-----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, Nue49KFgym7MkvbS6hJr9sssiKWftfC5hNvG3jp8p0ywn9dkH0DI7Z3GipuwtIpX CvxYqmVbkSUHLblHj/HTUw== 0001005477-00-001223.txt : 20000215 0001005477-00-001223.hdr.sgml : 20000215 ACCESSION NUMBER: 0001005477-00-001223 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000214 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: 333-30308 FILM NUMBER: 539849 BUSINESS ADDRESS: STREET 1: 20700 VENTURA BOULEVARD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 3102273370 MAIL ADDRESS: STREET 1: 20700 VENTURA BLVD SUITE 140 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 S-3 1 FORM S-3 As filed with the Securities and Exchange Commission on February 10, 2000. 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 (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization)
20700 Ventura Boulevard, Suite 140 Woodland Hills, California 91364 (818) 227-3370 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Henry R. Mandell, Chief Executive Officer Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 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 Maximum Amount of Class of Securities Registered (1) Offering Price Per Aggregate Offering Registration Fee to be Registered Share Price (2) - ------------------- -------------- ------------------ ----------------- -------------- Common Stock, $.01 par value per 6,197,636 $2.02(2) (2) $3,305.08 share
(1) This registration statement relates to the resale of 6,197,636 shares of Common Stock issued prior to the filing date hereof, and the resale of up to 2,525,000 shares of Common Stock issuable on the exercise of currently outstanding Options and Warrants. (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 OTC Bulletin Board on February 8, 2000. The Registration Fee is calculated based on 6,197,636 shares at a proposed offering price per share of $2.02. 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. SPATIALIZER AUDIO LABORATORIES, INC. Cross-Reference Sheet
Item No. Form S-3 Caption 1. Forepart of the registration statement and Outside Front Outside Front and Cover Page Cover Page of prospectus 2. Inside Front and Outside Back Cover Pages of prospectus Inside Front and Outside Back Cover Pages of prospectus 3. Summary Information, Risk Factors and Ratio of Earnings The Company; Business; Risk 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 SEC Position on Indemnification for Indemnification and Personal Securities Act Liabilities Liability of Officers and Directors
[Front Cover of Prospectus] 6,197,636 Shares SPATIALIZER AUDIO LABORATORIES, INC. (a Delaware corporation) Certain stockholders of Spatializer Audio Laboratories, Inc. are offering for resale 6,197,636 shares of Common Stock, including 3,672,636 shares of Common Stock which are currently outstanding and 2,525,000 shares of Common Stock reserved for issuance on the exercise of outstanding Options and Warrants. Of these, 1,933,381 shares of the Common Stock are, or upon exercise of Options and Warrants will be, held by Selling Stockholders who are officers or directors. Our Common Stock is traded on the OTC Bulletin Board under the symbol "SPAZ." On February 8, 2000 the closing price of the Common Stock on the OTC Bulletin Board was $2.03 U.S. Before investing in the Common Stock, you should carefully consider the risks described in the "Risk Factors" section beginning on page 4. Per Share Total(1) Public offering price $2.02 $12,519,224 Proceeds, before expenses, to Selling Stockholders $2.02 $10,085,884 Proceeds, before expenses, to the Company on $ 2,433,000 exercise of Options and Warrants at varying prices (1) Reflects current exercise prices for Options and Warrants and assumes holders immediately resold at current market price of $2.02 per share. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is ______, 2000. (Back Cover) ------------------------------------ No person is authorized in connection with this prospectus to give any information or to make any representations about us, the Selling Stockholders, the Common Stock, or any matter discussed in this prospectus, 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 us or any Selling Stockholder. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the Common Stock in any circumstances under which the offer or solicitation is unlawful. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. -------------------------------------- TABLE OF CONTENTS Page WHERE YOU CAN FIND MORE INFORMATION.........................................i INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................i SPATIALIZER AUDIO LABORATORIES, INC..........................................1 RISK FACTORS.................................................................4 USE OF PROCEEDS..............................................................8 CAPITALIZATION...............................................................9 BUSINESS ...................................................................10 SELLING STOCKHOLDERS........................................................11 PLAN OF DISTRIBUTION........................................................14 DESCRIPTION OF CAPITAL STOCK................................................14 SHARES ELIGIBLE FOR FUTURE SALE.............................................18 INDEMNIFICATION AND PERSONAL LIABILITY OF OFFICERS AND DIRECTORS............18 LEGAL MATTERS...............................................................19 EXPERTS.....................................................................19 SPATIALIZER AUDIO LABORATORIES, INC. The date of this prospectus is ___________, 2000. WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement that we filed with the SEC. 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 SEC. In addition, the registration statement and this prospectus incorporate by reference certain materials previously filed with the SEC. You should read the exhibits carefully for provisions that may be important to you. We became subject to the reporting requirements imposed under the Securities Exchange Act of 1934 (the "1934 Act") on August 21, 1995, and have filed all reports required to be filed since such date. We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., Chicago, Illinois, and New York, New York. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's Web site at "http://www.sec.gov". Until February, 1997 when we terminated our listing on the Vancouver Stock Exchange, we and our predecessor, Spatializer Audio Laboratories, Inc., a Yukon corporation ("Spatializer-Yukon"), also were subject to the information and reporting requirements under the Yukon Territory Business Corporations Act and the British Columbia Securities Act. You may read and copy all periodic reports, proxy materials and other reports filed with the Superintendent of Brokers for British Columbia and the VSE at the VSE offices at 609 Granville Street, 4th Floor, Vancouver, B.C. V7Y 1H1, CANADA and at the offices of the Superintendent of Brokers for British Columbia at 865 Hornby Street, Suite 1200, Vancouver, B.C. V6Z 2H4, CANADA, at prescribed rates. Upon request, we will provide copies of materials on file at the SEC to stockholders and any person to whom a prospectus is delivered, including material incorporated herein by reference. Requests should be made orally or in writing to Spatializer Audio Laboratories, Inc. at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, Attention: Secretary, telephone (818) 227-3370. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to these documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below, which we have already filed with the SEC, and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until we sell all of the securities. i Period - ------ Annual Report on Form 10-K................. Year ended December 31, 1998 Current Reports on Form 8-K................ Filed December 27, 1999 Quarterly Reports on Form 10Q.............. Fiscal quarters ended March 31, 1999, June 30, 1999 and September 30, 1999 Proxy Statement............................ Filed January 12, 2000 ii - -------------------------------------------------------------------------------- SPATIALIZER AUDIO LABORATORIES, INC. Spatializer Audio Laboratories, Inc. is a leading developer, licensor and marketer of next generation technologies for the consumer electronics, personal computing, enterprise computing and entertainment industries. Our position as a leading developer of next generation technologies is based on our strong relationships with brand leaders, such as Apple, Toshiba and Hitachi. We conduct our audio business through our parent company and our wholly owned subsidiary, Desper Products, Inc. ("DPI"). DPI has developed a full complement of patented and proprietary 3-D or virtual audio signal processing technologies directed to the consumer electronics and multimedia PC markets. We continue to expand our product offerings to take advantage of the emerging digital audio marketplace specifically for consumer products like Digital Versatile Disc ("DVD") for personal computers, and home entertainment; and interactive positional audio for PC gaming on the Windows 95/98(TM) platforms. As of December 31, 1999, more than 17 million licensed units had been shipped. DPI's 3-D audio signal processing technologies have been incorporated in over 380 products offered by global brand leaders including in consumer electronics, Toshiba, Panasonic, JVC, Hitachi, Mitsubishi, Samsung, Sanyo, Goldstar, Emerson, Zenith and Proton, and in the PC multimedia marketplace, Apple, Compaq, Dell, Gateway, Hewlett Packard, Sony, Micron, Fujitsu, NEC, Seiko-Epson and Labtec, among others. We are focused on broadening recognition for the Spatializer brand name through association with these and other globally recognized consumer electronics and multimedia computer brand leaders, and on broadening our audio technology and software base to position ourselves for continued growth. We believe that with the accelerating growth in the digital audio/video marketplace, the market for virtual audio technologies, and therefore for our products, is entering a new phase of opportunity. Our other wholly owned subsidiary, MultiDisc Technologies, Inc., formed in June 1996 when we acquired development stage optical disc storage and robotics assets and technologies from Home Theater Products, International, Inc., a debtor in possession, is now inactive. In September 1998, we announced our plan to refocus our business on the exploitation of our core audio technologies, suspend research and development at MDT and to properly position the MultiDisc assets for sale. Therefore, MDT has been accounted for as a discontinued operation. Since 1998 we have been unsuccessful in identifying a purchaser for this technology. This repositioning strategy recognized that the capital investment required to properly commercialize the MDT technology was beyond our current capacity. We believe this strategy provides a better opportunity to further solidify our position as a leading provider of virtual audio solutions, based on available capital resources. In December 1999, we completed the placement of $1 million of Common Stock, at no discount from market, the conversion of $1 million of short-term debt to new Series B Redeemable Convertible Preferred Stock and the restatement of $225,000 on existing secured debt to secured long-term debt (the "December Transactions"). The December Transactions significantly strengthen our balance sheet and restore working capital and shareholder's equity. The resulting liquidity will allow us to emerge from turnaround mode and to pursue growth. Our executive offices are located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, Telephone (818) 227-3370. We maintain Websites at www.spatializer.com and www.multidisc.com. Information available on our Websites is not part of this prospectus. We were incorporated in the State of Delaware in February, 1994. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Offering The Offering relates to the resale of up to 3,672,636 shares of Common Stock which are currently outstanding and 2,525,000 shares of Common Stock reserved for issuance upon exercise of presently outstanding Warrants and Options. 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. We are not entitled to any of the proceeds of sale of any such securities by the Selling Stockholders, but we will pay the expenses of the filing of the registration statement. We will receive the proceeds, in the ordinary course, from any exercise of outstanding Options and Warrants. If all outstanding Options and Warrants registered herein are exercised, including those that currently have exercise prices above the market price of our stock, we will receive proceeds of approximately $2.4 million. 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 SEC and the registration statement has not been withdrawn by us. The Offering may be through the facilities of the OTC Bulletin Board 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 our knowledge, 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." The Selling Stockholders include the investors who participated in the December Transactions and were granted registration rights covering the resale of the Common Stock they acquired, entities that have provided services and received Common Stock in connection with these services, and our officers and directors or directors of DPI who hold warrants issued for loans advanced or performance shares. The release of the performance shares from escrow is treated as compensation to the some of the holders of the performance shares, as of the date of release and those individuals may find it necessary to sell a portion of their performance shares to meet their tax obligations. For the others, the inclusion of the shares in our registration statement provides them with the flexibility to dispose of a portion of their shares in the market when their personal needs or planning require the sale. 2 - -------------------------------------------------------------------------------- Outstanding Securities
As Adjusted(2) -------- Shares of Common Stock Outstanding at December 27, 1999 43,655,223 45,594,477 Reserved for Issuance - Options 2,859,467(1) 2,859,467(2) Reserved for Issuance - Warrants 905,000(1) 2,640,000(2) Total Shares of Common Stock Outstanding Assuming Exercise of Warrants and Options 47,419,690 51,093,944 Shares Offered by Selling Shareholders N/A 6,197,636 (including 2,525,000 shares reserved for issuance on exercise of Warrants and Options)
------------------------------ (1) Includes all employee and similar options and warrants issued in prior financings. (2) These amounts include the 2,100,000 warrants issued net of the 500,000 outstanding warrants that were canceled in the December Transactions. This prospectus includes references to MultiDisc(TM), Spatializer (R) and other trademarks, tradenames, and product names of Spatializer and of other entities, some of which may not be designated as such. 3 - -------------------------------------------------------------------------------- RISK FACTORS Investment in our securities is speculative. Please 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 our securities. If one or more of these risks actually materialize, our business and the trading price of our Common Stock would likely suffer and you could lose all or part of the money you invested in our Common Stock. If We Can't Obtain and Enforce Intellectual Property Protection For Our Technologies, Our Business Will Not Be Successful. Our success will depend significantly on our ability to obtain and enforce intellectual property protection for our 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. Patent and Trademark Office. There can be no assurance that any U.S. patent will be granted 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 our patents will not be challenged, invalidated or circumvented, or that our competitors will not independently develop or patent technologies that are equivalent or superior to our technology. While we have attempted to protect our technology and general intellectual property rights, there is no assurance that our 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 our ability to adequately guard against such piracy and infringement. While we believe the steps we have taken to guard against such abuses are reasonable, there is no assurance we will be successful in this effort. If Product Development Is Delayed, We Will Experience Delays in Revenues and Competitive Products May Reach the Market Before Our Products. We can't predict the timing or the amount, if any, of revenues which we will receive from current or future product sales and licensing activities. Since our inception, we have experienced delays in bringing our products to market and commercial application as a result of delays inherent in technology development, financial resource limits and industry responses and maturity. These delays have resulted in delays in the timing of revenues and product introduction. In the future, new delays in product development or technology introduction on behalf of us, our OEMs, IC foundries or our software producers and marketers could result in further delays in revenues and could allow competitors to reach the market with products before us. In view of the emerging nature of the technology involved, and the rapidly changing character of the entire media, internet and computer markets, our expansion into other technology areas and the uncertainties concerning the ability of our products to achieve meaningful commercial acceptance, there can be no assurance of when or if we will achieve or sustain profitability. We Have a History of Losses. The overall results for 1997 and 1998 reflect continuing losses from operations because of the funding requirements of the development of the MDT server technology and subsequently the wind down costs for MDT. Although we were profitable in each of the first three quarters of fiscal 1999, the first such profitability in our history, there can be no assurance that we will ever sustain an overall positive profit position. 4 If We Lose Key Personnel, We May Not Be Able To Successfully Operate Our Business. Our future success 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 our business prospects. While we believe that we will be able to recruit and retain personnel with the skills required for future growth, we can't assure you that we will be successful. Failure to do so could have an adverse impact upon our business, the results of our operations and our prospects. Currently, we have an employment agreement with our vice president of engineering with a term expiring in October 2000, we are finalizing an employment agreement with Henry R. Mandell for a term expiring in 2002 and we are negotiating agreements with three engineers. If We Can't Raise Additional Capital, We May Have To Modify or Delay Our Development and Marketing Activities. We have funded our operations from revenues and from a number of equity financings. We continue to acquire new financing. While our audio subsidiary, DPI, was profitable for the first time during the last two quarters of 1997, these revenues were consumed in financing operations and funding the MDT technology development until we restructured and downsized our operations in September 1998. Since then we have achieved positive operating results at reduced operating levels but have delayed product development. With the recent financing and cash generated from our existing operations, we expect to be able to meet our operating obligations and the anticipated additional research, development, and commercial marketing cost for the audio business during the next twelve months. Because The Market In Which We Operate Is Highly Competitive, We May Not Be Successful in Establishing and Maintaining the Technological Superiority of Our Products Over Those of Our Competitors. We are seeking commercial acceptance of our products in highly competitive markets. Our future success is dependent on establishing and maintaining the technological superiority of our products over those of competitors and our ability to successfully identify and bring other compatible technologies and products to market. Certain of our current competitors have access to greater financial resources than we do. There is no assurance that our 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. The market for 3D Virtual Audio technologies is characterized by intense competition and commodity pricing pressures. We compete 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, our principal competitors are SRS Labs, Inc., QSound Labs, Inc., Aureal Semiconductor, Inc., CRL and Harman International, some of which have considerably greater capitalization and resources than we do. In the future, our products and technologies may also compete with audio technologies and products developed by other companies, including entities that have business relationships with us. There can be no assurance that we will be able to favorably compete in this market in the future. 5 Because There Is a Limited Trading Market in Our Stock, You May Not Be Able To Sell the Common Stock, or May Only Be Able To Sell It for Less Than the Offering Price. The Common Stock of the Company trades on the OTC Bulletin Board under the symbol "SPAZ." There is no assurance that our current trading will be sustained or expanded as to correspond with your desire for a ready market for our shares. If We Issue Preferred Stock, Your Rights May Be Adversely Affected. We are authorized to issue up to 1,000,000 shares of 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, the conversion feature and dilution impact and redemption rights and sinking fund provisions. Since the Board of Directors has the authority to determine, from time to time, the terms of the Preferred Stock to be issued in the future, there is no limit on the amount of Common Stock (or the related dilution impact) that could be issuable under the terms of future series of preferred stock authorized by the Board of Directors. Of the 1,000,000 shares of preferred stock, 102,967 shares of Series B, 10% Redeemable Convertible Preferred Stock ("Series B Preferred Stock") are issued and outstanding and the issuance of additional shares of Series B Preferred Stock or any other preferred stock could affect the rights of the holders of Common Stock and the value of the Common Stock, could result, upon conversion, in a change of control 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." Since Our Officers and Directors Own a Substantial Number of Shares of Our Common Stock, They Can Substantially Control Actions by the Stockholders. Our current directors and officers beneficially own or control or have rights to acquire 9.3 million shares of Common Stock or approximately 21.6% of our fully diluted Common Stock. 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 our business and affairs. Sales of Shares Following This Offering Could Adversely Affect the Market Price of Our Common Stock. Virtually all of our currently outstanding Common Stock, including the Common Stock held by our affiliates, will be tradeable currently or in the near future, either under this prospectus or pursuant to Rule 144. Of the issued and outstanding shares of Common Stock, officers, directors and other founders or employees hold 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, 5% on June 22, 1998 and 10% on June 22, 1999, and the remainder of the Performance Shares are scheduled to be released automatically as follows: 20% on June 22, 2000; 30% on June 22, 2001; and 30% on June 22, 2002. In addition to the automatic releases, performance shares can be released based on the cash flow release criteria contained in the original June 22, 1992 escrow agreement although, to maintain a stable market in the Company's stock, in any year not more than 30% of the shares will be released, based on the cash flow criteria. In addition, under the revised arrangement the performance shares will vest if the individual holder has not voluntarily terminated his or her service with us prior to the applicable vesting dates. Any individual 6 who is involuntarily terminated by us 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 with us to retain a portion or all of any unvested performance shares. We Do Not Intend To Pay Dividends We have not paid any cash dividends on our Common Stock and have no present intention of paying any dividends. Our current policy is to retain earnings, if any, for use in operations and in the development of our business. Our future dividend policy will be determined from time to time by the Board of Directors. Since Our Securities Are Subject To the Penny Stock Rules, You May Find It More Difficult To Sell Our Common Stock. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on Nasdaq provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Our securities are presently subject to the penny stock rules, and, as a result, investors may find it more difficult to sell their securities. 7 USE OF PROCEEDS Securities offered for resale hereunder are to be offered for the account of the Selling Stockholders. We are not entitled to any of the proceeds of sale of any such securities, but we will pay the expenses of the filing of the registration statement. We 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 and Warrants registered herein are exercised, we will receive proceeds of approximately $2.4 million. 8 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999 (assuming none of the currently outstanding Options or Warrants are exercised). DEBT Notes Payable 324,149 Advanced from Related Parties 907,500 ------------ Total Debt $ 1,231,649 STOCKHOLDERS' EQUITY Preferred shares, $.01 par value, 1,000,000 shares 281 authorized, 28,140 shares Series A 7% Convertible Preferred Stock Outstanding at September 30, 1999 Common Stock, $.01 par value, 50,000,000 shares 360,912 authorized 36,091,184 shares issued and outstanding at September 30, 1999 Additional Paid-In Capital 44,048,255 Accumulated Deficit (45,915,963) ------------ Total Stockholders' Equity (1,506,515) ------------ Total Capitalization $ (274,866) ============ 9 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, 1998. 10 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, or who may acquire the shares on exercise, from time to time, of Warrants or Options held by them. The shares offered also include the performance shares which have been released to date and which have not been sold by the holders as well as the performance shares to be released in June 2000. The following tables set forth the names and addresses of each of the Listed Selling Stockholders, other than officers and directors (who have an address at the Company), indicate their relationship to us or our predecessors and specify security ownership at December 27, 1999, except the security ownership of the participants in the December Transactions, Steven D. Gershick, Henry R. Mandell and Brand Farrar are stated to give effect to the termination of Mr. Gershick's ownership of performance shares and the issuance of these shares to Mr. Mandell and the issuance of shares in the December Transactions and to Brand Farrar. The tables show security ownership 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) - ------------------------------- -------------------- --------- ----------- -------------- ------------- Henry R. Mandell Shares - 168,628 168,628 0 Chief Executive Officer, Escrow - 674,516 168,628 505,888 Chief Financial Officer, Options - 750,000 0 750,000 Secretary and Director(3) Warrants - 5,000 0 0 Total - 1,598,144 337,256 3.6% 1,255,888 2.8% Carlo Civelli Shares - 517,924 278,176 0 Director (4) Escrow - 1,112,704 278,176 834,528 Options - 250,000 0 250,000 Warrants - 75,000 0 0 Total - 1,955,628 556,352 4.4% 1,084,528 2.5% Stephen W. Desper Shares - 272,145 272,145 0 Director Escrow - 1,559,305 389,828 1,169,477 Options - 173,800 0 173,800 Total - 2,005,250 661,973 4.6% 1,343,277 3.06% Gilbert N. Segel Shares - 117,000 22,000 95,000 Director Escrow - 88,000 22,000 66,000 Options - 50,000 0 50,000 Warrants - 5,000 0 5,000 Total - 260,000 44,000 * 216,000 *
