferred Stock") of Spatializer Audio Laboratories, Inc. (Nasdaq Small Cap Stock Market symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). The terms on which the Preferred Stock may be converted into common stock of the Company, $0.01 par value per share,(the "Common Stock") and the other terms of the Preferred Stock are set forth in the Certificate of Designation of the 7% Convertible Preferred Stock Series A (Exhibit A annexed hereto). In addition, the Company will sell to the Subscribers listed on Schedule A annexed hereto (the "Subscribers" or "Purchasers"), a warrant (the "Warrant") to purchase One Hundred Fifty Thousand (150,000) shares of Common Stock of the Company for each One Million ($1,000,000) Dollars funded hereunder (such number of shares of Common Stock underlying the Warrants shall be pro rated for each subscription amount) 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 B annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Preferred Stock, Warrants and the Common Stock 1 34 underlying the Warrant and Preferred Stock (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 Sections 1.1 and 15 herein. Aton Select Fund, Ltd., the Subscriber listed on Schedule A annexed hereto ("Subscriber") hereby represents and warrants to, and agrees with the Company as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and the 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, Twenty Thousand (20,000) shares of Preferred Stock for an aggregate purchase price of One Million ($1,000,000) U.S. Dollars based on U.S. $50.00 per share (the "Purchase Price"). Dividends will accrue and be paid at the rate of seven (7%) percent 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. Dividends shall be calculated at the Conversion Price (as hereinafter defined) on the Conversion Date (as hereinafter defined) when converted. 1.2 Form of Payment. The Subscriber shall pay the Purchase Price by delivering good funds in United States Dollars by wire transfer to the Company against delivery of the original Preferred Stock and Warrants as payment in full for the Securities. Section 2. Representations and Warranties of the Subscriber. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. The Subscriber is duly incorporated or organized and 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 the Subscriber, the performance by the Subscriber of its obligations hereunder and the consummation by the Subscriber of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by the Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of the Subscriber, enforceable against the Subscriber in accordance with its terms. 2.2 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 2 35 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. 2.3 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. 2.4 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-K's, and registration statements, filed by the Company since March 1, 1997, and the draft of the Company's Form 10-K for the period ended December 31, 1998 (which the Company represents will be filed on or About April 15, 1998) (collectively, the "Reports"). Except for the Reports, the Subscriber 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 the Subscriber may reasonably request, including technical information, and other material information about the Company and Subscriber has been offered Company's full and unconditional cooperation in making such information available to Subscriber and acknowledges that the Company has recommended that the Subscriber request and review such information prior to making an investment decision. No oral or written representations have been made, or oral or written information furnished to the Subscriber or its advisors, if any, in connection with the offering of the Securities which were or are in any way inconsistent with the Reports. 2.5 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 the Subscriber. 2.6 Reports Constitute Sole Representations. Except as set forth in the Reports, no representations or warranties have been made to Subscriber by (a) the Company or any agent, employee or affiliate of the Company or (b) any other person, and in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports and the results of independent investigation by Subscriber. 2.7 Subscriber is an Accredited Investor. The 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 3 36 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; (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; 4 37 (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; and (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. 2.8 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 the Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of the Subscriber to acquire the Securities. 2.9 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. 2.10 No Advertisements. The 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. 2.11 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit D). 5 38 Section 3. Representations and Warranties of the Company. For so long as any Securities held by the 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 NASDAQ Small Cap Stock Market. 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 this offer and sale, or such shorter period that the Company has been required to file such Reports as defined herein, to the best of the Company's knowledge (i) none of the Company's filings with the Securities and Exchange Commission 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 filed all requisite forms, reports and exhibits thereto with the Securities and Exchange Commission. 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 the 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 6 39 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 nonassessable 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, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit, under, any provision of the Articles of Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and any amendments thereto of the Company or any material mortgage, 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 and 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 March 1, 1997, 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 circumstances 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. 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 7 40 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 by-laws 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 the Reports and this Agreement, 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 8 41 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 Nasdaq Small Cap Stock Market or other organized United States market or quotation system with exception to the provisions of Section 10 below. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Preferred 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. However, the Company represents that as of the date hereof it does not meet the net asset value or market capitalization requirements of the Nasdaq Stock Market. 