11
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) - ------------------------------- -------------------- --------- ----------- -------------- ------------- James D. Pace Shares - 85,400 25,400 60,000 Director Escrow - 101,597 25,400 76,197 Options - 130,000 0 130,000 Warrants - 5,000 0 5,000 Total - 321,997 50,800 * 271,197 * Steven D. Gershick (3) Shares - 83,000 83,000 0 Options - 300,000 200,000 100,000 Total - 383,000 283,000 * 100,000 * I.N. Inc. Warrants - 125,000 125,000 * 0 * Lufeng Investments Ltd. Shares - 179,453 179,453 0 Warrants - 200,000 200,000 0 Total - 379,453 379,453 * 0 * Bank Insinger de Beaufort Shares - 448,632 448,632 0 Herengracht 551 Warrants - 500,000 500,000 0 1017 BW Amsterdam Total - 948,632 948,632 2.17% 0 * The Netherlands Brand Farrar & Buxbaum LLP Shares - 55,000 55,000 * 0 * 515 S. Flower St., Ste. 3500 Los Angeles, CA 90071 Romofin AG Shares - 541,132 448,632 92,500 Burglestrasse 6 Warrants - 500,000 500,000 0 8027 Zurich, Switzerland Total - 1,041,132 948,632 2.17% 92,500 * CPR (USA) Inc. Shares - 1,537,779 403,769 1,134,010 101 Hudson St., 37th Floor Warrants - 450,000 450,000 0 Jersey City, NJ 07302 Total - 1,987,779 853,769 4.99%(5) 1,134,010 4.99%(5) LibertyView Funds, L.P. Shares - 1,447,052 323,015 1,124,037 Hemisphere House Warrants - 360,000 360,000 0 9 Church Street Total - 1,807,052 683,015 4.99%(5) 1,124,037 4.99%(5) Hamilton, Bermuda HMDX LibertyView Fund, LLC Shares - [406,775] 80,754 [326,021] 101 Hudson St., 37th Floor Warrants - 90,000 90,000 0 Jersey City, NJ 07302 Total - [496,775] 170,754 1% [326,021] *
12
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) - ------------------------------- -------------------- --------- ----------- -------------- ------------- Cardinal Capital Mgmt, Inc. Warrants - 100,000 100,000 * 0 * 3340 Peachtree Road N.E. Suite 620 Atlanta, GA 30326
- ---------- (1) Includes Escrowed Performance Shares of Common Stock and Options and Warrants which are currently exercisable or exercisable within 60 days of the date hereof. Escrowed Performance Shares which are scheduled for release from Escrow during 2000 are included as being registered for resale by the respective holders. (2) Denominator includes all shares reserved for issuance to the specified person on exercise of Options and Warrants which are exercisable within 60 days of the date hereof. (3) In November 1999, the Board of Directors approved, subject to the finalization of appropriate documentation, the reallocation of the 674,516 performance shares held in escrow for Steven D. Gershick to Henry R. Mandell and the transfer among Mr. Gershick, us and Mr. Mandell of the 168,628 performance shares previously released from escrow to Mr. Gershick. The above table reflects the transactions. Mr. Gershick has appointed Mr. Mandell as his proxy to vote the performance shares. (4) 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. (5) CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund LLC are affiliated entities but each has made an individual investment in the Company. In addition to limitations set forth in the Certificate of Designation for the Series A Preferred Stock, which limits ownership of the Common Stock by any holder to 4.99% of the Company's outstanding Common Stock, the three entities have independent legal obligations and internal practices which bar them from collectively owning more than 4.99% of any company's outstanding Common Stock at any particular time. Therefore, the disclosure reflects beneficial ownership of the aggregate percentage of Common Stock that could be beneficially owned by the three entities combined at any one time, during the effectiveness of this registration statement. * Denotes less than 1% ownership. 13 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 OTC Bulletin Board 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 SEC and we have not withdrawn the registration statement. 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 our knowledge, 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. We will receive the proceeds from the exercise of Options and Warrants but the Selling Stockholders, not we, will receive the net proceeds of any sales of their Common Stock hereunder after payment of any discounts and commissions. We have paid the professional fees and related costs of this registration statement from our general funds. Registration Rights of Certain Selling Stockholders We have granted certain registration rights with respect to Common Stock to the Selling Stockholders who are not our affiliates and who acquired 2,181,930 shares of Common Stock (in the December Transactions and in private placements) or who could acquire 2,475,000 shares issuable on exercise of Warrants issued in the December Transactions (the "Registrable Shares"). We also have agreed that if we propose to register any of our securities under the 1933 Act in connection with the public offering of such securities for cash, including the performance shares, as released, (other than a registration relating solely to the sale of securities 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 General Our authorized capital consists of 65,000,000 shares of Common Stock (par value U.S. $.01) of which 43,655,223 were outstanding at December 27, 1999 and 1,000,000 shares of Preferred Stock (par value U.S. $.01) of which no shares were issued and outstanding at December 27, 1999. Common Stock All of the issued shares of our Common Stock 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, participation in the distribution of our assets on a liquidation, dissolution or 14 winding-up and the entitlement to dividends. Each share of Common Stock entitles the holder to one vote. In the event of our liquidation, dissolution or winding-up or other distribution of our assets, the holders of the Common Stock will be entitled to receive, on a pro-rata basis, all of the assets remaining after we have paid our 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 43,655,223 shares of Common Stock currently issued and outstanding, 4,527,359 are classified as Escrowed Performance Shares, are held in escrow by our transfer agent, Harris Trust Company of California, and will vest under the modification arrangements. We have Options outstanding which could result in the issuance of up to approximately 2.86 million shares of additional Common Stock and have Warrants outstanding which could result in the issuance of up to approximately 2.64 million additional shares of Common Stock. 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 our capital. See "Executive Compensation" in our Annual Report on Form 10-K or in our Proxy materials for further information with respect to the Options. In December 1999, we completed a set of financial transactions (the "December Transactions") with certain existing holders of our equity and debt and with new institutional investors. The December Transactions included the private placement of 1,884,254 additional shares of our Common Stock ($1.05 million in new capital or $0.55725 per share), the issuance of warrants to acquire 2,100,000 shares of Common Stock exercisable for three years at an exercise price of $.67 per share), the cancellation of 500,000 warrants to acquire Common Stock issued in that earlier financing, the conversion of $1 million of short term debt into a new Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured debt into secured long term convertible debt. In the December Transactions, $895,000 in short term loan advances from officers, directors and their affiliates and certain other securities holders, and accrued interest of $134,647, were restructured into the $1,000,000 in new Series B Preferred Stock. The Series B Preferred Stock, and any dividends therefrom not converted into cash, are convertible commencing in 2001 into restricted Common Stock at a 10% discount, based on the 10 day average closing bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per share. We have a three year option to redeem any Series B Preferred Stock, not sooner converted, in whole or in part, in cash. In the December Transactions, $225,000 of secured debt, including accrued interest, was converted into secured long term convertible debt. The long term debt is held by existing institutional investors and is secured by essentially all of our assets. The debt, and accrued interest, is convertible at our or the holder's options into registered Common Stock at a conversion price equal to the average 10 day closing bid price prior to conversion but subject to the same minimum and maximum conversion prices set for the Series B Preferred Stock. Also, concurrently with the December Transactions, 55,000 shares were allocated to Brand Farrar & Buxbaum LLP ("Brand Farrar") in payment of a portion of its legal fees. 15 Preferred Stock Generally 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. Series A Preferred Stock In connection with a private placement in April 1998, 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 private placement, 60,000 shares were issued. None of the Series A Preferred Stock is currently outstanding. Series B Preferred Stock In connection with the December Transaction, the Board of Directors authorized the issuance of up to 150,000 shares of Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") with a par value of $0.01 per share and a stated value of $10.00 per share, with a 10% annual dividend. In the December Transaction 102,967 shares were issued. The Series B Preferred Stock ranks: (i) prior to all of our Common Stock, and (ii) prior to any class or series of capital stock created after the Series B Preferred Stock (unless such future class specifically, by its terms, ranks on parity with the Series B Preferred Stock), and (iii) junior to any class or series of capital stock created before the Series B Preferred Stock, in each case as to distributions of assets upon liquidation, dissolution or winding up, whether voluntary or involuntary (all such distributions being referred to together as "Distributions"). The Series B Preferred Stock will bear a 10% per annum cumulative dividend, payable out of assets legally available therefor, at the Conversion Date (as defined below) in cash or Common Stock at the Conversion Price (as defined below), at our option. No dividends shall be paid on the Common Stock or any other subsequently issued stock prior to the payment of dividends on the Series B Preferred Stock. In the event of any liquidation, dissolution or winding up, either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive a liquidation preference of $10.00 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 B Preferred Stock have a right to convert their shares, at their option on or after December 29, 2000. The date we receive a notice of conversion from a shareholder shall be treated as a "Conversion Date." The conversion price shall be determined on the Conversion Date and shall equal ninety percent of the average of the closing bid prices of Common Stock for ten consecutive trading days ending on the trading day immediately preceding the Conversion Date. The conversion price may not be lower than the average of the closing bid prices of Common Stock for the ten consecutive trading days ending one trading day prior to December 29, 1999 (the "Floor Price") or be higher than 200% of the Floor Price. 16 After giving effect to the Series B Preferred Stock, we have 750,000 shares of Preferred Stock remaining reserved for issuance all of which shares which could be issued quickly with terms calculated to delay or prevent a change in control 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 without any further action by the stockholders or discouraging bids for our Common Stock at a premium because the purchasers would not be in a position to limit certain future capital transactions through the issuance of Preferred Stock. In addition, we believe that conversions of future issuances of Preferred Stock could discourage market interest in our Common Stock because of the dilutive effects on the capital structure and possible price pressure and market overhang because of a potential sale of the Common Stock into the market. If the future preferred stock were to be issued with conversion features that set the conversion price of the preferred stock at less than current market, it could discourage interest in our Common Stock and could have the effect of decreasing the market price of the Common Stock. Application of California Corporations Code Although incorporated in Delaware, our business has been conducted through our 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 Spatializer can be subject to Section 2115 even though we do not ourselves 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 our 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. We currently are deemed to be subject to Section 2115. Delaware Corporate Governance Issues As a Delaware corporation, we are 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 our Certificate of Incorporation and Bylaws. Our 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. We have adopted certain provisions to limit the ability of stockholders to change corporate management. Our Certificate of Incorporation contains provisions which 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- 17 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 with us and may discourage third parties from attempting to acquire control of us. As a result, our stockholders may have reduced opportunities to sell their stock in transactions where third parties are seeking an interest in us and such third parties may be discouraged from undertaking transactions to acquire a significant interest in us. SHARES ELIGIBLE FOR FUTURE SALE As of December 27, 1999 and including the effect of the December Transactions, there were 45,594,477 shares of Common Stock outstanding and 2,640,000 shares reserved for issuance on exercise of outstanding Warrants and 2,859,467 shares reserved for issuance on exercise of outstanding Options, representing in the aggregate a fully diluted total of 51,093,944 shares. The shares of Common Stock underlying the Series B Preferred Stock are not reflected since the number of shares will be calculated at the time of conversion. Of that total, approximately 9.3 million, or 21.6%, were held by persons who are officers or directors including 3,640,557 of Escrowed Performance Shares. INDEMNIFICATION AND PERSONAL LIABILITY OF OFFICERS AND DIRECTORS Our Certificate of Incorporation contains a provision authorized by Delaware law which eliminates the personal liability of a director to us, or to any of our 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. Our bylaws obligate us to indemnify our 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 1933 Act, if the indemnitee acted in good faith and in what he or she reasonably believed to be in, or not opposed to, our best interest, 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, us) arising out of a position with us (or with some other entity at our 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, us, unless the director or officer is found liable to us and an appropriate court does not determine that he or she is nevertheless fairly and reasonably entitled to indemnification. 18 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 us 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. Our bylaws establish procedures pursuant to which such a determination may be made. Delaware law permits us to enter into written agreements confirming (and in certain cases, extending its obligations to) the purchase of insurance on behalf of any of our directors, officers, employees or agents or other corporation, partnership, joint venture, trust or other enterprise whether or not we would have the power to indemnify such insured under Delaware law, against liabilities arising out of their positions with us. To date, we have not obtained any such insurance. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, 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 us by Brand Farrar & Buxbaum LLP. EXPERTS The consolidated financial statements of Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998 have been included herein in reliance upon the report of Farber & Hass, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. 19 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 $ 3,305.08 Transfer Agent Fees $ 500.00* Printing and Engraving Costs $ 3,000.00* Legal Fees $15,000.00* Accounting Fees $10,000.00* Miscellaneous $ 5,000.00* TOTAL $36,805.08 - ---------- * Estimated. II-1 ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS We are 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, our best interests, 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. Our 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 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. II-2 Our 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." Our Bylaws obligate us to indemnify our 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: "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 II-3 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 us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the 1933 Act and is therefore unenforceable. The preceding discussion of our Certificate of Incorporation, Bylaws and Section 145 of the DGCL is qualified in its entirety by reference to the complete text of our Certificate of Incorporation and Bylaws which are on file with the SEC. II-4 ITEM 16. 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.) 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 SEC.) 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. 4.10* Form of 7% Convertible Series A Preferred Stock Subscription Agreement, Warrant Agreement and Registration Right Agreement (with Form of Amendment) for April 14, 1998 Private Placement. 4.11 Form of Common Stock Subscription Agreement for December 1999 Private Placement with CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.12 Form of Secured Non-Negotiable Convertible Promissory Note issued to CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC in the original principal amounts of $112,620.55, $90,096.43 and $22,524.12, respectively. II-5 4.13 Form of Agreement Regarding Indebtedness, dated December 29, 1999, among the Registrant and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.14 Form of Security Agreement, dated December 29, 1999, among the Registrant and CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund, LLC. 4.15 Form of Common Stock Subscription Agreement for December 1999 Private Placement with Bank Insinger de Beaufort. 4.16 Form of Common Stock Subscription Agreement for December 1999 Private Placement with Romofin AG. 4.17 Form of Common Stock Subscription Agreement for December 1999 Private Placement with Arab Commerce Bank. 4.18 Form of 10% Convertible Series B Preferred Stock Subscription Agreement for December 1999 Private Placement with Clarion Finanz, A.B., Carlo Civelli, Henry R. Mandell, James D. Pace, Jerold H. Rubenstein, Gilbert N. Segel, Aton Select Fund, Ltd., and Romofin A.G. 4.19 Form of Agreement Regarding Cancellation of Warrants, dated December 29, 1999, among the Registrant, CPR(USA) Inc., LibertyView Funds, L.P., LibertyView Fund, LLC, Clarion Finanz, A.G. and Aton Select Fund, Ltd. 4.20 Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock (included in Exhibit 4.18). 5.1 Opinion of Brand Farrar & Buxbaum LLP concerning legality of securities subject to registration. 23.1** Consent of Farber & Hass, independent certified public accountants. 23.2 Consent of Brand Farrar & Buxbaum LLP (included in Exhibit 5.1) - ---------- * Previously filed. ** To be filed by amendment. ITEM 17. UNDERTAKINGS. We hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933 (the "Act"), each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) That, for purposes of determining any liability under the Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and where applicable each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be II-6 a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (5) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of Spatializer pursuant to the provisions described in Item 6 or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-7 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 February 10, 2000. SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Henry R. Mandell ------------------------------------- Name: Henry R. Mandell Title: 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/ Henry R. Mandell Chief Executive Officer, February 10, 2000 - ------------------------ Chief Financial Officer, Henry R. Mandell Secretary and Director /s/ Carlo Civelli Director February 10, 2000 - ------------------------- Carlo Civelli /s/ James D. Pace Director February 10, 2000 - ------------------------- James D. Pace /s/ Gilbert N. Segel Director February 10, 2000 - ------------------------- Gilbert N. Segel /s/ Stephen W. Desper Director, Vice Chairman of the February 10, 2000 - ------------------------- Secretary Board Stephen W. Desper *By:_____________________ Henry R. Mandell, Attorney-in-Fact POWER OF ATTORNEY We, the undersigned officers and directors of Spatializer Audio Laboratories, Inc., hereby severally constitute Henry R. Mandell our true and lawful attorney with full power to him, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-3 filed herewith and any and all amendments (including post-effective amendments) to said Registration Statement, and generally to do all such things in our name and on behalf in the capacities indicated below to enable Spatializer Audio Laboratories, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney, to said Registration Statement and any and all amendments thereto. 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 - --------- ----- /s/ Henry R. Mandell Chief Executive Officer, Chief - -------------------------- Financial Officer, Secretary Henry R. Mandell and Director /s/ Stephen W. Desper Director, Vice Chairman of the Board - -------------------------- Stephen W. Desper /s/ Carlo Civelli Director - -------------------------- Carlo Civelli /s/ James D. Pace Director - -------------------------- James D. Pace /s/ Gilbert N. Segel Director - -------------------------- Gilbert N. Segel II-9 EX-4.11 2 FORM OF COMMON STOCK SUBSCRIPTION AGREEMENT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT Spatializer Audio Laboratories, Inc. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscribers listed on Schedule A annexed hereto (collectively referred to as a "Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock and Warrants to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder, for an aggregate purchase price of Four Hundred Fifty Thousand U.S. Dollars (US$450,000.00) (the "Aggregate Purchase Price") based on the purchase price per share of Common Stock (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Four Hundred Fifty Thousand U.S. Dollars (US$450,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price and the Company shall deliver the shares of Common Stock and Warrants to counsel for Subscriber, who shall release such shares and Warrants to Subscriber after the Aggregate Purchase Price has been paid to the Company. Section 2. Representations and Warranties of Subscriber. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's 2 charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act 3 whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; 4 (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement or pursuant to an available exemption to registration, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States. Accordingly, without agreeing to hold the Securities for any specific period of time, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through 5 a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations (such restrictions not in effect after two years). Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities (Subscriber is however entering into this transaction based upon the Company's representations and covenants below in Section 5), or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. Section 3. Representations and Warranties of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a Material Adverse Effect. A "Material Adverse Effect" shall mean any effect on the business, operations, properties, results of operations, prospects, or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement, or Warrants in any material respect. Except as set forth in Section 2.14, the Company is not in violation of any material terms of its Certificate of Incorporation (as defined below) or Bylaws (as defined below). 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock 6 pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a Material Adverse Effect on the Company. The financial statements of the Company included in the Company's filings with the SEC as referenced above comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement (and all Exhibits annexed hereto) and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement (and all Exhibits annexed hereto) by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any 7 violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a Material Adverse Effect. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a Material Adverse Effect on the Company. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither 8 the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a Material Adverse Effect on the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in a Material Adverse Effect on the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and 9 Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. No shares of Common Stock or preferred stock of the Company are entitled to preemptive or similar rights. Except (i) as disclosed in the Reports, (ii) for the issuance to Subscribers and other investors of Common Stock and Warrants pursuant to a private placement involving an aggregate investment of up to One Million Twenty-five Thousand United States Dollars (US$1,025,000), (iii) for the delivery to Subscribers of promissory notes in an aggregate principal amount of Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10) that are convertible into Common Stock according to their terms, and (iv) the issuance of Series B 10% Redeemable Convertible Preferred Stock to certain investors that is convertible into Common Stock according to the terms of the Company's Certificate of Designation of Series B 10% Redeemable Convertible Preferred Stock, there are no outstanding options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any subsidiary is or may become bound to issue additional shares of Common Stock or securities or rights convertible or exchangeable into shares of Common Stock. Except as disclosed in the Reports, to the knowledge of the Company, no Person or group of Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the 1934 Act) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of five percent of the Common Stock. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. 3.21 Corporate Documents. The Company has furnished or made available to the Subscribers true and correct copies of the Company's Certificate of Incorporation, as amended and in effect on the date hereof (the "Certificate of Incorporation"), and the Company's bylaws, as amended and in effect on the date hereof (the "Bylaws"). The Certificate of Incorporation and Bylaws are in full force and effect as of the Closing Date, without change or amendment. 3.22 No Material Adverse Effect. Since January 1, 1999, no Material Adverse Effect has occurred or exists with respect to the Company, except as disclosed in the Reports, or as publicly announced. 3.23 Employee Relations. The Company is not involved in any labor dispute, nor, 10 to the knowledge of the Company, is any such dispute threatened which could reasonably be expected to have a Material Adverse Effect. None of the Company's employees is a member of a union and the Company believes that its relations with its employees are good. 3.24 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has no notice to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. 3.25 Board Approval. The Board of Directors of the Company has concluded, in its good faith business judgment that the issuances of the Securities in connection with this Agreement are in the best interests of the Company. 3.26 Patents and Trademarks. The Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses, trade secrets and other intellectual property rights which are necessary for use in connection with its business or which the failure to so have would have a Material Adverse Effect (collectively, the "Intellectual Property Rights"). To the best knowledge of the Company, none of the Intellectual Property Rights infringe on any rights of any other Person, and the Company either owns or has duly licensed or otherwise acquired all necessary rights with respect to the Intellectual Property Rights. The Company has not received any notice from any third party of any claim of infringement by the Company of any of the Intellectual Property Rights, and has no reason to believe there is any basis for any such claim. To the best knowledge of the Company, there is no existing infringement by another Person on any of the Intellectual Property Rights. 3.27 Use of Proceeds. The net proceeds are to be used for general working capital and not for the repayment of any judgment. 3.28 Taxes. Except for the Company's failure to (i) file its federal and state tax returns for its fiscal year 1998, and (ii) pay any federal or state taxes owed for its fiscal year 1998, (which taxes are not of a material amount), all federal, state, city and other tax returns, reports and declarations required to be filed by or on behalf of the Company have been filed and such returns are complete and accurate and disclose all taxes (whether based upon income, operations, purchases, sales, payroll, licenses, compensation, business, capital, properties or assets or otherwise) required to be paid in the periods covered thereby. 3.29 No Bankruptcy. The Company is aware of no facts or claims against it that would, and the Company has no present intention to, liquidate the assets of the Company and/or seek bankruptcy protection either voluntarily or involuntarily. Section 4. Covenants of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 11 (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. The Company shall (a) not later than the fifth Business Day following the Closing Date prepare and file with the OTC Bulletin Board an additional shares listing application covering at least the sum of (i) the shares of Common Stock issued on the Closing Date, and (ii) the Warrant Shares issuable upon exercise in full of the Warrants, (b) take all steps necessary to cause such shares to be approved for listing on the OTC Bulletin Board (as well as on any other national securities exchange, market or trading facility on which the Common Stock is then listed) as soon as possible thereafter, and (c) provide to the Subscribers evidence of such listing, and the Company shall maintain the listing of its Common Stock on such exchange or market for so long as the Securities is owned by any of the Subscribers. In addition, if at any time the number of shares of Common Stock issuable on exercise in full of the Warrant is greater than the number of shares of Common Stock theretofore listed with the OTC Bulletin Board (and any such other national securities exchange, market or trading facility), the Company shall promptly take such action (including the actions described in the preceding sentence), if required pursuant to the rules and regulations of the OTC Bulletin Board, to file an additional shares listing application with the OTC Bulletin Board (and any such other national securities exchange, market or trading facility) covering at least a number of shares equal to the number of Warrant Shares as would be issuable upon exercise in full of the Warrants. The Company warrants that it (i) has not received any notice, oral or written, affecting its continued listing on the OTC Bulletin Board, and (ii) is in full compliance with the requirements for continued listing on the OTC Bulletin Board. The Company will take no action, which would impact its continued listing or the eligibility of the Company for such listing. The Company will comply with the listing and trading requirements of its Common Stock on the OTC Bulletin Board and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the OTC Bulletin Board. If the Company receives notification from Nasdaq or any other controlling entity stating that the Company is not in compliance with the listing qualifications of such OTC Bulletin Board, the Company will immediately thereafter give written notice to the Subscribers and take all action necessary to bring the Company into compliance with all applicable listing standards of the OTC Bulletin Board. 12 (iii) It will permit Subscriber to exercise its right to exercise the Warrants and shall deliver the shares of Common Stock to the Subscriber upon exercise of the Warrants as per the terms of the Warrant. Section 5. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) not take any action or file any document (whether or not permitted by the 1934 Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act. (iv) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. Section 6. Indemnification. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 7. Registration or Exemption Requirements. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless they are registered or such registration is not required. Section 8. Legend. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting 13 transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 9. Closing Date. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. Section 10. Conditions to the Company's Obligation to Sell. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. Section 11. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; 14 (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Date; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. Section 12. Miscellaneous. 12.1 Governing Law/Jurisdiction. This Agreement will be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement (or any Exhibit annexed hereto) or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company 15 with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 16 IN WITNESS WHEREOF, this Agreement was duly executed on and as of December _______, 1999. SPATIALIZER AUDIO LABORATORIES, INC., By: /s/ Henry R. Mandell ----------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer CPR (USA) INC. By: /s/ Steven S. Rogers ----------------------- Name: Steven S. Rogers Title: Managing Director LIBERTYVIEW FUNDS, L.P. By: /s/ Steven S. Rogers ----------------------- Name: Steven S. Rogers Title: Authorized Signatory LIBERTYVIEW FUND, LLC By: /s/ Steven S. Rogers ----------------------- Name: Steven S. Rogers Title: Authorized Signatory 17 SCHEDULE A Subscriber Purchase Number of Shares Number Name and Address Price of Common Stock of Warrants - ---------------- ----- --------------- ----------- CPR (USA) Inc. US$225,000 403,769 450,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982 LibertyView Funds, L.P. US$180,000 323,015 360,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982 LibertyView Fund, LLC US$45,000 80,754 90,000 c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Phone: (201) 200-1199 Fax: (201) 200-1982 SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. EXHIBIT A Stock Purchase Warrant CPR (USA) Inc. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 450,000 Shares of Common Stock of Spatializer Audio Laboratories, Inc. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, CPR (USA) INC. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Four Hundred Fifty Thousand (450,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Twenty-five Thousand United States Dollars (US$225,000) between the Company, the Investor, LIBERTYVIEW FUNDS, L.P., and LIBERTYVIEW FUND, LLC, and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable or assignable other than to an affiliate of the Investor. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of CPR (USA) Inc. the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 CPR (USA) Inc. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of 3 CPR (USA) Inc. Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 CPR (USA) Inc. hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 CPR (USA) Inc. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By:_________________________________ Name:_______________________________ Title:______________________________ 6 CPR (USA) Inc. NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ CPR (USA) INC. By:_________________________________ Name:_______________________________ Title:______________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EXHIBIT B Registration Rights Agreement Subscription REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, collectively referred to as the "Holder" or "Holders"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, an aggregate of Eight Hundred Seven Thousand Five Hundred Thirty-eight (807,538) shares of Common Stock, and a Warrant to purchase an aggregate of Nine Hundred Thousand (900,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holders are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holders pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company Subscription that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or 2 Subscription transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. (f) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by the April 15, 2000 (the "Effective Date"), then the Company will pay, in cash, to the Holders on a pro-rata basis by wire transfer, as liquidated damages for such failure and not as a penalty, two (2%) percent of the then value of the Registrable Securities then outstanding each month thereafter until the Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder(s). If the Company does not remit the damages to the Holder as set forth above, the Company will pay the to the Holders the reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Holders in cash immediately if the registration of the Registrable Securities are not effected; provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Registrable Securities pursuant to this Section. The registration of the Securities pursuant to this provision shall not affect or limit Holder's other rights or remedies as set forth in this Agreement. (g) The Company agrees that within three Business Days after being notified by the SEC that the Registration Statement(s) has been cleared to go effective, the Company it will declare such Registration Statement effective. The Company also agrees that it shall respond in writing to any questions and/or comments from the SEC that relate to the Registration Statement(s) within ten business days of receipt of such question or comment. (h) In the event the number of shares of Common Stock included in the Registration Statement shall be insufficient to cover the number of Registrable Securities due to the Holder under the terms of the Purchase Agreement and/or the Notes, the Company agrees that it shall file either a new Registration Statement including such additional shares or amend the then existing Registration Statement. The Company agrees that in such event it will file with the SEC either an amendment to the then existing Registration Statement or a new Registration Statement within 30 days of when required hereunder, and use its best efforts to cause either the amendment or such Registration Statement to become effective within 90 calendar days from when required. If such amendment or new Registration Statement is not filed and/or declared effective in a timely manner as set forth herein, the Company shall be subject to liquidated damages as pursuant to the provisions of Section 3(f). Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information 3 Subscription reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has 4 Subscription knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall be assigned to affiliates, heirs, and successors of the Holders. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations 5 Subscription promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the 6 Subscription Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7 Subscription Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) business days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 Subscription Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 9 Subscription IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ WITNESSED: ___________________________________ Margaret G. Graf CPR (USA) INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ LIBERTYVIEW FUNDS, L.P. By:_____________________________________ Name:___________________________________ Title:__________________________________ LIBERTYVIEW FUND, LLC By:_____________________________________ Name:___________________________________ Title:__________________________________ 10 EX-4.12 3 FORM OF PROMISSORY NOTE CPR (USA) Inc. SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$112,620.55 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001 FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to CPR (USA) INC. ("Payee"), the principal amount of One Hundred Twelve Thousand, Six Hundred Twenty and 55/100 Dollars (US$112,620.55), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion CPR (USA) Inc. Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 2 CPR (USA) Inc. In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive 3 CPR (USA) Inc. trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax 4 CPR (USA) Inc. under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or 5 CPR (USA) Inc. (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 6 CPR (USA) Inc. 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace 7 CPR (USA) Inc. and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer 9 LibertyView Funds, L.P. SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$90,096.43 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001 FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to LIBERTYVIEW FUNDS, L.P. ("Payee"), successor-in-interest to LIBERTYVIEW PLUS FUND, the principal amount of Ninety Thousand, Ninety-six and 43/100 Dollars (US$90,096.43), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New LibertyView Funds, L.P. Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead 2 LibertyView Funds, L.P. round the number of shares of Common Stock issued up to the next whole share of Common Stock. In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) 3 LibertyView Funds, L.P. be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall 4 LibertyView Funds, L.P. provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or 5 LibertyView Funds, L.P. (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 6 LibertyView Funds, L.P. 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace 7 LibertyView Funds, L.P. and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer 9 LibertyView Fund, LLC SECURED NON-NEGOTIABLE CONVERTIBLE PROMISSORY NOTE US$22,524.12 Issued: December 29, 1999 New Principal Amount Maturity Date: June 15, 2001 FOR VALUE RECEIVED, SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), hereby promises to pay under this non-negotiable convertible promissory note ("Note") to LIBERTYVIEW FUND, LLC ("Payee"), the principal amount of Twenty-two Thousand, Five Hundred Twenty-four and 12/100 Dollars (US$22,524.12), which represents the principal of the funds advanced by Payee and accrued interest thereon from the date of advance through December 29, 1999 ("New Principal"), together with interest thereon from December 29, 1999, according to the following terms and conditions. This instrument is not negotiable by Payee. All references herein to currency herein shall refer to United States Dollars. This Note has been secured by the Collateral of Maker pursuant to the terms of the security agreement (the "Security Agreement"), of even date hereof, entered into between Maker and Payee. 1. Interest. Interest shall accrue from the date hereof on the New Principal outstanding from time to time under this Note, at a rate per annum equal to ten percent (10%). Interest hereunder shall be computed for the actual number of days elapsed on the basis of a three hundred sixty (360) day year. Cash payments of New Principal and interest are payable in lawful money of the United States of America in same day funds. 2. Payment Schedule. (a) Unless the outstanding New Principal and the interest accrued thereon shall have sooner been discharged through a conversion into the common stock, par value $0.01 per share, of Maker ("Common Stock"), or a successor to Maker as a result of a restructuring or reorganization involving Maker (any such successor and Maker are collectively referred to as "Maker"), as the case may be, or through the exercise of a Conversion Option (as defined in Section 3 below), the unpaid New Principal plus interest accrued thereon shall be due and payable to Payee on the earlier of June 15, 2001 (the "Maturity Date") or upon the occurrence of an Event of Default as set forth below. In the event that the outstanding New Principal shall be converted into Common Stock pursuant to Section 3, then accrued interest due on the outstanding New Principal also shall be paid in shares of Common Stock pursuant to Section 3 and the number of shares issued will be adjusted to include interest accrued as of the Conversion Date (as defined in Section 3(c) below). (b) Provided no Event of Default (as set forth below) has occurred and/or is occurring, the outstanding New Principal and interest accrued thereon may be prepaid in cash by Maker, in whole or in part, at any time prior to the Maturity Date (except that portion of the New Principal outstanding hereunder and interest accrued thereon that is the subject of a Conversion LibertyView Fund, LLC Notice (as defined in Section 3(c) below) which has previously been sent to Maker), without premium or penalty of any kind by giving written notice to Payee (the "Prepayment Notice"). In the event of prepayment pursuant to Section 2(b), Maker shall not be required to pay unaccrued interest. All payments hereunder shall be applied first to accrued interest and the balance of such payments shall be applied to the New Principal amount payable hereunder. Maker shall wire transfer the appropriate amount of funds to Payee to complete the prepayment, which shall be no later than the third business day after the Prepayment Notice was received by Payee (the "Prepayment Date"). Upon facsimile receipt of the Prepayment Notice, Payee's right to convert New Principal outstanding hereunder and interest accrued thereon into Common Stock shall terminate and be canceled immediately (the right to convert shall be immediately reinstated if Maker fails to comply with the prepayment provisions). In the event that Maker does not wire transfer the appropriate amount of funds to Payee, on or before the Prepayment Date, or shall otherwise fail to comply with the prepayment provisions set forth herein, then it shall have waived its right to prepay any portion of this Note at any time thereafter. The Prepayment Notice shall set forth (i) the Prepayment Date, (ii) the Prepayment Price, as defined below, and (iii) the New Principal being prepaid. The Prepayment Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid, to Payee at its address as the same shall appear on the books of Maker. The "Prepayment Price" shall be equal to the portion or all of the New Principal being prepaid plus all accrued and unpaid interest due thereon. At the close of business on the Prepayment Date, subject to Payee's receipt of the applicable Prepayment Price, the portion of this Note being prepaid shall be automatically canceled and converted into a right to receive the Prepayment Price. Immediately following the Prepayment Date (assuming full compliance by Maker with the prepayment provisions set forth herein), Payee shall surrender its original Note at the office of Maker, and Maker shall issue to Payee a new Note certificate for the principal amount that remains outstanding, if any. Notwithstanding the foregoing, Maker shall not be entitled to send a Prepayment Notice unless it has: (i) the full amount of the applicable Prepayment Price in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) immediately available credit facilities, in the full amount of the Prepayment Price with a bank or similar financial institution; or (iii) a combination of the items set forth in (i) and (ii) above, aggregating the full amount of the Prepayment Price. 3. Conversion. (a) Provided no Event of Default (as set forth below) has occurred and/or is occurring, all of the shares of Common Stock underlying the Note are then included in an effective Registration Statement, and the closing bid price of the Common Stock as reported by Bloomberg LP as of the Conversion Date is greater than the Conversion Price (as defined below), Maker shall have the option (the "Maker Conversion Option") to convert, at its sole discretion at any time prior to the Maturity Date, all New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to Payee upon conversion shall be determined by dividing (i) all New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 2 LibertyView Fund, LLC In the event that Maker does not forward the shares of Common Stock to Payee pursuant to the conversion delivery provisions set forth below, then it shall have waived its right to force conversion of any portion of this Note at any time thereafter. Maker's Conversion Notice shall set forth the New Principal being prepaid. Maker's Conversion Notice shall be irrevocable, and it shall be delivered by facsimile or mailed, postage prepaid to Payee at its address as the same shall appear on the books of Maker. (b) Payee shall have the option (the "Payee Conversion Option"; the Payee Conversion Option and the Maker Conversion Option are sometimes collectively referred to herein as "Conversion Options") to convert, at any time on or after the issuance date of this Note, all or any portion of the New Principal outstanding hereunder and all accrued interest thereon, into fully paid and nonassessable shares of Common Stock based on the Conversion Price. The number of shares of Common Stock to be issued upon conversion shall be determined by dividing (i) the portion of New Principal outstanding hereunder and accrued interest thereon as of the Conversion Date, by (ii) the Conversion Price, provided, however, that Maker shall not issue to Payee a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (c) Maker shall exercise the Maker Conversion Option by delivering written notice thereof (a "Conversion Notice") to Payee, and Payee shall exercise the Payee Conversion Option by delivering written notice thereof (also a "Conversion Notice") to Maker. Any Conversion Notice shall be sent via facsimile to the telecopier numbers and addresses listed below. The date on which Maker or Payee shall send a Conversion Notice shall be the "Notice Date". Maker shall issue and deliver to Payee the applicable number of shares of Common Stock to Payee no later than three business days after the Notice Date. The date on which Maker issues shares of Common Stock to Payee pursuant to an exercised Conversion Option shall be the "Conversion Date". (d) After all of the New Principal outstanding and accrued interest thereon have been converted into shares of Common Stock, all New Principal and interest payable to Payee under this Note shall be deemed paid in full, and all obligations hereunder shall be completely satisfied. No later than ten (10) business days after the last Conversion Date, provided that Maker has fully complied with the conversion provisions set forth herein, Payee shall surrender this Note to Maker for cancellation. (e) The "Conversion Price" shall be determined on the Conversion Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Notice Date, provided, however, that any day on which the aggregate of the purchases and sales or either of them of Common Stock by Payee and its affiliates account for greater than twenty-five percent (25%) of that day's total trading volume (as reported by Bloomberg LP) shall not be counted in calculating the Closing Price and the parties shall use the immediately preceding trading day(s) on which this volume limitation has not been exceeded to determine the ten day period over which the Conversion Price shall be calculated. Notwithstanding the foregoing, the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive 3 LibertyView Fund, LLC trading days ending one (1) trading day prior to the date hereof (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg LP. (f) Provided that Maker is in full compliance with the terms of this Note, Payee has agreed not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal and accrued interest thereon shall remain outstanding and payable under this Note. (g) In the event of any stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (h) In the event that Maker issues shares of Common Stock pursuant to an exercised Conversion Option, the shares of Common Stock shall be issued as restricted securities under federal securities laws and there shall be an appropriate legend restricting the transfer thereof (if so required under applicable federal securities laws). (i) This Note, and Payee's rights hereunder, are not transferable or assignable other than to an affiliate of Payee. The foregoing limitation shall not apply in the event that Maker is not in full compliance with the terms of this Note and the Transaction Documents (as defined in Section 7(a) below). 