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 conversion of the Preferred Stock or 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 the Subscriber shall provide the Transfer Agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to the 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. 9 42 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 21,423,345 were outstanding as of March 20, 1998, 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which were outstanding prior to the date of this Agreement. 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 conversion of the Preferred Stock, and/or exercise of the Warrant, would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. Section 4. Further Representations and Warranties of the Company. For so long as any Securities held by the Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) It will 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 of the outstanding Securities. (ii) It will maintain the listing of its Common Stock on either the Nasdaq Small Cap Stock Market or Nasdaq National Market, or the successors thereto. (iii) It will permit the Subscriber to exercise its right to convert the Preferred Stock and/or exercise the Warrants by telecopying an executed and completed Notice of Conversion and/or Notice of Exercise to the Company and delivering the original Notice of Conversion and/or original Notice of Exercise and the certificate representing the Preferred Stock and/or the original Warrant to the Company by express courier. Each business date on which a Notice of Conversion and/or Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date" and/or "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon conversion of any Preferred Stock and/or exercise of any Warrants (together with the certificates representing the Preferred Stock not so converted and/or Warrants not so exercised) to the Subscriber via express courier, by electronic transfer or otherwise within three business days after the Conversion Date and/or Exercise Date if the Company has received the original 10 43 Notice of Conversion and Preferred Stock certificate being so converted and/or the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to the Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three business day period, the Subscriber will be entitled to revoke the relevant Notice of Conversion and/or Notice of Exercise 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 and/or Notice of Exercise. The Notice of Conversion and Preferred Stock and/or the Notice of Exercise and Warrant representing the portion of the Preferred Stock converted and/or Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 134 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: President Section 5. Opinion of Counsel. Subscriber shall, upon the Closing, receive an opinion from counsel to the Company subject to reasonable and customary limitations and qualifications to the effect that: (i) The Company is duly incorporated and validly existing under the laws and jurisdiction of its incorporation. The Company and/or its subsidiaries are duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the Company and/or its subsidiaries owns or leases properties, maintains employees or conducts business, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company, and has all requisite corporate power and authority to own its properties and conduct its business. (ii) Except as set forth in the Reports, there is no action, proceeding or investigation pending, or threatened against the Company which might result, either individually or in the 11 44 aggregate, in any material adverse change in the business or financial condition of the Company. (iii) Except as set forth in the Reports, and without an independent investigation, 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. (iv) Except as set forth in the Reports, there is no action, suit, proceeding or investigation by the Company currently pending, other than licensing agreement audits performed in the ordinary course of business. (v) The Preferred Stock, which shall be issued at the Closing, will be duly authorized and validly issued under the laws of the Company's State of Incorporation. (vi) This Subscription Agreement, the issuance of the Preferred Stock and Warrants, and the issuance of Common Stock, upon conversion of the Preferred Stock and/or exercise of the Warrants, have been duly approved by all required corporate action and that all such securities, upon delivery, shall be validly issued and outstanding, fully paid and nonassessable. (vii) The issuance of the Securities will not violate the applicable listing agreement between the Company and any securities exchange or market on which the Company's securities are listed, except that the parties acknowledge that the issuance of more than 4,284,669 shares of Common Stock to the Subscriber and other parties to the offering may require stockholder approval under the governance standards of Nasdaq. (viii) Assuming the accuracy of the representation and warranties of the Company and the Subscriber set forth in this Subscription Agreement, the offer, issuance and sale of the Preferred Stock, Warrants and shares of Common Stock to be issued upon exercise and/or conversion to the Subscriber pursuant to this Agreement are exempt from the registration requirements of the Act. (ix) As more specifically described in the Reports, and as certified by the Company's transfer agent, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, 12 45 $0.01 par value per share, of which 21,423,345 were outstanding as of March 20, 1998 and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which were outstanding prior to the date of this Agreement. (x) The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the 1934 Act and to the best of Counsel's knowledge without an independent investigation the Company has timely filed all the material required to be filed pursuant to Sections 13(a) or 15(d) of such Act for a period of at least twelve months preceding the date hereof. (xi) The Company has the requisite corporate power and authority to enter into the Agreements and to sell and deliver the Securities and the Common Stock to be issued upon the conversion of the Securities as described in this Agreement; the Agreement has been duly and validly authorized by all necessary corporate action by the Company, to the best of our knowledge, no approval of any governmental or other body is required for the execution and delivery of each of the Agreements by the Company or the consummation of the transactions contemplated thereby; the Agreement has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors rights generally, and except as to compliance with federal, state and foreign securities laws, as to which no opinion is expressed. (xii) After due inquiry, the execution, delivery and performance of the Agreements by the Company and the performance of its obligations thereunder do not and will not constitute a breach or violation of any of the terms and provisions of, or constitute a default under or conflict with or violate any provision of (i) the Company's Certificate of Incorporation or By-Laws, (ii) any indenture, mortgage, deed of trust, agreement or other instrument to which the Company is a party or by which it or any of its property is bound, (iii) any applicable statute or regulation, (iv) or any judgment, decree or other of any court or governmental body having jurisdiction over the Company or any of its property. 