4. Subordination. So long as any portion of this Note remains outstanding, Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker shall create, incur, assume, guarantee, secure or in any manner become liable in respect of any indebtedness, unless junior to this Note in all respects, except for indebtedness of Maker outstanding as of the issuance date of this Note. Maker agrees that neither Maker nor any direct or indirect subsidiary of Maker will permit any liens, claims, or encumbrances to exist against Maker or any direct or indirect subsidiary of Maker or any of their assets, except for (i) indebtedness of Maker outstanding as of the issuance date of this Note, and (ii) Permitted Indebtedness. "Permitted Indebtedness" means indebtedness secured by the assets of Maker or any of its subsidiaries other than the Collateral (as defined in the Security Agreement) so long as such indebtedness does not exceed the value of the assets securing such indebtedness. Maker may, at its sole discretion and without any required consent of Payee, incur Permitted Indebtedness. 5. Interest Withholding. If required by law, Maker shall withhold U.S. tax under Sections 1441 or 1442, as the case may be of the Internal Revenue Code of 1986, as amended (the "Code"), from all interest payments at the rate of thirty percent (30%) unless Payee provides Maker three (3) duly executed copies of Form 1001, prior to the Maturity Date or earlier Conversion Date, in which case Maker shall withhold tax at the reduced rate specified in the Form 1001. Maker shall provide Payee, on a timely basis, with a copy of Form 1042 evidencing the withholding of the tax 4 LibertyView Fund, LLC under Sections 1441 or 1442, of the code, as the case may be. 6. In the event that Payee shall elect to convert any portion of this Note as provided herein, Maker cannot refuse conversion based on any claim that Payee or anyone associated or affiliated with Payee has been engaged in any violation of law, unless an injunction from a court, restraining and/or enjoining conversion of all or part of said portion of this Note shall have been issued and Maker posts a surety bond for the benefit of Payee in the amount of 130% of the New Principal sought to be converted plus outstanding interest through such date, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to Payee in the event it obtains a favorable judgment (but shall not in any way limit any additional damages Payee may be entitled to). 7. The following shall constitute an "Event of Default" : (a) Any of the representations, covenants, or warranties made by Maker herein, or in the Agreement Regarding Indebtedness, Registration Rights Agreement, and/or Security Agreement of even date herewith (collectively referred to as the "Transaction Documents") shall have been incorrect when made in any material respect or shall thereafter be determined to be incorrect; or (b) Maker shall breach, fail to perform, or fail to observe in any material respect any material covenant, term, provision, condition, agreement or obligation of Maker under this Note and/or the Transaction Documents; or (c) A trustee, liquidator or receiver shall be appointed for Maker or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) calendar days after such appointment; or (d) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Maker and shall not be dismissed within thirty (30) calendar days thereafter; or (e) Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Maker and, if instituted against Maker, Maker shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within thirty (30) calendar days thereafter; or (f) The Common Stock is suspended and/or delisted from trading on the OTC Bulletin Board, or Maker has received notice of final action concerning delisting from the OTC Bulletin Board; or 5 LibertyView Fund, LLC (g) The effectiveness of the Registration Statement including the shares of Common Stock underlying this Note has been suspended for a period of five (5) business days; or (h) Maker shall fail to pay interest and/or principal within two business days of when due hereunder; or (i) Maker shall have failed to deliver shares of Common Stock issuable upon conversion of this Note pursuant to Section 3(c) above; or (j) The occurrence of an Event of Default as that term is defined in the Security Agreement; or (k) Maker, or any other party, shall, at any time after the issuance date of this Note, (1) in any way adversely alter Payee's security interest that it has been granted in the Collateral pursuant to the Security Agreement, or (2) sell the Collateral in violation of the Security Agreement. 8. Remedies. Upon the occurrence of an Event of Default, and in each and every such case, unless such Event of Default shall have been waived in writing by Payee (which waiver shall not be deemed to be a waiver of any subsequent default) or cured as provided herein, at the option of Payee, and in Payee's sole discretion, Payee may consider this Note (and all interest through such date) immediately due and payable in cash (and enforce its rights under the Security Agreement), without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and Payee may immediately, and without expiration of any period of grace, enforce any and all of Payee's rights and remedies provided herein or any other rights or remedies afforded by law (including but not limited to consequential damages if any). It is agreed that in the event of such action, Payee shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys. Nothing contained herein shall limit the rights of Payee to collect liquidated damages as provided herein or in any other agreement entered into between Maker and Payee, or any other damages that Payee may otherwise be entitled to. Payee may declare all outstanding New Principal, and all interest accrued thereon, immediately due and payable. The rights and remedies available to Payee under this Note shall be cumulative and in addition to any other rights or remedies that Payee may be entitled to pursue at law or in equity. The exercise of one or more of such rights or remedies shall not impair Payee's right to exercise any other right or remedy at law or in equity. Notwithstanding the occurrence of a Default and/or Payee's exercise of any of its rights or remedies hereunder, until such time as Payee receives payment in full of all amounts due hereunder or shares of Common Stock pursuant to an exercised Conversion Option, interest will continue to accrue on the outstanding New Principal at the interest rate charged hereunder. 9. Costs. Maker shall pay, on demand, any and all costs and expenses, including reasonable attorneys' fees, incurred by Payee in connection with a Default and the collection of any portion of the outstanding New Principal and interest accrued thereon. 6 LibertyView Fund, LLC 10. No Offset. The amounts due under this Note are not subject to reduction or offset for any claims of Maker or its successors or assigns against Payee or any third party. 11. No Continuing Waiver. The waiver of a Default shall not constitute a continuing waiver or a waiver of any subsequent Default. Maker hereby waives presentment, demand, dishonor and notice of nonpayment. 12. Notice. Except as provided above, all notices, requests, consents and other communications which may be desired or required hereunder shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered in person to the party named below, or three (3) business days after mailing if deposited in the United States mail, first class, registered or certified mail, return receipt requested, with postage prepaid, addressed as follows: If to Maker: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364 Telephone: (818) 227-3370 Telecopier: (818) 227-9751 Attention: Henry R. Mandell If to Payee: c/o LibertyView Capital Management, Inc. 101 Hudson Street, Suite 3700 Jersey City, NJ 07302 Telephone: (201) 200-1199 Telecopier: (201) 200-1982 Attention: Alan Mark or to such other persons or addresses as either party may from time to time designate by notice given to the other party in accordance with this Section 11. All payments made by Maker hereunder shall be made to Payee at the address set forth above or as otherwise designated by Payee in accordance with this Section 12. 13. Severability. If any provision of this Note or the application thereof to any person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Note and the application of any such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14. Supercedes Prior Indebtedness. This Note, and the indebtedness evidenced hereby, completely replaces, supercedes and extinguishes all outstanding principal and accrued interest existing on or prior to the date hereof (the "Prior Indebtedness") owed by Maker to Payee and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"). This Note and that certain Agreement Regarding Indebtedness, dated of even date herewith, by and among Maker and Payee, together constitute the entire understanding of Maker, Payee and all Related Parties with respect to any indebtedness of Maker to Payee or to any other Related Party, and completely replace 7 LibertyView Fund, LLC and supercede and all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payee, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payee, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payee. 15. Governing Law. This Note shall be exclusively construed and enforced in accordance with and governed by the laws of the State of New York except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal court, eastern district of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 8 LibertyView Fund, LLC IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered on the date first above written. SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ------------------------------------ Name: Henry R. Mandell Title: Interim Chief Executive Officer 9 EX-4.13 4 AGREEMENT REGARDING INDEBTEDNESS AGREEMENT REGARDING INDEBTEDNESS This AGREEMENT REGARDING INDEBTEDNESS (this "Agreement"), dated as of December 29, 1999, is entered into by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Maker"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and together with CPR and LP, "Payees"). WHEREAS, Payees have advanced funds to Maker in the aggregate original principal amount of Two Hundred Ten Thousand Dollars (US$210,000) pursuant to: (i) that certain letter agreement by and among Maker and Payees, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payees, dated April 16, 1999; (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payees; and (iv) certain other agreements and understandings, whether written or oral; WHEREAS, as of the date hereof, the aggregate amount of outstanding principal and accrued interest that Maker owes to Payees is Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10). WHEREAS, Maker has executed and delivered to Payees that certain Non-Negotiable Convertible Promissory Note (the "New Note"), dated of even date herewith, which is intended to supercede and replace all prior agreements and understandings with respect to the indebtedness of Maker to Payees referenced above, and the obligations of Maker with respect to such indebtedness. NOW THEREFORE, the parties hereto hereby agree as follows: 1. The aggregate amount of all outstanding principal and accrued interest existing as of the date hereof (the "Prior Indebtedness") owed by Maker to Payees, and/or to any person or entity related to or affiliated with any Payee (each a "Related Party"), shall become the new original principal amount outstanding under the New Note (the "New Principal"), to be repaid according to its terms. Maker and Payees hereby agree that, as of the date hereof, the Prior Indebtedness equals Two Hundred Twenty-five Thousand, Two Hundred Forty-one and 10/100 Dollars (US$225,241.10). 2. The New Note, and the indebtedness evidenced thereby, completely replaces, supercedes and extinguishes all Prior Indebtedness. This Agreement, the New Note, and that certain Security Agreement, dated of even date herewith, among Maker and Payees, together constitute the entire understanding of Maker, Payees and all Related Parties with respect to any indebtedness of Maker to Payees or to any other Related Party, and completely replace and supercede all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Prior Indebtedness, including without limitation: (i) that certain letter agreement by and among Maker and Payees, dated April 14, 1999; (ii) that certain letter agreement by and among Maker and Payees, dated April 16, 1999; and (iii) that certain Nonnegotiable Secured Promissory Note, dated on or about March 1999, made by Maker in favor of Payees. 3. All written documents that evidence or relate to any portion of the Prior Indebtedness shall be null and void and of no force or effect. Payees shall return any original copies of such documentation to Maker for cancellation. 4. Provided that Maker is in full compliance with the terms of this Note, each Payee hereby agrees not to engage in any short sales of any shares of capital stock of Maker for so long as any New Principal (as defined in the New Note) and accrued interest thereon shall remain outstanding and payable under the New Note. 5. Maker hereby restates and reaffirms all of the representations and warranties contained in that certain Subscription Agreement entered into between the Maker and the Payees of even date herewith as if same are set forth herein. 6. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of New York, except for matters arising under the federal securities laws, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the State of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] 2 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Henry R. Mandell ------------------------------------ Name: Henry R. Mandell Title: Chief Executive Officer CPR (USA) INC. By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Managing Director LIBERTYVIEW FUNDS, L.P. By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Authorized Signatory LIBERTYVIEW FUND, LLC By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Authorized Signatory 3 EX-4.14 5 FORM OF SECURITY AGREEMENT SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made as of December 29, 1999, by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation ("Debtor"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, and LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC", and collectively with CPR and LP, "Secured Party") 1. Definitions. (a) Certain Defined Terms. The following terms, as used herein, have the meanings set forth below: ARI - means that certain Agreement Regarding Indebtedness (including all Exhibits annexed thereto) of even date herewith, by and between Debtor and Secured Party. Assets - shall mean all of the assets (including but not limited to: tangible, intangible and goodwill, all "equipment" (as defined in the UCC), including, without limitation, all machinery, motor vehicles, trucks, trailers, vessels, and rolling stock and all parts thereof and all additions and accessions thereto and replacements therefor) of the Debtor. Collateral - has the meaning assigned to that term in Section 2. Event of Default - has the meaning assigned to that term in Section 9. Material Adverse Effect - means any effect on the business, operations, properties, results of operations, prospects, or financial condition of the Debtor that is material and adverse to the Debtor and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Debtor to enter into and perform any of its obligations under this Agreement or the Notes in any material respect. Notes - mean those certain Secured Non-Negotiable Convertible Promissory Notes of even date herewith, in the aggregate original principal amount of $225,241.10, made and executed by Debtor and issued to Secured Party, and all amendments and supplements thereto, restatements thereof and renewals, extensions, restructuring and refinancings thereof. Person - means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. Proceeds - means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, any Collateral including, without limitation, all claims against third 1 parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance with respect to any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. Secured Obligations - has the meaning assigned to that term in Section 3. Security Interests - means the security interests granted pursuant to Section 2, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. UCC - means the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy. (b) Other Definition Provisions. References to "Sections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1(a) may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All references to statutes and related regulations shall include (unless otherwise specifically provided herein) any amendments of same and any successor statutes and regulations. 2. Grant of Security Interest In order to secure the payment and performance of the Secured Obligations in accordance with the terms thereof, Debtor hereby grants to Secured Party a continuing security interest in and to all right, title and interest of Debtor in the Assets (and any Proceeds therefrom) described on Attachment A hereto, whether now owned or existing or hereafter acquired or arising (all being collectively referred to as the "Collateral"). 3. Security for Obligations This Agreement secures the payment and performance of the ARI and the Notes, and all renewals, extensions, restructuring and refinancings thereof (the "Secured Obligations"). 4. Representations and Warranties. Debtor represents and warrants as follows: (a) Binding Obligation. This Agreement has duly executed and delivered by the Debtor, which is a legal, valid and binding obligation of Debtor, enforceable against Debtor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditor's rights generally. This Agreement is not in violation of any other agreements, 2 instruments, orders or judgments by which Debtor is bound or subject. The execution, delivery and performance of this Agreement by Debtor does not require the consent or approval of any other person, entity or governmental agency. (b) Location of Assets. All of the Assets are located in the State of California. (c) Ownership of Collateral. Debtor owns the Collateral free and clear of any lien, security interest or encumbrance. No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office. Debtor is, and as long as this Agreement shall be in effect pursuant to its terms, shall be the sole, record, legal and beneficial owner of, and has good and marketable title to, the Assets, subject to no lien, pledge or encumbrance, except the lien on the Assets created by this Agreement. (d) Office Locations; Debtor Names. (i) As of the date hereof, the chief place of business, the chief executive office and the office where Debtor keeps its books and records is located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, CA 91346. Debtor has not maintained any other street address at any time during the five years preceding the date hereof. (ii) Debtor does not do business nor, as of the date hereof, has it done business during the past five years under any corporate name, trade name or fictitious business name except for Debtor's corporate name set forth above. (e) Perfection. This Agreement, and the filing of an appropriate UCC-1 financing statement with the Secretary of State of the State of California, create to secure the Secured Obligations a valid, perfected and priority security interest in the Collateral. (f) Governmental Authorizations; Consents. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or consent of any other Person is required either (i) for the grant by Debtor of the Security Interests granted hereby or for the execution, delivery or performance of this Agreement by Debtor, or (ii) for the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Debtor or Secured Party) other than the filing of appropriate UCC-1 financing statements in connection with the perfection of the Security Interests. (g) Value of Collateral. The value of the Collateral as of the date hereof is equal to not less than Three Hundred Thousand United States Dollars ($300,000). (h) Accurate Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Debtor with respect to the Collateral is and will be accurate and complete in all material respects. 3 (i) Deficiency. Debtor will remain liable for any deficiency in the event that the delivery of the Assets to the Secured Party is insufficient to satisfy the Debtor's obligations under the Notes. (j) Survival. From and after the date hereof and so long as this Agreement shall be in effect pursuant to its terms, the Debtor agrees that it shall not take any action that would cause the Debtor to be in breach or default of any of the Secured Obligations, that all representations and warranties made by Debtor shall survive this Agreement and that as of the date hereof, the Secured Party shall be deemed to have a priority lien on the Assets for the purposes and in accordance with the terms and provisions hereof, and the Debtor shall cooperate with the Secured Party and take all action requested by the Secured Party to ensure the representations and warranties shall survive this Agreement with respect thereto. (k) Validity. The Debtor's performance of its obligations under this Agreement will not result in the creation or imposition by the Debtor of any liens, charges, claims or other encumbrances upon the Assets, or any of the assets of the Debtor other than the security interest granted under this Agreement. (l) No Conflicts. The execution, delivery and performance of this Agreement by the Debtor and the consummation by the Debtor of the transactions contemplated hereby do not and will not (i) result in a violation of its Articles of Incorporation or ByLaws or (ii) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, patent, patent license, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Debtor is a party, or (iii) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Debtor or by which any property or asset of the Debtor is bound or affected, nor is the Debtor otherwise in violation of, in conflict with, or in default under, any of the foregoing except as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The business of the Debtor is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (m) Insurance. The Debtor is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Debtor believes to be prudent and customary in the businesses in which the Debtor is engaged. The Debtor has no notice to believe that the Debtor will not be able to renew its existing insurance coverage as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (n) Taxes. Except for the Debtor 's failure to (i) file its federal and state tax returns for its fiscal year 1998, and (ii) pay any federal or state taxes owed for its fiscal year 1998 (which taxes are not of a material amount), all federal, state, city and other tax returns, reports and declarations required to be filed by or on behalf of the Debtor have been filed and such returns are complete and accurate and disclose all taxes (whether based upon income, operations, 4 purchases, sales, payroll, licenses, compensation, business, capital, properties or assets or otherwise) required to be paid in the periods covered thereby. (o) Title to Assets. Debtor has good and marketable title to the Assets, and all properties and material assets as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Debtor. 5. Further Assurances; Covenants (a) Other Documents and Actions. Debtor will, from time to time, promptly execute and deliver all further instruments and documents prepared by Secured Party at Secured Party's expense, and take all further action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Debtor will: (i) execute such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (ii) at any reasonable time, upon demand by Secured Party exhibit the Collateral to allow inspection of the Collateral by Secured Party or persons designated by Secured Party; and (iii) upon Secured Party's request, appear in and defend any action or proceeding that may affect Debtor's title to, or Secured Party's security interest in, the Collateral. (b) Secured Party Authorized. Debtor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of Debtor where permitted by law. (c) Corporate or Name Change. Debtor will notify Secured Party promptly in writing at least 30 days prior to (a) any change in Debtor's name and (b) Debtor's commencing the use of any trade name, assumed name or fictitious name. (d) Business Locations. Debtor will keep the Collateral at the location specified in Section 4(b) above. Debtor shall give Secured Party thirty (30) days' prior written notice of any change in its chief place of business or of any new location of business or any new location for any of the Collateral. With respect to any new location (which in any event shall be within the continental United States), Debtor shall execute such documents and take such actions as Secured Party reasonably deems necessary to perfect and protect the Security Interests. (e) Bailees. No Collateral shall at any time be in the possession or control of any warehouseman, bailee or Debtor's agents or processors without Secured Party's prior written consent and unless Secured Party, if Secured Party has so requested, has received warehouse receipts or bailee letters reasonably satisfactory to Secured Party prior to the commencement of such storage. Debtor shall, upon the request of Secured Party, notify any such warehouseman, bailee, agent or processor of the Security Interests. 