13 46 Section 6. Opinion of Counsel Upon Conversion. The Company will obtain for the Subscriber, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to convert the Preferred Stock, including, but not limited to, obtaining for the Subscriber an opinion of counsel, subject only to receipt of a Notice of Conversion in the form of Exhibit C and receipt by Counsel of such representations, warranties, and documents as are determined to be necessary to comply with applicable securities laws, duly executed by the Subscriber which shall be satisfactory to the Transfer Agent, directing the Transfer Agent to remove the legend from the certificate. Section 7. 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 the 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 the Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing the Subscriber to sell any such Securities without registration. Section 8. Representations and Warranties of the Company and Subscriber. The Subscriber and the Company represent to the other the following with respect to itself: 8.1 Subscription Agreement. The Subscription Agreement has been duly authorized, validly executed and delivered on behalf of the Company and the Subscriber and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy or other laws affecting the enforcement of creditors' rights generally. 14 47 8.2 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 (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation, and any amendments thereto, Bylaws and any amendments thereto of the Company or any material mortgage, 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. 8.3 Approvals. Neither the Company nor the Subscriber is aware of any authorization, approval or consent of any governmental body which is legally required for the issuance and sale of the Securities. 8.4 Indemnification. The Company and the 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) 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. 8.5 Transfer Restrictions/Conversion Holding Period. Refer to Certificate of Designation (Exhibit A). 8.6 Right of First Refusal. In the event the Company wishes to obtain further financing in the form of any discounted or reset convertible securities convertible into Common Stock within one (1) year following the Closing Date, the Subscriber or Clarion Finanz A.G. or its designee shall have the right of to provide up to Two Million ($2,000,000) Dollars in financing (in the form of convertible securities) within sixty (60) days after the Closing Date. 8.7 Subsidiary Financing. The Subscriber or Clarion Finanz A.G. or its designee shall have the right to invest up to Two Million ($2,000,000) Dollars (pro rata) in the Company's subsidiary, MultiDisc Technologies, Inc. ("MultiDisc"), as follows: (i) for a period of ninety (90) days following the Closing Date assuming a pre-investment valuation of MultiDisc of Twelve Million ($12,000,000) Dollars; or (ii) in the event MultiDisc wishes to obtain debt or equity financing within one (1) year following the Closing Date, the Subscriber shall have the right to participate in such offering (up to Two Million ($2,000,000) Dollars) and shall have ten (10) business 15 48 days to reply in writing after receipt of written notice of such offering from the Company. Section 9. Restrictions on Conversion of Preferred Stock. The Subscriber acknowledges any Securities issued hereunder to it or to Clarion Finanz A.G. or it designee will not be convertible into shares of Common Stock at any time prior to six (6) months after the effective date of the Registration Statement (as more fully set forth in the Registration Rights Agreement). Section 10. Mandatory Conversion. In the event the Preferred Stock has not been converted three (3) years from the Closing Date, the Preferred Stock shall automatically be converted (and all dividends owed thereon shall be paid by the Company) as if the Subscriber voluntarily elected such conversion in accordance with the procedure, terms and conditions set forth in this Agreement. Section 11. 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 12. Legend. (a) The certificates representing the Securities shall be subject to 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 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 certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. 16 49 Section 13. Stock Delivery Instructions. The Preferred Stock Certificate shall be delivered to Subscriber on a delivery versus payment basis as set forth in the Escrow Agreement. Section 14. Closing Date. Closing Date hereunder shall be April 15, 1998, or such other date 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 15. Conditions to the Company's Obligation to Sell. Subscriber understands that the Company's obligation to sell the Preferred 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 good cleared funds as payment in full for the purchase of the Securities; (iii) All representations and warranties of the Subscriber contain herein shall remain true and correct as of the Closing Date; (iv) The sale and issuance of the Preferred Stock, Warrants, and the proposed issuance of the Common Stock underlying the Preferred Stock, and Warrants shall be legally permitted by all laws and regulations to which the Subscriber and the Company are subject; and (v) The Certificate of Designation for the Preferred Stock shall have been filed with the Delaware Secretary of State. Section 16. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Preferred Stock, and Warrant is conditioned upon: (i) Acceptance by the Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; 17 50 (ii) Delivery of the original Securities as described herein; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; (iv) Receipt of opinion of counsel and proof of a filed Certificate of Designation; (v) At the Closing Date, the sale and issuance of the Preferred Stock, and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject; and (vi) The Company shall have received an unqualified opinion from its auditors for the fiscal year ended December 31, 1997. Section 17. Miscellaneous. 17.1 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. 17.2 Confidentiality. The Company and the 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 18 51 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. 17.3 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 the Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 17.4 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. 17.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between the Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 17.6 Reliance by Company. The Subscriber represents to the Company that the representations and warranties of the 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. 17.7 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. 17.8 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. 19 52 IN WITNESS WHEREOF, this Agreement was duly executed on the date first written below. Agreed to and Accepted on this 14th day of April 1998 Spatializer Audio Laboratories, Inc. By /s/ Steven D. Gershick ------------------------------------ Title: President and CEO Aton Select Fund, Ltd. By /s/ Dr. Werner Keicher --------------------------------- Title: Director Executed this 15th day of April, 1998 20 53 SCHEDULE A
Subscriber Number of Number of Name and Address Purchase Price Preferred Shares Warrants - ---------------- -------------- ---------------- --------- Aton Select Fund, Ltd. US $50.00 20,000 150,000 c/o or Clarion Finanz A.G. Seefeldstrasse 214 8034, Zurich, Switzerland Attn: Jan Barcikowski
21 54 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 150,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS CERTIFIES that, for value received, Aton Select Fund, Ltd. (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 April 15, 2001 (the "Termination Date") but not thereafter, to subscribe for and purchase from Spatializer Audio Laboratories, Inc., a Delaware corporation (the "Company"), One Hundred Fifty Thousand (150,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be One Hundred Forty (140%) percent of the average closing bid prices of the Common Stock as quoted by Bloomberg, LP for the ten (10) trading days immediately preceding the Closing Date (as defined in the 7% Convertible Preferred Stock Series A Subscription Agreement dated on or about April 14, 1998). 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 7% Convertible Preferred Stock Series A Subscription Agreement dated on or about April 14, 1998, in the amount of One Million ($1,000,000) Dollars (the "Agreement") 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. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder may be assigned, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 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, 1 55 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 paragraph 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 registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the holder of this Warrant 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 holder hereof 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 holder hereof 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 holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Restrictions on Transfer. (a) This Warrant and any 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 this Warrant or 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 a duly executed Assignment for and 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 delivery of a duly executed Assignment Form and a prospectus then meeting the requirements of the Act relating to such securities and the offering thereof for such sale or disposition, and 2 56 thereafter to all successive assignees. (b) Unless the Warrant Shares have been registered under the Act, or exempt from registration, upon exercise of any of the Warrant and the issuance of any of the 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 holder of the Warrant agrees and acknowledges that the Warrant is being purchased for the holder's 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 holder 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 holder 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 holder 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 shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder 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. Assignment and Transfer of Warrant. This Warrant may be assigned by the surrender of this Warrant and the Assignment Form 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 registered holder hereof at the address of such holder appearing on the books of the Company); provided, however, that this Warrant may not be resold or otherwise transferred except (i) in a transaction registered under the Act, or (ii) in a transaction pursuant to an exemption, if available, from such registration and whereby, if requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Warrant to the effect that the transaction is so exempt. 3 57 10. 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 or stock certificate, 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 or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 11. 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 legal holiday. 12. 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 shareholders consists solely of cash, the Company shall give the holder of this Warrant 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 a Sale or Merger Transaction in which the consideration to be received by the Company or its shareholders consists in part of consideration other than cash, the holder of this Warrant 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) Registration Rights. The holder of this Warrant shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated April 14, 1998. 13. 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 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 4 58 shall be adjusted so that the holder of this Warrant 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. 14. 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. 15. 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 holder of this Warrant 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. 16. Authorized Shares. The Company covenants that during 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. 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 Nasdaq Small Cap Market or any domestic securities exchange upon which the Common Stock may be listed. 17. 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 Company. 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 holder hereof 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. 