5 (f) Insurance. Debtor currently does maintain and shall maintain insurance with respect to the Collateral of types and in amounts that are customary for similarly situated businesses. Debtor hereby direct all insurers under such policies of insurance with respect to its assets to pay all material proceeds of such insurance policies to Secured Party. (g) Taxes and Claims. Debtor will pay (i) all taxes, assessments and other governmental charges imposed upon the Collateral before any penalty accrues thereon and (ii) all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a lien upon any of the Collateral before any penalty or fine is incurred with respect thereto; provided that no such tax, charge or claim need be paid if Debtor is contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if Debtor has established such reserve or other appropriate provision, if any, as shall be required in conformity with generally accepted accounting principles consistently applied. (h) Collateral Description. Debtor will furnish to Secured Party, from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (i) Use of Collateral. Debtor will not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statue, regulation or ordinance or any policy of insurance covering any of the Collateral. (j) Records of Collateral. Debtor shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Secured Party may reasonably request indicating that the Collateral is subject to the Security Interests. (k) Other Information. Debtor will, promptly upon request, provide to Secured Party all information and evidence it may reasonably request concerning the Collateral to enable Secured Party to enforce the provisions of this Agreement. (l) Maintenance. The Debtor will maintain the condition of the Collateral in such condition as is customary in the businesses in which the Debtor is engaged, and shall take any and all actions necessary for such maintenance as are customary. 6. Secured Party Appointed Attorney-in-Fact. Debtor hereby irrevocably appoints each Secured Party as its attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable after the occurrence and during the continuation of an Event of Default to accomplish the purposes of this Agreement, including, without limitation: (a) to obtain and adjust insurance required to be paid to Secured Party; 6 (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for monies due and to become due under or in respect of any of the Collateral; (c) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (d) to pay or discharge taxes or liens, levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, and such payments made by Secured Party to become obligations of Debtor, due and payable immediately without demand and secured by the Security Interests; and (e) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral. Neither Secured Party nor any Person designated by Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than as a result of Secured Party's or such Person's gross negligence or willful misconduct. These powers, being coupled with an interest, is irrevocable so long as this Agreement shall remain in force. 7. Transfers and Other Liens Debtor shall not, without Secured Party's prior written consent: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral other than (i) in the ordinary course of its business, (ii) in connection with the replacement of any Collateral of equivalent use and value, or (iii) with respect to the capital stock of Multidisc Technologies, Inc. (a wholly-owned inactive subsidiary of Debtor) or any of the assets of such subsidiary. (b) Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person except for the security interest created by this Agreement. 8. Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default by Debtor under this Agreement: (a) General Default. Debtor shall fail to observe or perform any covenant, obligation, term or condition contained in the ARI, the Notes or this Agreement. 7 (b) Nonpayment. Debtor shall fail to pay any principal, interest or other amount owing under the Notes when and as the same shall be due and payable. (c) Material Misrepresentations. Any representation or warranty by the Debtor set forth herein shall prove to be false in any material respect. (d) Going Concern. Debtor shall terminate its corporate existence or shall cease to operate as a going concern. (e) Judgments. A judgment shall be entered against Debtor or a warrant of execution or similar process shall be issued or levied against its property and within thirty (30) days after such judgment, warrant or process shall not have been paid in full or proper appeal of the same made. (f) Relief - Voluntary. Debtor shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing. (g) Relief - Involuntary. Any involuntary case or other proceeding shall be commenced against Debtor seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of thirty (30) days; or an order for relief shall be entered against Debtor under the federal bankruptcy laws as now or hereafter in effect. (h) Transfer. The Collateral is sold or transferred by the Debtor in violation of Section 7. (i) Other. The occurrence of any "Event of Default" as that term is defined in the Notes. 9. Remedies (a) If any Event of Default shall have occurred and be continuing, Secured Party may declare the entire outstanding principal amount of the Notes immediately due and payable without any notice, demand or other action on the part of Secured Party. (b) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on 8 default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (i) require Debtor to, and Debtor hereby agrees that it will, at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (ii) without notice or demand or legal process, enter upon any premises of Debtor and take possession of the Collateral for sale pursuant to this Section 9; (iii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable; (iv) notify the obligors on any Accounts or Instruments to make payments there under directly to Secured Party; (v) without notice to Debtor, renew, modify or extend any of the Accounts and Instruments or grant waivers or indulgences with respect thereto or accept partial payment thereof, or substitute any obligor thereon, in any manner as Secured Party may deem advisable, without affecting or diminishing Debtor's continuing obligations hereunder; and (v) and shall have all applicable remedies set forth in the UCC. Debtor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, Secured Party may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Secured Party. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Debtor hereby specifically waives all rights of redemption, stay or appraisal, which it has or may have under any law now existing or hereafter enacted. (c) Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to enter upon the premises of Debtor where the Collateral is located (or is believed to be located) without any obligation to pay rent to Debtor, or any other place or places where the Collateral is believed to be located and kept, to render the Collateral useable or saleable, to remove the Collateral therefrom to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire in order to effectively collect or liquidate the Collateral, and/or to require Debtor to assemble the Collateral and make it available to Secured Party at a place or places to be designated by Secured Party. Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to take possession of Debtor's original books and records, to obtain access to Debtor's data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner Secured Party deems appropriate; and Secured Party shall have the right to notify postal authorities to change the address for delivery of Debtor's mail to an address designated by Secured Party and to receive, open and dispose of all mail addressed to Debtor. 10. Limitation on Duty of Secured Party with Respect to Collateral. Beyond the safe custody thereof, Secured Party shall have no duty with respect to any Collateral in its possession or control (or in the possession or control of any agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. 9 Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. Secured Party shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by Secured Party in good faith. 11. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default as set forth herein, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied (pro rata among each participant in the Secured Party based on the indebtedness then owing): first, to all fees, costs and expenses incurred by Secured Party with respect to the Collateral; and second, to the Secured Obligations. Secured Party shall pay over to Debtor any surplus and Debtor shall remain liable for any deficiency. 12. Expenses. Debtor agrees to pay all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral, or with respect to periodic appraisals and inspections of the Collateral, or with respect to the sale or other disposition thereof. If Debtor fails promptly to pay any portion of the above expenses when due or to perform any other obligation of Debtor under this Agreement, Secured Party may, at its option, but shall not be required to, pay or perform the same, and Debtor agree to reimburse Secured Party therefor on demand, or the Secured Party may deem it to be an Event of Default. All sums so paid or incurred by Secured Party for any of the foregoing, any and all other sums for which Debtor may become liable hereunder and all costs and expenses (including attorneys' fees, legal expenses and court costs) incurred by Secured Party in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Secured Obligations, shall bear interest until paid at the rate provided in the Notes and shall be secured by the Collateral. 13. Termination of Security Interests; Release of Collateral. Upon payment in full of all Secured Obligations or upon the conversion of all principal outstanding under the Notes and all interest accrued thereon into shares of common stock, par value $0.01 per share, of the Debtor, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtor. Upon such termination of the Security Interests or release of any Collateral, Secured Party will, at the expense of, and preparation by, the Debtor, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. 14. Notices. Each notice, communication and delivery under this Agreement: (a) shall be made in writing signed by the party giving it; (b) shall specify the section of this Agreement pursuant to which given; (c) shall either be delivered in person or by telecopier, a nationally recognized next business day courier service or Express Mail; (d) unless delivered in person, shall be given to the address specified below; (e) shall be deemed to be given (i) if delivered in person, on the date delivered, (ii) if sent by telecopier, on the date of telephonic confirmation of receipt, (iii) if sent by a nationally recognized next business day courier service with all costs paid, on the next business day after it is delivered to such courier, or (iv) if sent by 10 Express Mail (with postage and other fees paid), on the next business day after it is mailed. Such notice shall not be effective unless copies are provided contemporaneously as specified below, but neither the manner nor the time of giving notice to those to whom copies are to be given (which need not be the same as the addressee) shall control the date notice is given or received. The addresses and requirements for copies are as follows: If to Debtor: at the address set forth in Section 4(d) above. If to Secured Party at their respective addresses set forth in the Notes. Except as otherwise expressly set forth in any particular provision of this Agreement, any consent or approval required or permitted by this Agreement to be given by Secured Party may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by Debtor of any term of this Agreement, the ARI or the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written specific consent of Secured Party. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of Secured Party in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon Debtor shall entitle Debtor to other or further notice or demand in similar or other circumstances. The rights in this Agreement, the ARI and the Notes are cumulative and are not exclusive of any other remedies provided by law. The invalidity, illegality or unenforceability of any provision in or obligation under this Agreement shall not affect or impair the validity, legality or enforceability of the remaining provisions or obligations under this Agreement. 15. Successors and Assigns. This Agreement is for the benefit of Secured Party and its successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the Secured Obligations so assigned, may be transferred with such Secured Obligations. This Agreement shall be binding on Debtor and its successors and assigns, provided that Debtor shall not assign this Agreement without Secured Party's prior written consent. 16. Changes in Writing. No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by Debtor therefrom, shall in any event be effective without the written concurrence of Secured Party and Debtor. 17. Governing Law/Venue/Jurisdiction. This Agreement shall be exclusively governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of law principles thereof. Each of the parties consents to the exclusive jurisdiction of the U.S. District Court sitting in the Southern District of the State of New York sitting in Manhattan in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if the other party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to 11 the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. 18. Headings. Cross reference pages and headings contained herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 19. Counterparts. This Agreement may be executed by each party upon a separate copy, and in such case one counterpart of this Agreement shall consist of enough of such copies to reflect the signatures of all of the parties. This Agreement may be executed in two or more counterparts, each of which shall be an original, and each of which shall constitute one and the same agreement. Any party may deliver an executed copy of this Agreement and of any documents contemplated hereby by facsimile transmission to another party and such delivery shall have the same force and effect as any other delivery of a manually signed copy of this Agreement or of such other documents. 12 DULY EXECUTED and delivered by the parties on the date first written above. SPATIALIZER AUDIO LABORATORIES, INC. By: /s/ Henry R. Mandell ---------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer CPR (USA) INC. By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Managing Director LIBERTYVIEW FUNDS, L.P. By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Authorized Signatory LIBERTYVIEW FUND, LLC By: /s/ Steven S. Rogers ------------------------------------ Name: Steven S. Rogers Title: Authorized Signatory 13 ATTACHMENT A Description of Collateral The Collateral consists of all Assets (as such term is defined in Section 1(a) of this Agreement) of the Debtor. 14 EX-4.15 6 FORM OF COMMON STOCK SUBSCRIPTION AGREEMENT Bank Insinger de Beaufort THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT Spatializer Audio Laboratories, Inc. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by any authoritative source acceptable to the Company. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. In connection with this transaction, the parties agree that the Company shall pay a finder's fee to Bristol Capital, LLC, pursuant to the Finder's Fee Agreement between the Company and Bristol Capital, LLC dated as of December 27, 1999. Section 2. Representations and Warranties of Subscriber. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 3 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; 4 (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" 5 (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 promulgated by the SEC under the Act is not presently available to exempt the sale of the Securities from the registration requirements of the Act. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. Section 3. Representations and Warranties of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) 6 of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the 7 Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the conversion or exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted in the Reports. To the Company's knowledge, and except as 8 disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company 9 shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. Section 4. Covenants of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days 10 after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer Section 5. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. Section 6. Indemnification. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 7. Registration or Exemption Requirements. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such 11 registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. Section 8. Legend. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 9. Closing Date. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. Section 10. Conditions to the Company's Obligation to Sell. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally 12 permitted by all laws and regulations to which Subscriber and the Company are subject. Section 11. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. Section 12. Miscellaneous. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly 13 available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. 12.9 Restriction on Trading Prior to Exercise of Warrants. Subscriber hereby agrees that, during the ten (10) trading days immediately preceding any exercise of its right to purchase Common Stock under the Warrant, it shall not, whether directly or indirectly, engage in any short sales of any shares of capital stock of the Company. Subscriber hereby agrees that it shall not be entitled to exercise its rights under the Warrant until ten (10) consecutive trading days have elapsed during which Subscriber has not engaged in any transaction prohibited by this Section 12.9. [Remainder of Page Intentionally Left Blank] 14 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer Subscriber: BANK INSINGER DE BEAUFORT, a Netherlands bank By: /s/ R. Mooij ----------------------------------------- Name: R. Mooij Title: Director Executed this 29th day of December, 1999. 15 SCHEDULE A Subscriber Number of Shares Number Name and Address Purchase Price of Common Stock of Warrants - ---------------- -------------- --------------- ----------- BANK INSINGER DE BEAUFORT US $250,000 448,632 500,000 Herengracht 551 1017 BW Amsterdam The Netherlands SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. EXHIBIT A Stock Purchase Warrant Bank Insigner de Beaufort THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of Spatializer Audio Laboratories, Inc. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, BANK INSINGER DE BEAUFORT, a Netherlands Bank (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Agreement and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Bank Insigner de Beaufort Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except as follows: (i) to a person who, in the opinion of counsel to the Company, is a person to whom the Warrant Shares may legally be transferred without registration and without the delivery of a current prospectus under the Act with respect thereto, and then only against receipt of the written agreement of such person to comply with the provisions of this Section 6(a) with respect to any resale or other disposition of such securities; or (ii) to any person upon the effectiveness of the Company's Registration Statement on Form S-3 to be filed pursuant to that certain Registration Rights Agreement (the "Registration Rights Agreement"), dated of even date herewith, between the Company and the Investor. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable 2 Bank Insigner de Beaufort state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or would have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (b) The Investor shall be granted registration rights for the Warrant Shares pursuant to the Registration Rights Agreement. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 Bank Insigner de Beaufort Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. 4 (b) Governing Law; Jurisdiction. This Warrant shall be binding upon any successors or assigns of the parties hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law principles or rules. The Company consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. The Company hereby agrees that if Investor obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the Company, and the Company hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. The Company irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. (c) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (d) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (e) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. (f) Legal Costs and Fees. In any action to enforce the provisions of this Warrant, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] 5 Bank Insigner de Beaufort IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By:___________________________________ Name: Henry R. Mandell Title: Interim Chief Executive Officer 6 Bank Insigner de Beaufort NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ BANK INSINGER DE BEAUFORT By:______________________________________ Name:____________________________________ Title:___________________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 EXHIBIT B Registration Rights Agreement Bank Insinger de Beaufort REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated the 29th day of December, 1999, between BANK INSINGER DE BEAUFORT, a Netherlands Bank with an address at Herengracht 551, 1017 BW Amsterdam, The Netherlands (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-eight Thousand Six Hundred Thirty-two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Bank Insinger de Beaufort Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by May 1, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold by Holder pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf, the fees and expenses of any counsel it selects, and such other extraordinary expenses as are necessary to qualify the sale of the Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed by the Company by the thirtieth (30th) day after the Closing Date, or if the Registration Statement is not declared effective by the SEC by April 15, 2000, then the Company will pay, in cash, to the Holder by wire transfer, as liquidated damages for such failure and not as a penalty, two percent (2%) of the Purchase Price (as defined in the Subscription Agreement) per share of Registrable Security each month thereafter until such Registration Statement has been filed and/or declared effective. The liquidated damages shall be payable within five (5) calendar days of written demand by the Holder. 2 Bank Insinger de Beaufort (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 Bank Insinger de Beaufort (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 Bank Insinger de Beaufort final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Amended Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Amended Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 Bank Insinger de Beaufort connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 Bank Insinger de Beaufort expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. Section 12. Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be 7 Bank Insinger de Beaufort considered an original document and which together shall be considered a complete document. This Agreement constitutes the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. Section 16. Legal Costs and Fees. In any action to enforce the provisions of this Agreement, the prevailing party shall be able to collect as damages from the other party, in addition to all other remedies provided by applicable law, the prevailing party's court costs and reasonable attorneys' fees. [Remainder of Page Intentionally Left Blank] Bank Insinger de Beaufort IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: ----------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer WITNESSED: - ------------------------ Margaret G. Graf BANK INSINGER DE BEAUFORT By: ----------------------------------- Name: Title: 8 EX-4.16 7 STOCK SUBSCRIPTION AGREEMENT Romofin AG THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT Spatializer Audio Laboratories, Inc. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing Two Hundred Fifty Thousand U.S. Dollars (US$250,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. Section 2. Representations and Warranties of Subscriber. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and 2 any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer 3 registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; 4 (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale 5 being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. Section 3. Representations and Warranties of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact 6 required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or 7 regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade 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 8 might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 9 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. Section 4. Covenants of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer 10 Section 5. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. Section 6. Indemnification. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 7. Registration or Exemption Requirements. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. Section 8. Legend. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION 11 THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 9. Closing Date. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. Section 10. Conditions to the Company's Obligation to Sell. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. Section 11. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and 12 (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. Section 12. Miscellaneous. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall 13 continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 14 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer Subscriber: ROMOFIN AG By: /s/ B.J. Mosimann ------------------------------------ Name: B.J. Mosimann Title: President Executed this 29th day of December, 1999. 15 SCHEDULE A Subscriber Purchase Number of Shares Number Name and Address Price of Common Stock of Warrants - ---------------- ----- --------------- ----------- ROMOFIN AG US $250,000 448,632 500,000 Burglestrasse 6 8027 Zurich, Switzerland SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. EXHIBIT A Stock Purchase Warrant EXHIBIT B Registration Rights Agreement Romofin, A.G. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 500,000 Shares of Common Stock of Spatializer Audio Laboratories, Inc. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, ROMOFIN, A.G. (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Five Hundred Thousand (500,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of Two Hundred Fifty Thousand United States Dollars (US$250,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for Romofin, A.G. the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 Romofin, A.G. 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 Romofin, A.G. Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 Romofin, A.G. hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ 6 Romofin, A.G. NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ ROMOFIN, A.G. By:_____________________________________ Name:___________________________________ Title:__________________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 Romofin, A.G. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between ROMOFIN, A.G. (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, Four Hundred Forty-Eight Thousand Six Hundred Thirty-Two (448,632) shares of Common Stock, and a Warrant to purchase an aggregate of Five Hundred Thousand (500,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Romofin, A.G. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. 2 Romofin, A.G. (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 Romofin, A.G. (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 Romofin, A.G. final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 Romofin, A.G. connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 Romofin, A.G. expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. 7 Romofin, A.G. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 8 Romofin, A.G. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ WITNESSED: ___________________________________ Margaret G. Graf ROMOFIN, A.G. By:_____________________________________ Name:___________________________________ Title:__________________________________ 9 EX-4.17 8 STOCK SUBSCRIPTION AGREEMENT Arab Commerce Bank THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. COMMON STOCK SUBSCRIPTION AGREEMENT Spatializer Audio Laboratories, Inc. THIS COMMON STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned in connection with the private placement of the Common Stock, $0.01 par value per share (the "Common Stock") of Spatializer Audio Laboratories, Inc. (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, a corporation organized under the laws of Delaware, USA (hereinafter referred to as the "Company"). In addition, the Company will sell to the Subscriber listed on Schedule A annexed hereto ("Subscriber" or "Purchaser"), a warrant (the "Warrant") to purchase Two (2) shares of Common Stock for each One Dollar ($1.00) funded hereunder and shall be exercisable for a period of three (3) years from the Closing Date (as defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Common Stock, Warrant and the Common Stock underlying the Warrant (collectively the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 9 herein. Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with Subscriber, as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and Subscriber will buy, in reliance upon the representations and warranties of the Company and Subscriber contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Common Stock for an aggregate purchase price of One Hundred Thousand U.S. Dollars (US$100,000.00) (the "Aggregate Purchase Price") based on the purchase price per share (the "Purchase Price") defined below. The number of shares of Common Stock to be issued to Subscriber pursuant to this Agreement shall be determined by dividing One Hundred Thousand U.S. Dollars (US$100,000.00) by the Purchase Price, provided, however, that the Company shall not issue to Subscriber a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. 1.2. Purchase Price. The Purchase Price shall be determined on the Closing Date, and shall equal the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to the Closing Date. The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by Bloomberg L.P. 1.3 Form of Payment. Subscriber shall pay the Aggregate Purchase Price by delivering immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date against delivery of the Common Stock and Warrants as payment in full for the Securities. Section 2. Representations and Warranties of Subscriber. Subscriber acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. Subscriber is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's 2 charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: 3 (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of US$5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of US$5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000; (iv) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds US$1,000,000; (vi) Any natural person who had an individual income in excess of US$200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; 4 (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 2.12 Registration Rights. The parties have entered into a Registration Rights Agreement (Exhibit B annexed hereto). 2.13 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. 5 Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.14. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. Section 3. Representations and Warranties of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 3.1 Organization/Qualification. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) 6 months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscriber which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 7 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule B annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 3.9 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except as may be required by applicable securities laws. 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade 8 name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Common Stock and Warrants are outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issuable upon exercise of the Warrants remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscriber shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such 9 transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of Preferred Stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. 3.20 Dilution. The Company is aware and acknowledges that exercise of the Warrant would cause dilution to existing stockholders and could significantly increase the outstanding number of shares of Common Stock. Section 4. Covenants of the Company. For so long as any Securities held by Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscriber to exercise its right to exercise the Warrants by telecopying an executed and completed Notice of Exercise to the Company and delivering the original Notice of Exercise and the original Warrant to the Company by overnight courier. Each business date on which a Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed an "Exercise Date". The Company will transmit the certificates representing shares of Common Stock issuable upon exercise of any Warrants (together with the certificates representing the Warrants not so exercised) to Subscriber via express courier, by electronic transfer or otherwise within three (3) business days after the Exercise Date if the Company has received the original Notice of Exercise and Warrant being exercised by such date. In addition to any other remedies which may be available to Subscriber, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, Subscriber will be entitled to revoke the relevant Notice of Exercise by delivering a notice to such effect to the Company whereupon the Company and Subscriber shall each be restored to their respective positions 10 immediately prior to delivery of such Notice of Exercise. The Notice of Exercise and Warrant representing the portion of the Warrant exercised shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9750 Attn: Henry R. Mandell, Interim Chief Executive Officer Section 5. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscriber forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. Section 6. Indemnification. The Company and Subscriber agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 7. Registration or Exemption Requirements. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 11 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. Section 8. Legend. The certificates representing shares of Common Stock, including shares of Common Stock to be issued upon exercise of the Warrants, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 9. Closing Date. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999, on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. Section 10. Conditions to the Company's Obligation to Sell. Subscriber understands that the Company's obligation to sell the Common Stock and Warrants are conditioned upon: (i) The receipt and acceptance by the Company of this Subscription Agreement and all duly executed Exhibits thereto by an authorized officer of the Company; (ii) Delivery by Subscriber of immediately available funds in United States Dollars by wire transfer to an account designated by the Company prior to the Closing Date as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscriber set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Common Stock, Warrants, and the proposed issuance of the Common Stock underlying the Warrants shall be legally permitted by all laws and regulations to which Subscriber and the Company are subject. 12 Section 11. Conditions to Subscriber's Obligation to Purchase. The Company understands that Subscriber's obligation to purchase the Common Stock and Warrants is conditioned upon: (i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Common Stock and Warrants; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Common Stock and Warrants shall be legally permitted by all laws and regulations to which the Company and Subscriber are subject. Section 12. Miscellaneous. 12.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 12.2 Confidentiality. The Company and Subscriber agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other 13 written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 12.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 12.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 12.6 Reliance by Company. Subscriber represents to the Company that the representations and warranties of Subscriber contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 12.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 12.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. [Remainder of Page Intentionally Left Blank] 14 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer Subscriber: ARAB COMMERCE BANK By: /s/ A. De Nazareth ------------------------------------- Name: A. De Nazareth Title: Co Secretary Executed this 29th day of December, 1999. 15 SCHEDULE A Subscriber Number of Shares Number Name and Address Purchase Price of Common Stock of Warrants - ---------------- -------------- --------------- ----------- Arab Commerce Bank US $100,000 179,453 200,000 [address] SCHEDULE B 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. EXHIBIT A Stock Purchase Warrant EXHIBIT B Registration Rights Agreement Arab Commerce Bank THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. STOCK PURCHASE WARRANT To Purchase 200,000 Shares of Common Stock of Spatializer Audio Laboratories, Inc. THIS STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, ARAB COMMERCE BANK (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time after the date hereof and on or prior to December 31, 2002 (the "Termination Date") but not thereafter, to subscribe for and purchase from SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), Two Hundred Thousand (200,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be Sixty-Seven United States Cents (US$0.67). The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Common Stock Subscription Agreement (the "Agreement"), dated as of December 29, 1999, in the amount of One Hundred Thousand United States Dollars (US$100,000) between the Company and the Investor and is subject to its terms. Capitalized terms not otherwise defined herein shall have that meaning as set forth in the Agreement. In the event of any conflict between the terms of this Warrant and the Agreement, the Agreement shall control. 1. Title of Warrant. This Warrant shall be issued in the name of the Investor. This Warrant is not transferable. 2. Authorization of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times one day after the date hereof, in whole or in part, before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in Section 12 below, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Investor at the address of the Investor appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased; whereupon the Investor shall be entitled to receive a certificate for Arab Commerce Bank the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the Investor within five business days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price of the shares may be by certified check or cashier's check or by wire transfer to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Investor for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Investor. 6. Restrictions on Transfer of Warrant Shares. (a) Warrant Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed of except in accordance with applicable federal and state securities laws. (b) Unless the Warrant Shares have been registered under the Act, or are exempt from registration, upon exercise of the Warrant or any portion thereof and the issuance of any Warrant Shares, all certificates representing Warrant Shares shall bear on the face thereof substantially the following legend: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The Investor agrees and acknowledges that this Warrant is being purchased for its own account, for investment purposes only, and not for the account of any other person, and not with a view to distribution, assignment, pledge or resale to others or to fractionalization in whole or in part. The Investor further represents, warrants and agrees as follows: no other person has or will have a direct or indirect beneficial interest in this Warrant and the Investor will not sell, hypothecate or otherwise transfer the Warrant except in accordance with the Act thereunder and applicable state securities laws or unless, in the opinion of counsel for the Investor acceptable to the Company, an exemption from the registration requirements of the Act and such laws is available. 7. Closing of Books. The Company will at no time close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant. 2 Arab Commerce Bank 8. No Rights as Stockholder until Exercise. This Warrant does not entitle the Investor to any voting rights or other rights as a stockholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase of Warrant Shares the Investor shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to the Investor as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Effect of Certain Events. (a) If at any time the Company proposes to sell or otherwise convey all or substantially all of its assets, a sale in which the consideration to be received by the Company or its stockholders consists solely of cash, the Company shall give the Investor thirty (30) days' notice of the proposed effective date of the transaction specifying that the Warrant shall terminate if the Warrant has not been exercised by the effective date of the transaction. (b) In case the Company shall at any time effect any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity, or other property, the Investor shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. (c) The Investor shall be granted registration rights for the Warrant Shares pursuant to a Registration Rights Agreement dated of even date herewith. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: In case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of 3 Arab Commerce Bank Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then, in such events, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Investor shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. An adjustment made pursuant to this Section 12 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 13. Voluntary Adjustment by the Company. The Company may at its discretion, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Investor notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Investor hereby acknowledges that, as of the Closing Date (as defined in the Agreement), the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company covenants that, after such time as it has increased the number of authorized shares of Common Stock and for the remainder of the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any rights under this Warrant. Subject to the foregoing, the Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of the Company's Common Stock upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin Board or any domestic securities exchange upon which the Common Stock may be listed. 16. Miscellaneous. (a) Issue Date; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the parties 4 Arab Commerce Bank hereto. This Warrant shall constitute a contract under the laws and jurisdiction of California and for all purposes shall be construed in accordance with and governed by the laws of said state without regard to its conflict of law, principles or rules. (b) Restrictions. The Investor acknowledges that the Common Stock acquired upon the exercise of this Warrant, if not registered, may have restrictions upon its resale imposed by state and federal securities laws. (c) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. [Remainder of Page Intentionally Left Blank] 5 Arab Commerce Bank IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated as of: December 29, 1999 SPATIALIZER AUDIO LABORATORIES, INC. By:____________________________________ Name:__________________________________ Title:_________________________________ 6 Arab Commerce Bank NOTICE OF EXERCISE To: Spatializer Audio Laboratories, Inc. (1) The undersigned hereby elects to purchase _________________ shares of Common Stock of Spatializer Audio Laboratories, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned. Dated:___________________ ARAB COMMERCE BANK By:____________________________________ Name:__________________________________ Title:_________________________________ NOTE: Signature must conform in all respects to holder's name as specified on the face of the attached warrant. 7 Arab Commerce Bank REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 29th day of December, 1999, between ARAB COMMERCE BANK (the "Holder"), and SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation having its principal place of business at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder is purchasing from the Company, pursuant to that certain Common Stock Subscription Agreement (the "Subscription Agreement"), dated of even date herewith, One Hundred Seventy-Nine Thousand Four Hundred Fifty-Three (179,453) shares of Common Stock, and a Warrant to purchase an aggregate of Two Hundred Thousand (200,000) shares of Common Stock. The shares of Common Stock of the Company underlying the Warrants acquired by the Holder or the other purchasers are referred to as the "Warrant Shares" (capitalized terms defined in the Subscription Agreement and not otherwise defined herein have the meanings specified in the Subscription Agreement); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Securities" means the shares of Common Stock subscribed for and purchased by the Holder pursuant to the Subscription Agreement, and the Warrant Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Act") and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Registrable Securities may be made by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made or (ii) a registration statement under the Act is then in effect with respect thereto. Arab Commerce Bank Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission (the "SEC"), within thirty (30) days after the date hereof, a registration statement on Form S-3 or if the Company is not eligible to use such Form S-3, another appropriate form of registration statement (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of Holder's Registrable Securities, so as to permit resale of the Registrable Securities under the Act. The Company agrees that it will cause the Registration Statement to become effective by April 15, 2000. The number of securities to be registered shall include all of Holder's Registrable Securities. (b) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 3 hereof current under Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) three (3) years after the effective date of the Registration Statement (the "Effective Date"). (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the costs of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered on its behalf and all of the other fees and expenses of such registration, including of its counsel and such other expenses as are necessary to qualify the sale of Registrable Securities in compliance with any state Blue Sky laws. The Company shall use its best efforts to qualify any of the securities for sale in such states as the Holder reasonably designates and shall furnish indemnification in the manner provided in Section 9 hereof. However, the Company shall not be required to qualify the Registrable Securities in any state or jurisdiction which will require an escrow or other restriction relating to the Company and/or the sellers, or where the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such state or jurisdiction. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder. (d) The Company shall not be required by this Section 3 to include Holder's Registrable Securities in the Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company), the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not restricted securities, as defined in Rule 144 under the Act. 2 Arab Commerce Bank (e) No provision contained herein shall preclude the Company from selling securities pursuant to any registration statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. Cooperation with Company. Holder will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. Whenever the Company is required by the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective as per Section 3(b) herein and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement when the Holder of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 under the Act); (b) furnish to the Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by the Holder; provided, however, that: (i) the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process, and (ii) the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5(c) in any jurisdiction in which the Company would be required to qualify as a dealer in securities under the securities or blue sky laws of such jurisdiction. (d) list such securities on the OTC Bulletin Board or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; 3 Arab Commerce Bank (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Assignment. The rights granted the Holder under this Agreement shall not be assigned. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 7. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to the Holder upon the occurrence of any of the following: (a) all of the Holder's securities subject to this Agreement have been registered; (b) such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Act; (c) such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k). Section 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls Holder within the meaning of the Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, preliminary prospectus, 4 Arab Commerce Bank final prospectus, offering circular, notification or amendment, or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This Section shall not inure to the benefit of any Distributing Holder with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Distributing Holder failed to send or give (in violation of the Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in the Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Distributing Holder was obligated to do so under the Act or the rules and regulations promulgated hereunder. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement prepared by the Company, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in 5 Arab Commerce Bank connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 9. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) the Distributing Holder, or the Company, makes a claim for indemnification, but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Agreement provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Distributing Holder, or the Company, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other 6 Arab Commerce Bank expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 10. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its address set forth herein. (b) If to the Company, at the address set forth herein, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. Section 11. "Piggy-Back" Registration. The Holder shall have the right to include the Registrable Securities as part of any registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8) and must be notified in writing of such filing; provided, however, that the Holder agrees it shall not have any piggy-back registration rights pursuant to this Section if the Registrable Securities may be sold in the United States pursuant to the provisions of Rule 144. The Holder shall have five (5) business days to notify the Company in writing as to whether the Company is to include the Holder or not include the Holder as part of the registration; provided, however, that if any registration pursuant to this Section shall be underwritten, in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If in the good faith judgment of the underwriter evidenced in writing of such offering only a limited number of Registrable Securities should be included in such offering, or no such shares should be included, the holder, and all other selling stockholders, shall be limited to registering such proportion of their respective shares as shall equal the proportion that the number of shares of selling stockholders permitted to be registered by the underwriter in such offering bears to the total number of all shares then held by all selling stockholders desiring to participate in such offering. Those Registrable Securities which are excluded from an underwritten offering pursuant to the foregoing provisions of this Section (and all other Registrable Securities) shall be withheld from the market by the holders thereof for a period, not to exceed one hundred eighty (180) days, which the underwriter may reasonably determine is necessary in order to effect such underwritten offering. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration. All registration expenses incurred by the Company in complying with this Section shall be paid by the Company, exclusive of underwriting discounts, commissions and legal fees and expenses for counsel to the Holder. 7 Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law, Venue. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Section 15. Severability/Defined Terms. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. Terms not otherwise defined herein shall be defined in accordance with the Subscription Agreement. [Remainder of Page Intentionally Left Blank] 8 Arab Commerce Bank IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ WITNESSED: ______________________ Margaret G. Graf ARAB COMMERCE BANK By:_____________________________________ Name:___________________________________ Title:__________________________________ 9 EX-4.18 9 STOCK SUBSCRIPTION AGREEMENT THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. 10% CONVERTIBLE SERIES B PREFERRED STOCK SUBSCRIPTION AGREEMENT Spatializer Audio Laboratories, Inc. THIS 10% CONVERTIBLE SERIES B PREFERRED STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act"). This Agreement has been executed by the undersigned parties in connection with the private placement of the 10% Convertible Series B Preferred Stock, $0.01 par value per share (the "Preferred Stock") of Spatializer Audio Laboratories, Inc., a corporation organized under the laws of Delaware, USA (OTC Bulletin Board symbol "SPAZ"), located at 20700 Ventura Boulevard, Suite 140, Woodland Hills, California 91364, (hereinafter referred to as the "Company") to the Subscribers listed on Schedule A annexed hereto (each a "Subscriber" or "Purchaser"). The terms on which the Preferred Stock may be converted into common stock of the Company, par value $0.01 per share (the "Common Stock") and the other terms of the Preferred Stock are set forth in the Certificate of Designation of the 10% Convertible Series B Preferred Stock (Exhibit A annexed hereto). This Subscription and, if accepted by the Company, the offer and sale of the Preferred Stock (sometimes referred to as the "Securities"), are being made in reliance upon the provisions of Regulation D under the Act. The Closing Date shall be determined in accordance with Section 11 herein. Each Subscriber hereby represents and warrants to and agrees with the Company, and the Company hereby represents and warrants to and agrees with each Subscriber, as follows: Section 1. Agreement to Subscribe; Purchase Price. 1.1 Closing. The Company will sell and each Subscriber will buy, in reliance upon the representations and warranties of the Company and the Subscribers contained in this Agreement, upon the terms and conditions hereinafter set forth, shares of Preferred Stock as set forth on Schedule A. 1.2 Cancellation of Existing Indebtedness. As of December 29, 1999, the Company owes that amount of outstanding principal and accrued interest thereon (the "Existing Indebtedness") as conclusively indicated for each Subscriber on Schedule B annexed hereto pursuant to those notes and agreements listed on Schedule B. The consideration for the issuance of shares of Preferred Stock to the Subscribers shall be the cancellation of the entire amount of Existing Indebtedness owed to the Subscribers. The Subscribers and the Company hereby agree that, upon the issuance of the Preferred Stock to the Subscribers in accordance with Schedule A, all Existing Indebtedness is completely extinguished, and that all obligations of the Company with respect to the Existing Indebtedness are completely satisfied and discharged. This Agreement constitutes the entire understanding of the Company and the Subscribers with respect to the Existing Indebtedness, and completely replaces and supercedes all prior notes, letters, communications, understandings, certificates, instruments, documents, and agreements, both oral and written, that evidence or relate to any portion of the Existing Indebtedness, including without limitation those notes, agreements and understandings listed on Schedule B. All written documents that evidence or relate to any portion of the Existing Indebtedness shall be null and void and of no force or effect. Subscribers shall return any original copies of such documentation to the Company for cancellation. 1.3 Number of Shares. The number of shares of Preferred Stock to be issued to each Subscriber was determined by dividing (i) that portion of the Existing Indebtedness owed to such Subscriber as of December 29, 1999 (as set forth on Schedule B), by (ii) Ten Dollars (US$10.00); provided, however, that the Company shall not issue to any Subscriber a fraction of a share of Preferred Stock and shall instead round the number of shares of Preferred Stock issued up to the next whole share of Preferred Stock. 1.4 Dividends. Dividends will accrue and be paid at the rate of ten (10%) percent per annum on the Preferred Stock until the Preferred Stock has been converted, and all accrued dividends thereon shall be payable in Common Stock of the Company or in cash at the time of conversion at the option of the Company. For purposes of calculating dividends, each share of Preferred Stock shall be deemed to have a face value of Ten Dollars (US$10.00). Section 2. Representations and Warranties of Subscriber. Each Subscriber hereby acknowledges, represents, warrants and agrees as follows: 2.1 Organization and Authorization. If not an individual, it is duly incorporated or organized and is validly existing in the state or country of its incorporation or organization and has 2 all requisite power and authority to purchase and hold the Securities. The decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and require no other proceedings on the part of Subscriber. The undersigned has all right, power and authority to execute and deliver this Agreement. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligation of Subscriber, enforceable against Subscriber in accordance with its terms. 2.2 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to a loss of a material benefit with respect to, any provision of Subscriber's charter, bylaws, partnership agreement, operating agreement or other organizational document and any amendments thereto, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to Subscriber. 2.3 Evaluation of Risks. Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. Subscriber recognizes that its investment in the Company involves a high degree of risk and it can afford the complete loss of its investment. 2.4 Independent Counsel. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. 2.5 Disclosure Documentation. Subscriber has received and reviewed copies of the Company's reports filed under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs, 8-Ks, and registration statements, filed by the Company since March 1, 1998 (collectively, the "Reports"). Except for the Reports and this Agreement, Subscriber acknowledges that it is not relying on any other information relating to the offer and sale of the Securities. Subscriber acknowledges that the Company has offered to make available any additional public information that any Subscriber may reasonably request, including technical information, and other material information about the Company. Subscriber acknowledges that the Company has offered its full and unconditional cooperation in making such information available to Subscriber, and that the Company has recommended that Subscriber request and review such information prior to making an investment decision. 2.6 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of Subscriber. 3 2.7 This Agreement and Reports Constitute Sole Representations. Except for the delivery of the Reports and this Agreement, no oral or written representations or warranties have been made, or oral or written information furnished, to Subscriber or its advisors, if any, with respect to the offer and sale of the Securities by the Company, any agent, employee or affiliate of the Company, or by any other person. Subscriber acknowledges that in entering into this transaction Subscriber is not relying upon any information, other than that contained in the Reports, this Agreement and the results of independent investigation, if any, by Subscriber. 2.8 Subscriber is an Accredited Investor. Subscriber is an "Accredited Investor" as defined below and represents and warrants it is included within one or more of the following categories of Accredited Investors: (i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan associated or other institution as defined in Section 3(a)(5)A of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the 1934 Act; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivision, for the benefits of its employees if such plan has total assets in excess of $5,000,000; and employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (ii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iii) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; (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; 4 (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching that same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 230.506(b)(2)(ii) of Regulation D under the Act; (viii) Any entity in which all of the equity owners are accredited investors; (ix) Any self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors within the meaning of Rule 501 of Regulation D promulgated under the Act; or (x) Any private investment company with assets under management in excess of US$________________________. 2.9 No Registration, Review or Approval. Subscriber acknowledges and understands that the limited private offering and sale of Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Subscriber set forth herein in order to determine the applicability of such exemptions and the suitability of Subscriber to acquire the Securities. 2.10 Investment Intent. Without limiting its ability to resell the Securities pursuant to an effective registration statement, Subscriber is acquiring the Securities solely for its own account and not with a view to the distribution, assignment or resale to others. Subscriber understands and agrees that it may bear the economic risk of its investment in the Securities for an indefinite period of time. 2.11 No Advertisements. Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. 5 2.12 Restricted Securities. Subscriber hereby confirms that it has been informed that the Securities will be, when issued, restricted securities under the Act and may not be resold or transferred unless first registered under the federal securities laws or unless an exemption from such registration is available with respect to a resale in the United States or in an "offshore transaction" (as such term is defined in Regulations S under the Act). Accordingly, Subscriber hereby acknowledges that it is prepared to hold the Securities for an indefinite period. Subscriber is aware that Rule 144 promulgated by the SEC under the Act is not presently available to exempt the sale of the Securities from the registration requirements of the Act. Subscriber is aware that Rule 144 and Regulation S, promulgated under the Act, permit limited public resales of securities acquired in non-public offerings, subject to the satisfaction of certain conditions. Subscriber understands that under Rule 144 the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not fewer than one (1) year or two (2) years, as applicable, after the party has purchased and paid for the securities to be sold, the sale being through a broker in an unsolicited "broker's transaction" and the amount of securities being sold during any three-month period not exceeding specified volume limitations. Subscriber acknowledges and understands that the Company may not be satisfying the current public information requirement of Rule 144 at the time Subscriber wishes to sell the Securities, or other conditions under Rule 144 which are required of the Company. Subscriber understands that Regulation S, as currently in effect, allows resales in private and public transactions in certain circumstances, only in qualified offshore transactions and only when certain holding periods of at least one (1) year have been fulfilled. Subscriber understands that he or she may be precluded from selling any of the Securities under Rule 144 or Regulation S even if the holding periods have been satisfied either because the other conditions may not have been fulfilled or because markets for resales do not exist. Prior to its acquisition of the Securities, Subscriber acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such knowledge and experience in financial and business matters as to make it capable of utilizing said information to evaluate the risks of the prospective investment and to make an informed investment decision. 2.13. Authorized Shares. Subscriber hereby acknowledges that, as of the Closing Date, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. Subscriber understands that the Company is currently taking steps to increase the number of authorized shares of Common Stock. Section 3. Representations and Warranties of the Company. For so long as any shares of Preferred Stock held by any Subscriber remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: 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 6 its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such status on a timely basis. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is listed and trades on the OTC Bulletin Board. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities (or for such shorter period that the Company has been required to file such material). 3.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding the Closing Date, to the Company's knowledge: (i) none of the Company's filings with the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and (ii) the Company has timely (after giving effect to any filings on Form 12b-25) filed all requisite forms, reports and exhibits thereto with the SEC. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to Subscribers which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 3.4 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Company, the authorization, sale, issuance and delivery of the Securities and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Securities will be validly issued, fully paid and non-assessable and will be free of any liens or encumbrances; provided, however, that the Securities are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Securities will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. 3.5 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation or acceleration of any 7 material obligation or to a loss of a material benefit with respect to, any provision of the Company's Certificate of Incorporation and any amendments thereto, Bylaws, or any material mortgage, deed of trust, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, which would have a material adverse effect on the Company's business and financial condition. 3.6 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the ordinary course of the Company's business since December 31, 1998, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstance has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.7 No Default. Except as set forth in this Agreement, the Reports or on Schedule C annexed hereto, The Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement, including the conversion or exercise provision of the Securities, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Certificate of Incorporation or Bylaws of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.8 Absence of Events of Default. Except as set forth in this Agreement, the Reports or on Schedule C annexed hereto, no default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become a default, has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. 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. 8 3.10 Intellectual Property Rights. Except as disclosed in the Reports, the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted in the Reports. To the Company's knowledge, and except as disclosed in the Reports, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the business or financial condition of the Company. 3.11 Material Contracts. Except as set forth in the Reports, the agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, and the Company is not in material breach or material default under any of such agreements. 3.12 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 3.13 Title to Assets. Except as set forth in Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.14 Subsidiaries. Except as disclosed in the Reports, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.15 Required Governmental Permits. The Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.16 Listing. The Company will use its best efforts to maintain the listing of its Common Stock on the OTC Bulletin Board or another organized United States market or quotation system. The Company has not received any notice, oral or written, regarding continued listing and, as long as the Preferred Stock is outstanding, the Company will take no action which would impact their continued listing or eligibility of the Company for such listing. 3.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in the Reports, the Company has no outstanding restricted shares, or shares of Common Stock sold under Regulation S, Regulation D or outstanding under any other exemption from registration, which are available for sale as unrestricted ("free trading") stock. 9 3.18 Registration Alternative. The Company covenants and agrees that for so long as any of the Common Stock issued upon conversion of the Preferred Stock remain outstanding and continue to be "restricted securities" within the meaning of Rule 144 under the Act, the Company shall permit resales of the underlying Common Stock pursuant to Rule 144 under the Act. The Company and Subscribers shall provide the Company's transfer agent any and all papers necessary to complete the transfer under Rule 144, including, but not limited to, opinions of counsel to such transfer agent, and the Company shall continue to file all material required to be filed pursuant to Sections 13(a) or 15(d) of the 1934 Act. 3.19 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.01 par value per share, of which 43,033,477 shares were outstanding as of December 14, 1999, and 1,000,000 shares of preferred stock, $0.01 par value per share, none of which are outstanding as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. Section 4. Covenants of the Company. For so long as any shares of Preferred Stock held by Subscribers remain outstanding, the Company acknowledges, represents, warrants and agrees as follows: (i) The Company shall use its best efforts to reserve, prior to February 15, 2000, a sufficient number of shares of Common Stock from its authorized but unissued shares of Common Stock to permit the exercise in full of all of the outstanding Warrants. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. (ii) It will maintain the listing of its Common Stock on the OTC Bulletin Board. (iii) It will permit Subscribers to exercise its right to convert the Preferred Stock by telecopying an executed and completed Notice of Conversion (in the form of Exhibit B annexed hereto) to the Company and delivering the original Notice of Conversion and the certificates representing the Preferred Stock to the Company by overnight courier. Each business date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company will transmit the certificates representing shares of Common Stock issuable upon conversion of any Preferred Stock (together with the certificates representing the Preferred Stock not so converted) to the Subscriber via overnight courier, by electronic transfer or otherwise within three (3) business days after the Conversion Date if the Company has received the original Notice of Conversion and Preferred Stock Certificate being converted by such date. In addition to any other remedies which may be available to Subscribers, in the event that the Company fails to effect delivery of such shares of Common Stock within such three (3) business day period, the Subscriber will 10 be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Subscriber shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. The Notice of Conversion and Preferred Stock representing the portion of the Preferred Stock converted shall be delivered as follows: If to the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 140 Woodland Hills, CA 91364-2357 Fax: (818) 227-9751 Attn: Henry R. Mandell, Interim Chief Executive Officer If to Subscribers, at the respective addresses set forth on Schedule A. Section 5. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Act or the 1934 Act; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; (iii) furnish to Subscribers forthwith, upon request, a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Act and the 1934 Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as any Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscribers to sell any such Securities without registration. Section 6. Indemnification. The Company and Subscribers agree to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) which the other may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. Section 7. Restrictions on Conversion of Preferred Stock. Subscribers acknowledge 11 that any shares of Preferred Stock issued to it hereunder shall not be convertible into shares of Common Stock at any time prior to one year after the Closing Date. Section 8. Mandatory Conversion. In the event the Preferred Stock has not been converted three (3) years from the Closing Date, at that time the Preferred Stock shall be automatically converted (and all dividends owed thereon shall be paid by the Company) as if Subscribers voluntarily elected such conversion in accordance with the procedure, terms and conditions set forth in this Agreement. Section 9. Registration or Exemption Requirements. Subscribers acknowledge and understand that the Securities may not be resold or otherwise transferred except in a transaction registered under the Act and any applicable state securities laws, or unless an exemption from such registration is available. Subscribers understand that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. Section 10. Legend. The certificates representing the Securities, including shares of Common Stock to be issued upon conversion of the Preferred Stock, shall bear a legend restricting transfer under the Act, such legend to be substantially as follows: THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY. The certificates representing these Securities, and each certificate issued in transfer thereof, will also bear any legend required under any applicable state securities law. Section 11. Closing Date. The Closing Date hereunder shall be December 29, 1999, or such earlier date on or before December 31, 1999 on which the terms and conditions hereof are satisfied (the "Closing Date"), and all acts, deliveries and confirmations comprising the Closing Date regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously, and such acts, deliveries, or confirmations shall not be effective unless and until the last of same shall have occurred, and as shall be mutually agreed upon as to time and place. Section 12. Conditions to the Company's Obligation to Sell. Subscribers understand that the Company's obligation to sell the Preferred Stock is conditioned upon: 12 (i) The receipt and acceptance by the Company of this Subscription Agreement and all Exhibits thereto, duly executed by the Subscribers; (ii) Delivery by Subscribers of the all written documentation evidencing or relating to the Existing Indebtedness for cancellation as payment in full for the purchase of the Securities; (iii) All representations and warranties of Subscribers set forth in this Agreement shall remain true and correct as of the Closing Date; and (iv) The sale and issuance of the Preferred Stock shall be legally permitted by all laws and regulations to which Subscribers and the Company are subject. Section 13. Conditions to Subscribers' Obligation to Purchase. The Company understands that Subscribers' obligation to purchase the Preferred Stock is conditioned upon: (i) Acceptance by Subscribers of a satisfactory Subscription Agreement and all duly executed Exhibits hereto for the sale of the Securities; (ii) Delivery of the original Preferred Stock; (iii) All representations and warranties of the Company contained herein shall remain true and correct as of the Closing Dates; and (iv) At the Closing Date, the sale and issuance of the Preferred Stock shall be legally permitted by all laws and regulations to which the Company and Subscribers are subject. Section 14. Miscellaneous. 14.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of California except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the State of California or the state courts of the State of California in connection with any dispute arising under this Agreement 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. 13 14.2 Confidentiality. The Company and Subscribers agree to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party, except information publicly available or in such party's domain prior to the date hereof, and except as required by court order and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information, without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herewith. 14.3 Facsimile/Counterparts. Except as otherwise stated herein, in lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. 14.4 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 14.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire agreement between Subscribers and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by all parties. 14.6 Reliance by Company. Each Subscriber represents to the Company that its representations and warranties contained herein are complete and accurate and may be relied upon by the Company in determining the availability of an exemption from registration under federal and state securities laws in connection with a private offering of securities. 14.7 Legal Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. 14.8 Authorization. Each of the parties hereto represents that the individual executing this Agreement on its behalf has been duly and appropriately authorized to execute the Agreement. 14.9 Restriction on Trading. Each Subscriber hereby agrees that, during the ten (10) trading days immediately preceding any Conversion Date (as defined in the New Note) and the ten (10) trading days immediately following the issuance of Common Stock in respect of such conversion, it shall not, whether directly or indirectly: (i) buy or sell, or make or accept any offer to buy or sell, any shares of capital stock of the Company; or (ii) buy or sell, or make or accept any offer 14 to buy or sell, any derivative security based on or relating to any capital stock of the Company (including without limitation options to buy or sell shares of capital stock of the Company). Each Subscriber hereby further agrees not to engage in any short sales of any shares of capital stock of the Company for so long as any of its shares of Preferred Stock remain issued and outstanding. No Subscriber shall be entitled to convert its Preferred Stock into Common Stock until ten (10) consecutive trading days have elapsed during which it has not engaged in any of the transactions prohibited by this Section 14.9. [Remainder of Page Intentionally Left Blank] 15 IN WITNESS WHEREOF, this Agreement was duly executed on and as of the date first written below. Agreed to and Accepted on this 29th day of December, 1999: SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation By: /s/ Henry R. Mandell ---------------------------------- Name: Henry R. Mandell Title: Interim Chief Executive Officer CLARION FINANZ, A.G., a Swiss corporation By: /s/ Carlo Civelli ------------------------------------ Name: Carlo Civelli Title: Director /s/ Carlo Ciuelli ---------------------------------------- CARLO CIVELLI, an individual /s/ Henry R. Mandell ---------------------------------------- HENRY R. MANDELL, an individual /s/ James D. Pace ---------------------------------------- JAMES D. PACE, an individual 16 ________________________________________ JEROLD H. RUBINSTEIN, an individual ________________________________________ GILBERT N. SEGEL, an individual ATON SELECT FUND, LTD., a Swiss corporation By: /s/ Jan Barcinowshi ------------------------------------ Name: Jan Barcinowshi Title: Director ROMOFIN A.G., a Swiss corporation By: /s/ B.J. Mosimann ------------------------------------ Name: B.J. Mosimann Title: President 17 SCHEDULE A