5 59 (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 holders hereof of the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to each such holder 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] 6 60 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: April 14, 1998 Spatializer Audio Laboratories, Inc. By: /s/ Steven D. Gershick ----------------------------------- Title: President and CEO 7 61 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 or in such other name as is specified below: ------------------------------- (Name) ------------------------------- (Address) ------------------------------- Dated: ------------------------------ Signature NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 8 62 ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is - ---------------------------------------------------------------. - --------------------------------------------------------------- Dated: ______________, 1998 Holder's Signature: _____________________________ Holder's Address: _____________________________ ----------------------------- Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 9 63 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 100,000 Shares of Common Stock of SPATIALIZER AUDIO LABORATORIES, INC. THIS CERTIFIES that, for value received, CARDINAL CAPITAL MANAGEMENT, INC. ("Cardinal"), 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 April 15, 2001 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), One Hundred Thousand (100,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be One Hundred Twenty (120%) percent of the average closing bid prices of the Common Stock as quoted by Bloomberg, LP for the ten (10) trading days immediately preceding April 15, 1998. 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 to Cardinal as compensation for its services in arranging the 7% Convertible Preferred Stock Series A Subscription Agreement dated April 15, 1998, in the amount of Two Million ($2,000,000) Dollars (the "Agreement") between the Company and certain institutional investors. 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. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder may be assigned, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 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). NOTE: A placement agent Warrant exercisable for 50,000 shares of Common Stock on the same term was issued to Clarion Finanz AG 1 64 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 paragraph 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 registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the holder of this Warrant 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 holder hereof 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 holder hereof 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 holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 1. Restrictions on Transfer. (a) This Warrant and any 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 this Warrant or 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 a duly executed Assignment for and 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 delivery of a duly executed Assignment Form and a prospectus then meeting the requirements of the Act relating to such securities and the offering thereof for such sale or disposition, and thereafter to all successive assignees. (b) Unless the Warrant Shares have been registered under the Act, or exempt from registration, upon exercise of any of the Warrant and the issuance of any of the Warrant 2 65 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 holder of the Warrant agrees and acknowledges that the Warrant is being purchased for the holder's 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 holder 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 holder 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 holder 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 shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder 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. Assignment and Transfer of Warrant. This Warrant may be assigned by the surrender of this Warrant and the Assignment Form 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 registered holder hereof at the address of such holder appearing on the books of the Company); provided, however, that this Warrant may not be resold or otherwise transferred except (i) in a transaction registered under the Act, or (ii) in a transaction pursuant to an exemption, if available, from such registration and whereby, if requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Warrant to the effect that the transaction is so exempt. 10. 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 or stock certificate, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon 3 66 reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 11. 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 legal holiday. 12. 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 shareholders consists solely of cash, the Company shall give the holder of this Warrant 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 a Sale or Merger Transaction in which the consideration to be received by the Company or its shareholders consists in part of consideration other than cash, the holder of this Warrant 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) Registration Rights. The holder of this Warrant shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated April 15, 1998. 13. 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 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 holder of this Warrant 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 4 67 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. 14. 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. 15. 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 holder of this Warrant 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. 16. Authorized Shares. The Company covenants that during 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. 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 Nasdaq Small Cap Market or any domestic securities exchange upon which the Common Stock may be listed. 17. 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 Company. This Warrant shall constitute a contract under the laws and jurisdictions of New York 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 holder hereof 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. 5 68 (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the holders hereof of the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: April 15, 1998 SPATIALIZER AUDIO LABORATORIES, INC. By: Title:_______________________________ 6 69 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 or in such other name as is specified below: ------------------------------- (Name) ------------------------------- (Address) ------------------------------- Dated: ------------------------------ Signature NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 70 ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is - ---------------------------------------------------------------. - --------------------------------------------------------------- Dated: ______________, 1998 Holder's Signature: _____________________________ Holder's Address: _____________________________ ----------------------------- Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 71 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 15th day of April, 1998, between the entities listed on Schedules A (the "Subscribers" or the "Holders"), issued pursuant to the 7% Convertible Preferred Stock Series A Subscription Agreement of even date herewith (the "Subscription Agreement"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 134, Woodland Hills, CA 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are purchasing from the Company, pursuant to the Subscription Agreement an aggregate of Forty Thousand (40,000) shares of Preferred Stock, and a Warrant to purchase an aggregate of Three Hundred Thousand (300,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Preferred Stock are referred to as the "Conversion Shares", and the shares of Common Stock of the Company underlying the Warrants 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 Conversion Shares, 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 Securities Act) and disposed of pursuant thereto, (ii) registration under the Securities 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 Securities as provided herein, the Securities are "restricted securities" as defined in Rule 144 promulgated under the Securities Act. The Holders understand that no disposition or transfer of the 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 Securities Act is then in effect with respect thereto. 72 Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission ("SEC"), within thirty (30) days after the Closing Date, a registration statement on Form S-3 (the "Registration Statement"), or in the event more than on Registration Statement is required to be filed to include such items as newly authorized shares of Common Stock, such further Registration Statement shall be filed within thirty (30) days after the issuance of such newly authorized shares of Common Stock or other event, as the case may be. In the event that such Registration Statement is not effective within ninety (90) days after its filing, the the liquidated damages in Section 3(e) shall apply. All Registration Statements required to be filed hereunder shall be prepared and filed at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of all holders of Registrable Securities, so as to permit resale of the Registrable Securities under the Securities Act, provided, the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 3(a) 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. The Company agrees that it will cause the Registration Statement to become effective within ninety (90) days after the Closing Date. The number of Registrable Securities to be registered shall be two hundred (200%) percent of the number of shares that would be required if all of the Registrable Securities were converted in accordance with the Certificate of Designation, on a date which is five (5) business days prior to the filing of the Registration Statement. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under the Securities 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. (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 cost of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered and all of other the fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of 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 such Holders reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify in any state which will require an escrow or other restriction relating to the Company and/or the sellers. 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. 73 (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Amended 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 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 Securities Act. (e) 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 ninetieth (90th) day after the Closing Date (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 Securities 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. 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. (f) 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. 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 Securities Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the Commission 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 Securities Act with respect to the sale or other disposition of all 74 securities covered by such registration statement when the Holder or 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 Securities Act); (b) furnish to each 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 Securities 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 each Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by such Holder, except that 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; (d) list such securities on the Nasdaq Small Cap Market 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 Securities 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 not be assigned without the written consent of the Company, which consent shall not be unnecessarily withheld. In the event of a transfer of the rights granted under this Agreement, the Holders agree that the Company may require that the transferee comply with reasonable conditions as determined in the discretion of the Company. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. 75 Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to each Holder (and permitted transferees or assignees ) upon the occurrence of any of the following: (a) all of that particular 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 Securities 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 Holders and each person, if any, who controls each Holder within the meaning of the Securities 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 Holders may become subject, under the Securities 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 Securities 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 Securities 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 Securities 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 76 officer, director or controlling person may become subject under the Securities 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 77 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 Securities 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 Securities 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 Securities 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 Holders, to its, his or her address set forth on Schedule A attached to this Agreement. (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. 