Number of Shares Subscriber Address of Preferred Stock - ---------- ------- ------------------ Clarion Finanz, A.G., a Swiss Seefeldstrasse 214 76,651 corporation 8034, Zurich, Switzerland Carlo Civelli, an individual Seefeldstrasse 214 8,259 8034, Zurich, Switzerland Henry R. Mandell, an individual 20700 Ventura Boulevard, 551 Suite 140 Woodland Hills, CA 91364 James D. Pace, an individual 551 Jerold H. Rubinstein, an individual 551 Gilbert N. Segel, an individual 550 Aton Select Fund, Ltd., Seefeldstrasse 214 5,336 a Swiss corporation 8034, Zurich, Switzerland Romofin A.G., a Swiss corporation Seefeldstrasse 214 10,518 8034, Zurich, Switzerland ====== Total: 102,967
SCHEDULE B
Existing Note, Letter or Other Agreement Indebtedness Subscriber Regarding Existing Indebtedness As of December 29, 1999 - ---------- ------------------------------- ----------------------- Clarion Finanz, A.G., Nonnegotiable Unsecured Promissory Note, $ 766,506.85 Swiss corporation issued on April 14, 1998, in the original principal amount of $650,000. Carlo Civelli, an Nonnegotiable Secured Promissory Note, $ 82,582.19 individual issued on December 14, 1998 (participant in the original principal amount of $75,000). Henry R. Mandell, an Nonnegotiable Secured Promissory Note, $ 5,508.22 individual issued on December 14, 1998 (participant in the original principal amount of $5,000). James D. Pace, an Nonnegotiable Secured Promissory Note, $ 5,508.22 individual issued on December 14, 1998 (participant in the original principal amount of $5,000). Jerold H. Rubinstein, Nonnegotiable Secured Promissory Note, $ 5,508.22 an individual issued on December 14, 1998 (participant in the original principal amount of $5,000). Gilbert N. Segel, an Nonnegotiable Secured Promissory Note, $ 5,498.63 individual issued on December 14, 1998 (participant in the original principal amount of $5,000). Aton Select Fund, ________________________________ in the $ 53,356.16 Ltd., a Swiss original principal amount of $50,000. corporation Romofin A.G., a Swiss ________________________________ in the $ 105,178.08 corporation original principal amount of $100,000. ============== Total: $ 1,029,646.57
SCHEDULE C 1. The Company has failed to pay at the stated maturity on December 31, 1998, the principal and accrued interest due under that certain Nonnegotiable Unsecured Promissory Note, issued April 14, 1998, by the Company to Clarion Finanz, A.G. in the original principal amount of US$650,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. 2. The Company has failed to pay at the stated maturity on November 30, 1999, the principal and accrued interest due under that certain Nonnegotiable Secured Promissory Note, issued December 14, 1998, by the Company to Carlo Civelli and certain officers and directors of the Company in the original principal amount of US$95,000.00. This note is being restructured on or before January 1, 2000, by agreement between the parties. EXHIBIT A Certificate of Designation of the 10% Convertible Series B Preferred Stock CERTIFICATE OF DESIGNATION OF SERIES B 10% REDEEMABLE CONVERTIBLE PREFERRED STOCK OF SPATIALIZER AUDIO LABORATORIES, INC. Pursuant to Section 151 of the General Corporation Law ("GCL") of the State of Delaware, and the Bylaws of SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), we the undersigned, being President and Secretary, respectively, DO HEREBY CERTIFY, that the following resolution was duly adopted by the Board of Directors on December 24, 1999: RESOLVED, that pursuant to the authority conferred upon the Board of Directors by the Company's Certificate of Incorporation and Bylaws, the Board of Directors hereby provides for the issuance of a series of Preferred Stock of the Company consisting of 150,000 authorized shares which shall have the voting powers, designations, preferences and relative participating, optional or other rights, if any, and the qualifications, limitations, or restrictions, set forth in such Certificate of Incorporation, and in addition thereto, the following: Section 1. Designation and Amount. The series of Preferred Stock hereby created shall be designated as the "Series B Preferred Stock", shall have a par value of $0.01 per share and the number of shares constituting the Series B Preferred Stock shall be 150,000 shares. The Series B Preferred Stock shall have a stated value of US$10.00 per share, with a 10% per annum dividend as set forth herein. Section 2. Rank. The Series B Preferred Stock shall rank: (i) prior to all of the Company's Common Stock, par value $0.01 per share ("Common Stock"), (ii) prior to any class or series of capital stock of the Company hereafter created (unless such future class specifically, by its terms, ranks on parity with the Series B Preferred Stock), and (iii) junior to any class or series of capital stock of the Company created before the date hereof (including without limitation the Series A Preferred Stock of the Company), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series B Preferred Stock will bear a 10% per annum cumulative dividend, payable out of assets legally available therefor, at the "Conversion Date" (as defined below) in cash or Common Stock at the "Conversion Price" (as defined below), at the Company's option. No dividends shall be paid on the Common Stock or any stock issued pursuant to Section 9 prior to the payment of dividends on Series B Preferred Stock. Section 4. Sinking Funding. No provisions shall be made for any sinking fund. Section 5. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive an amount per share equal to the sum of (i) US$10.00 for each outstanding share of Series B Preferred Stock, plus (ii) an amount equal to all accrued and unpaid dividends which shall accrue through the Conversion Date (the "Liquidation Preference"). If upon the occurrence of such event, the assets and funds available to be distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amounts due to such holders, then the entire assets and funds of the Company legally available for distribution shall be distributed among the holders of the Series B Preferred Stock on a pro rata basis. (b) Notwithstanding anything set forth above, holders of Series B Preferred Stock shall not be entitled to receive more than the Liquidation Preference in the event of any corporate reorganizations or any other transaction (or series of related transactions) that results in the transfer of more than fifty percent (50%) of the outstanding voting power of the Company, and such transactions shall not constitute a liquidation, dissolution, or winding up of the Company if the successor assumes that obligations of the Company with respect to the Series B Preferred Stock. A sale, conveyance, or other disposition of all or substantially all of the Company's assets, shall constitute a liquidation, dissolution or winding up within the meaning of this paragraph and shall entitle the holders of the Series B Preferred Stock to the Liquidation Preference, to the extent available above. The purchase or redemption by the Company of stock of any class, in any number permitted by law, for the purpose of this paragraph, shall not be regarded as a liquidation, dissolution or winding up of the Company. Section 6. Conversion. The record holders of this Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"). (a) Right to Convert. (1) The holders may not convert shares of Series B Preferred Stock until December 29, 2000. On or after December 29, 2000, the holders shall have the right, subject to Section 6(a)(2) below, to convert, in whole or in part, shares of Series B Preferred Stock into shares of Common Stock based on the conversion price per share defined below (the "Conversion Price"). The number of shares of Common Stock to be issued to the holder upon conversion shall be determined by (i) multiplying the number of shares of Series B Preferred Stock to be converted by US$10.00, and (ii) dividing this product by the Conversion Price, provided, however, that the Company shall not issue to any holder a fraction of a share of Common Stock and shall instead round the number of shares of Common Stock issued up to the next whole share of Common Stock. (2) Upon an election by a holder to convert shares of Series B Preferred Stock into shares of Common Stock, the Company shall have the right to pay cash to such holder in lieu of issuing shares of Common Stock. If the Company elects to pay cash rather than issuing shares of Common Stock, the Company shall pay to the holder US$10.00 for each share of Series B Preferred Stock that such holder had elected to convert to shares of Common Stock. The holder shall surrender the shares of Series B Preferred Stock to the Company for cancellation. (3) The "Conversion Price" shall be determined on the Conversion Date, and shall equal Ninety percent (90%) of the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending on the trading day immediately preceding the Conversion 2 Date, provided, however, that the Conversion Price shall under no circumstances: (i) be lower than the average of the closing bid prices of Common Stock for the ten (10) consecutive trading days ending one (1) trading day prior to December 29, 1999 (the "Floor Price"); or (ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing bid price" shall mean the last bid price for Common Stock on the OTC Bulletin Board, as reported by any authoritative source acceptable to the Company. (4) In the event of any stock split, reverse stock split, stock dividend, reclassification or similar event affecting the Common Stock (each an "Adjustment Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted by multiplying them by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Adjustment Transaction, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Adjustment Transaction. (b) Mechanics of Conversion. Conversion of the Series B Preferred Stock to Common Stock may be exercised by holder telecopying an executed and completed notice of conversion ("Notice of Conversion") to the Company, and delivering the original Notice of Conversion and the certificate representing the shares of Series B Preferred Stock to the Company by hand or by overnight courier within three (3) business days of exercise. Each date on which a Notice of Conversion is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date". The Company will transmit the certificates representing the Common Stock issuable upon conversion of all or any part of the shares of Series B Preferred Stock (together with any certificates for replacement shares of Series B Preferred Stock not previously converted but included in the original certificate presented for conversion) to the holder via overnight courier within three (3) business days after the Company has received the original Notice of Conversion and certificate for the shares of Series B Preferred Stock being so converted. The Notice of Conversion and certificate representing the portion of the shares of Series B Preferred Stock converted shall be delivered as follows: To the Company: Spatializer Audio Laboratories, Inc. 20700 Ventura Blvd., Suite 140 Woodland Hills, CA 91364-2357 Attention: Henry Mandell Telephone: (818) 227-3370 Facsimile: (818) 227-9751 or to such other person at such other place as the Company shall designate to the holder in writing. (c) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any certificates representing shares of Series B Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the certificate(s), if mutilated, the Company shall execute and deliver new certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen certificates if holder contemporaneously requests the Company to convert such Series B Preferred Stock into Common Stock. (d) Mandatory Conversion. The Series B Preferred Stock is subject to mandatory 3 conversion after three (3) years from the Closing Date, at which time all shares of Series B Preferred Stock will automatically be converted upon the terms set forth in Section 6(a) at the Conversion Price in effect at such time. Mandatory conversion shall not occur in the event of the occurrence of one or both of the following at the time of such mandatory conversion: (x) the Company is unable, or admits in writing its inability, to pay its debts, or is not paying its debts generally as they come due, or has made any assignment for the benefit of creditors; or (y) the Company has commenced, or there has been commenced against the Company, any case, proceeding, or other action seeking to have an order for relief entered with respect to the Company, or to adjudicate the Company as a bankrupt or insolvent. (e) Reservation of Stock Issuable upon Conversion. As of the date hereof, the Company may not be able to reserve from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to permit the conversion in full of all shares of Series B Preferred Stock. The Company is currently organizing a stockholder meeting to increase the number of authorized shares of Common Stock of the Company, and has filed with the SEC prior to the date hereof a preliminary proxy statement in connection with such stockholder meeting. After such time as the Company has increased the number of authorized shares of Common Stock, it shall at all times thereafter reserve and keep available out of its authorized but unissued shares of Common Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock at the Floor Price. (f) Conversion Adjustments. (1) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all Series B Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Company or another entity, or other property, then each holder of Series B Preferred Stock shall, upon being given at least ten (10) business days advance written notice of such transaction, thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities or other property as would have been issuable or payable with respect to or in exchange for the number of shares of Common Stock purchasable and receivable upon the conversion of Series B Preferred Stock held by such holder immediately prior to the merger, consolidation, exchange of shares, recapitalization or reorganization. Appropriate provisions shall be made with respect to the rights and interests of the holders of the Series B Preferred Stock to the end that the provisions hereof shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the conversion thereof. The Company shall not effect any transaction described in this subsection unless (1) each holder of Series B Preferred Stock has been given at least ten (10) business days advance written notice of such transaction, and (2) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the holders of the Series B Preferred Stock such shares of stock and/or securities or other property as the holders of the Series B Preferred Stock would be entitled to receive pursuant to this Section 6(f). (2) No Fractional Shares. If any adjustment under this Section would create a fractional share, or a right to acquire a fractional share, of any security, such fractional share 4 shall be disregarded and the number of shares of such security issuable upon conversion shall be the next higher number of shares. Section 7. Voting Rights. The holders of the Series B Preferred Stock shall have no voting power whatsoever, except with respect to any amendment to the Company's Certificate of Incorporation which would have an adverse effect on the Series B Preferred Stock or as otherwise provided by the Delaware Corporation Laws. Section 8. Status of Converted Stock. In the event any shares of Series B Preferred Stock shall be converted pursuant to Section 6 hereof, or if the Company has elected to pay cash to such holder pursuant to Section 6(a)(2) in lieu of issuing shares of Common Stock, the shares of Series B Preferred Stock so converted (or for which cash was paid in lieu of conversion) shall be cancelled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Company as Series B Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series B Preferred Stock. Section 10. Restrictions on Trading. Each holder of Series B Preferred Stock shall agree that, during the ten (10) trading days immediately preceding the Conversion Date, it shall not, whether directly or indirectly: (i) buy or sell, or make or accept any offer to buy or sell, any shares of capital stock of the Company; or (ii) buy or sell, or make or accept any offer to buy or sell, any derivative security based on or relating to any capital stock of the Company (including without limitation options to buy or sell shares of capital stock of the Company). Each holder of Series B Preferred Stock shall also agree not to engage in any short sales of any shares of capital stock of the Company for so long as any of its shares of Series B Preferred Stock remain issued and outstanding. No holder of Series B Preferred Stock shall be entitled to convert its Series B Preferred Stock into Common Stock until ten (10) consecutive trading days have elapsed during which such holder has not engaged in any of the transactions prohibited by this Section 10. [Remainder of Page Intentionally Left Blank] 5 IN WITNESS THEREOF, the Company has caused the undersigned to sign this Certificate of Designation this 24th day of December, 1999. SPATIALIZER AUDIO LABORATORIES, INC. By:_____________________________________ Name: Henry R. Mandell Title: Interim Chief Executive Officer Attest: By:________________________________ Name: Henry R. Mandell Title: Secretary 6 EXHIBIT B Form of Notice of Conversion NOTICE OF CONVERSION (To be executed by the Registered Holder in order to convert 10% Convertible Series B Preferred Stock) The undersigned hereby irrevocably elects to convert Preferred Stock Certificate No. ______ into shares of Common Stock of Spatializer Audio Laboratories, Inc. (the "Company") according to the conditions hereof, as of the date written below. The undersigned represents and warrants that: (i) all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Preferred Stock shall be made pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Act"), or pursuant to registration of the Common Stock under the Act, subject to any restrictions on sale or transfer set forth in the 10% Convertible Series B Preferred Stock Subscription Agreement between the Company and the holder of the Preferred Stock submitted herewith for conversion; (ii) the undersigned has not engaged in any transaction or series of transaction that is a part of or a plan or scheme to evade the registration requirements of the Act; and (iii) upon conversion pursuant to this Notice of Conversion, the undersigned will not own or be deemed to beneficially own (within the meaning of the Securities Exchange Act of 1934, as amended) 4.99% or more of the then issued and outstanding shares of the Company. ___________________________________ ________________________________________ Conversion Date Applicable Conversion Price ___________________________________ ________________________________________ Number of Common Shares upon Dollar Amount of Conversion Conversion ___________________________________ ________________________________________ Signature Print Name Address: ________________________________________ ________________________________________ ________________________________________ The original certificate(s) of Preferred Stock and Notice of Conversion must be received by the Company by the third (3rd) business day following the Conversion Date. EX-4.19 10 AGREEMENT REGARDING CANCELLATION OF WARRANTS AGREEMENT REGARDING CANCELLATION OF WARRANTS This AGREEMENT REGARDING CANCELLATION OF WARRANTS (this "Agreement"), dated as of December 29, 1999, is entered into by and between SPATIALIZER AUDIO LABORATORIES, INC., a Delaware corporation (the "Company"), CPR (USA) INC., a Delaware corporation ("CPR"), LIBERTYVIEW FUNDS, L.P., a Cayman Islands exempted limited partnership ("LP") and successor-in-interest to LIBERTYVIEW PLUS FUND, a Cayman Islands corporation, LIBERTYVIEW FUND, LLC, a Delaware limited liability company ("LLC"), CLARION FINANZ, A.G., a Swiss corporation ("Clarion"), and ATON SELECT FUND, LTD., a Swiss corporation ("Aton", and together with CPR, LP, LLC and Clarion, collectively, "Holders"). WHEREAS, the Holders are holders of Stock Purchase Warrants (the "Warrants") to purchase shares of common stock of the Company, par value $0.01 per share (the "Common Stock"), in the amounts set forth on Schedule A attached hereto; WHEREAS, concurrently herewith, the Company intends to enter into a private placement (the "Private Placement") of Common Stock in return for investments of up to an aggregate amount of One Million Fifty Thousand United States Dollars (US$1,050,000); WHEREAS, the Company deems the Private Placement to be in the best interest of the Company; WHEREAS, the Company requires that each Holder agree to cancel its Warrants as a condition to consummating the Private Placement and all concurrent transactions contemplated thereby. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. All Warrants are hereby cancelled. As of the date hereof, the Holders shall have no further rights of any kind under the Warrants, including without limitation the right to purchase or receive Common Stock pursuant to the Warrants. 2. All written documentation evidencing the Warrants shall be null and void and of no force or effect. The Holders shall return any such written documentation to the Company for cancellation. The failure of a Holder to return such documentation shall not affect the void and cancelled status of such Warrant. 3. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to conflict of laws principles. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. SPATIALIZER AUDIO LABORATORIES, INC. By: ________________________________________ Name: Henry R. Mandell Title: Chief Executive Officer CPR (USA) INC. By: ________________________________________ Name:_______________________________________ Title:______________________________________ LIBERTYVIEW FUNDS, L.P. By: ________________________________________ Name:_______________________________________ Title:______________________________________ LIBERTYVIEW FUND, LLC By: ________________________________________ Name:_______________________________________ Title:______________________________________ 2 CLARION FINANZ, A.G. By: Carlo Civelli Name: Carlo Civelli Title: Director ATON SELECT FUND, LTD. By: Barcikowski Jan Name: Barcikowski Jan Title: Director 3 SCHEDULE A Holder Number of Warrants CPR (USA) Inc. 150,000 LibertyView Funds, L.P. 120,000 LibertyView Fund, LLC 30,000 Clarion Finanz, A.G. 50,000 Aton Select Fund, Ltd. 150,000 ======== Total: 500,000 EX-5.1 11 OPINION [LETTERHEAD OF BRAND FARRAR & BUXBAUM LLP] February 10, 2000 Spatializer Audio Laboratories, Inc. 20700 Ventura Boulevard, Suite 134 Woodland Hills, California 91364 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as counsel to Spatializer Audio Laboratories, Inc. (the "Company"), with respect to the filing of the Company's Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission for the purpose of registering under the Securities Act of 1933, as amended, the resale of an aggregate of up to 6,197,636 shares (the "Shares") of Common Stock, par value $.01 per share ("Common Stock"), by certain stockholders of the Company. The Shares consist of 3,672,636 shares of Common Stock issued prior to the date hereof (the "Issued Shares"), and up to 2,525,000 shares of Common Stock issuable upon exercise of currently outstanding options and warrants ("Option Shares"). This opinion is delivered to you in connection with the Registration Statement for the aforementioned resales. 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. With respect to the Issued Shares, we have assumed that such shares have been issued and the certificates evidencing the same have been duly delivered, against receipt of the consideration stipulated therefor, which was not less than the par value of the Issued Shares. With respect to the issuance of the Option Shares by the Company, we have assumed that the Option Shares will be issued, and the certificates evidencing the same will be duly delivered, in accordance with the respective terms of the options and the warrants, as the case may be, and against receipt of the consideration stipulated therefor, which will not be less than the par value of the Option Shares. Spatializer Audio Laboratories, Inc. BRAND FARRAR & BUXBAUM LLP February 10, 2000 COUNSELLORS AT LAW Page 2 Based on such examination, in reliance thereon, subject to the foregoing assumptions, and subject to compliance with applicable state securities laws, we are of the opinion that the Issued Shares are or, in the case of the Option Shares, when issued by the Company and paid for in the manner described in the Registration Statement, will be, validly issued, fully paid and nonassessable. The Company is a Delaware corporation. We are not admitted to practice in Delaware. However, we are generally familiar with the Delaware General Corporation Law and have made such review thereof as we consider necessary for the purpose of this opinion. Subject to the foregoing, this opinion is limited to Delaware, California and federal law. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus which is a part of the Registration Statement. Very truly yours, /s/ BRAND FARRAR & BUXBAUM LLP BRAND FARRAR & BUXBAUM LLP -----END PRIVACY-ENHANCED MESSAGE-----