78 Section 11. "Piggy-Back" Registration. The Holders shall have the right to include all of 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 Registrable Securities 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 Holder(s) or not include the Holder(s) 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(s), 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 held by the selling stockholders) 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 whether or not any Holder elected to include securities in 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 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 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 Securities 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 New York or the state courts 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 79 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] [Signature Page Follows] 80 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. Attest: SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Henry Mandell By: /s/ Steven D. Gershick ------------------------- ---------------------------------- Name: Name: Title: Secretary Title: President CPR (USA) INC. By: /s/ ----------------------------------- Name: Steven Rogers/Philippe Rousseau Title: Authorized Signatories LIBERTYVIEW FUND, LLC By: /s/ ----------------------------------- Name: Steven Rogers/Philippe Rousseau Title: Authorized Signatories LIBERTYVIEW PLUS FUND By: /s/ ----------------------------------- Name: Steven Rogers/Philippe Rousseau Title: Authorized Signatories 81 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 14th day of April, 1998, between Aton Select Fund, Ltd., with an address at or Clarion Finanz A.G., Seefeldstrasse 213, 8034, Zurich Switzerland, and Spatializer Audio Laboratories, Inc., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 134, 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 the Subscription Agreement dated April 14, 1998 Twenty Thousand (20,000) shares of Preferred Stock, and a Warrant to purchase an aggregate of One Hundred Fifty Thousand (150,000) shares of Common Stock and certain other entities and parties are also acquiring shares of Preferred Stock and Warrants pursuant to a Subscription Agreement of even date. The shares of Common Stock of the Company underlying the Preferred Stock acquired by the Holder or the other purchasers are referred to as the "Conversion Shares", and 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 Conversion Shares, 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 Securities Act) and disposed of pursuant thereto, (ii) registration under the Securities 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 Securities as provided herein, the Securities are "restricted securities" as defined in Rule 144 promulgated under the Securities Act. The Holder understands that no disposition or transfer of the Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer 82 may be made or (ii) a registration statement under the Securities 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 ("SEC"), within thirty (30) days after the Closing Date, 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 all holders of Registrable Securities, so as to permit resale of the Registrable Securities under the Securities Act, provided, the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 3(a) 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. The Company agrees that it will cause the Registration Statement to become effective within ninety (90) days after the Closing Date. The number of Registrable Securities to be registered shall be two hundred (200%) percent of the number of shares that would be required if all of the Registrable Securities were converted in accordance with the Certificate of Designation, on a date which is five (5) business days prior to the filing of the Registration Statement. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under the Securities 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. (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 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 such Holders reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify in any state which will require an escrow or other restriction relating to the Company and/or the sellers. 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 Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Amended Registration Statement which is to be filed if, in the 83 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 Securities Act. (e) 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 ninetieth (90th) day after the Closing Date (the Effective Date), then the Company will pay, in cash, to the Holder 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 Securities 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. If the Company does not remit the damages to the Holder as set forth above, the Company will pay the to the Holder the reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Holder 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. (f) 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 Securities Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the Commission 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 Securities 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 84 sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Securities 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 Securities 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 each Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder, except that 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; (d) list such securities on the Nasdaq Small Cap Market 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 Securities 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 without the written consent of the Company, which consent shall not be unnecessarily withheld. In the event of a transfer of the rights granted under this Agreement, the Holder agrees that the Company may require that the transferee comply with reasonable conditions as determined in the discretion of the Company. 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 (and permitted transferees or assignees ) upon the occurrence of any of the following: 85 (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 Securities 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 each Holder within the meaning of the Securities 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 Securities 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 Securities 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 Securities 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 Securities 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 Securities 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 86 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. 87 Section 9. Contribution. In order to provide for just and equitable contribution under the Securities 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 Securities 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 Securities 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 Holders, to its, his or her 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 of the Registerable Securities Warrants shall have the right to include the Registerable 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 88 registration rights pursuant to this Section if the shares of Common Stock underlying the Warrants 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 Registerable 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 Registerable 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 Registerable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registerable 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 Securities 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. 89 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] [Signature Page Follows] 90 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. Attest: Spatializer Audio Laboratories, Inc. By: /s/ Henry Mandell By: /s/ Steven D. Gershick ------------------------------ --------------------------------- Name: Name: Title: Secretary Title: President Aton Select Fund, Ltd. By: /s/ Werner Keicher --------------------------------- Name: Title: Director 91 FORM OF AMENDMENT TO THE REGISTRATION RIGHTS AGREEMENT WHEREAS, on April 14 and 15, 1998, Registration Rights Agreements ("Registration Agreements") were executed by Spatializer Audio Laboratories, Inc. (the "Corporation") and certain investors CPR [USA], Inc., LibertyView Plus Fund, The LibertyView Fund, LLC (the "Liberty Investors") and Aton Select Fund, Ltd. ("Aton" and collectively with the Liberty Investors, the "Investors") as set forth in the 7% Convertible Series A Preferred Stock Subscription Agreements dated April 14 and 15, 1998 (the "Subscription Agreements"); and WHEREAS, Section 3(a) of each of the Registration Agreements obligates the Corporation to prepare and file a Registration Statement with the Securities and Exchange Commission registering two hundred percent (200%) of the number of Registerable Securities, as defined in the Registration Agreements, that would be required to be registered if all the Registerable Securities were converted in accordance with the terms set forth therein; and WHEREAS, the Registration Agreements, by their current terms, would require the Corporation to register securities in an amount greater than twenty percent (20%) of the Corporation's issued and outstanding Common Stock on the date hereof, and, as a consequence, requires stockholder approval of the possible issuance of additional Common Stock in order for the Corporation to remain in compliance with the NASDAQ Stock Exchange listing requirements; and WHEREAS, the Corporation, on the one hand, and the Liberty Investors and Aton on the other, by their respective execution of Amendments to the Registration Rights Agreement wish to have the issuance of Common Stock be undertaken in a manner that allows the Corporation to remain in compliance with the NASDAQ Stock Exchange listing and governance requirements; NOW THEREFORE IT IS AGREED THAT: 1. Defined terms not otherwise defined in this Amendment shall have the meanings set forth in the Subscription Agreement. The Liberty Investors will temporarily waive the two hundred percent (200%) requirement as stated in Section 3(a) of their Registration Agreement on the condition that the Corporation registers 4,284,000 shares of its Common Stock in the Registration Statement currently being filed by the Corporation on Form S-3, in accordance with the terms of the Subscription Agreement and, upon receipt of stockholder approval, at the Corporation's annual meeting will timely amend such Registration Statement (or file a new Registration Statement on Form S-3 if so required) to comply with the two hundred percent (200%) requirement set forth in the Subscription Agreement; 2. The Corporation agrees to submit at its annual stockholder's meeting a resolution ratifying the transaction with the Investors and authorizing the Amendment to the Registration Rights Agreement and the issuance of Common Stock in an amount which requires stockholder approval; 1 92 3. Upon approval by its stockholders, the Corporation agrees to amend its S-3 Registration Form filed with the Securities and Exchange Commission, pursuant to Rule 462(b) of the Securities Act of 1933, to include additional shares of Common Stock if needed, based on the conversion price in effect after the annual meeting or to file a new Registration Statement on Form S-3 if so required, with such filings to be made within thirty (30) days of the approval by the stockholders; 4. Except as set forth in this Amendment to the Registration Rights Agreement between the Corporation and the Liberty Investors, the terms thereof, as well as the provisions of their Subscription Agreement and the exhibits thereto shall each remain in full force and effect as originally executed. IN WITNESS THEREOF, this Amendment to the Registration Rights Agreement was duly executed on the date first written below. Agreed and accepted on this ____ day of May, 1998 Spatializer Audio Laboratories, Inc. By: _________________________ Title:________________________ CPR [USA], Inc. By: _________________________ Title:________________________ LibertyView Fund, LLC By: _________________________ Title:________________________ LibertyView Plus Fund By: _________________________ Title:________________________ NOTE: A comparable amendment was signed by Aton Select Fund, Ltd. 2 EX-5.1 3 OPINION OF BRAND FARRAR & BUXBAUM, LLP 1 Exhibit 5.1 BRAND FARRAR & BUXBAUM LLP COUNSELLORS AT LAW 515 South Flower Street, Suite 3500 LOS ANGELES, CALIFORNIA 90071-2201 Telephone: (213) 228-0288 Facsimile: (213) 426-6222 e-mail: bfb-la@brandfarrar.com May 14, 1998 Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 134 Woodland Hills, California 91364 Re: Spatializer Audio Laboratories, Inc. Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as counsel to Spatializer Audio Laboratories, Inc. (the "Company"), in connection with the filing of the Company's Registration Statement on Form S-3 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of up to 8,339,800 shares of Common Stock, par value $.01 per share (the "Shares"), all of which are or will be offered for resale by certain stockholders of the Company. As such counsel, we have examined such documents and records of the Company as we deemed necessary as a basis for the opinion set forth herein, and we are familiar with actions anticipated to be taken by the Company in connection with the authorization and issuance of the Shares. Based on such examination and subject to compliance with applicable state securities laws, we are of the opinion that the Shares are or, when issued by the Company in the manner described in the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an Exhibit to the Registration Statement. Very truly yours, /s/ BRAND FARRAR & BUXBAUM, LLP BEIJING o CHENGDU o GUANGZHOU o HONG KONG o NEW YORK o SHANGHAI SHENZHEN o ULAANBAATAR o XIAMEN EX-23.1 4 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.1 : Consent of Independent Accountants The Board of Directors Spatializer Audio Laboratories, Inc.: We consent to the use of our reports incorporated herein by reference and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP Los Angeles, California May 12, 1998 -----END PRIVACY-ENHANCED MESSAGE-----