-----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, PMy0YyAtabOSeueGqslkby4QSn8WAssVUHoFmhTsKkbRkmjsrShXjgr4zi0nERXS E8MQMQQqBvRf2B12SReaNA== 0000891618-99-001382.txt : 19990405 0000891618-99-001382.hdr.sgml : 19990405 ACCESSION NUMBER: 0000891618-99-001382 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUREAL SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000892433 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 943117385 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-75631 FILM NUMBER: 99586783 BUSINESS ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 BUSINESS PHONE: 5102524245 MAIL ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA VISION TECHNOLOGY INC DATE OF NAME CHANGE: 19931210 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AUREAL SEMICONDUCTOR INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3117385 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4245 TECHNOLOGY DRIVE FREMONT, CALIFORNIA 94538 (510) 252-4245 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DAVID J. DOMEIER VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AUREAL SEMICONDUCTOR INC. 4245 TECHNOLOGY DRIVE FREMONT, CALIFORNIA 94538 (510) 252-4245 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JAMES M. KOSHLAND, ESQ. DAVID A. HUBB, ESQ. GRAY CARY WARE & FREIDENRICH LLP 400 HAMILTON AVENUE PALO ALTO, CALIFORNIA 94301-1825 (650) 328-6561 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. 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, as amended (the "Securities Act"), 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 number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration 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, check the following box. # CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- Common Stock ($0.001 par value )... 33,333,333 $0.60 $20,000,000 $5,560 - --------------------------------------------------------------------------------------------------------------------- Rights to purchase Common Stock, par value $0.001 per share....... 33,333,333 $0 $0 $0 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION, DATED , 1999 33,333,333 RIGHTS TO PURCHASE COMMON STOCK 33,333,333 SHARES AUREAL SEMICONDUCTOR INC. COMMON STOCK $0.60 PER SHARE ------------------------- Aureal Semiconductor Inc. is offering 33,333,333 shares of common stock to all of our stockholders who owned shares of our common stock on , 1999. You will receive, at no cost, a right to buy one share of common stock at a price of $0.60 for every shares of common stock that you owned on , 1999. This right is called the basic subscription privilege. We will not issue fractional rights, and we will not pay cash in place of rights. If you exercise all of your rights, you also may request to buy additional shares of common stock at the same price as the basic subscription privilege. This right is called the over-subscription privilege. The subscription rights are exercisable beginning on the date of this prospectus and continuing until 5:00 p.m., Eastern Daylight Savings Time on , 1999. If you want to participate in the rights offering, we recommend that you submit your subscription documents to the subscription agent before that deadline or to your broker or bank at least 10 days before that deadline. Please see page 16 for further instructions on submitting subscriptions. All subscriptions will be held in escrow by our subscription agent, ChaseMellon Shareholders Services, through the expiration date of the rights offering. We reserve the right to cancel the rights offering at any time before the expiration date. There is no minimum number of shares that we must sell in order to complete the rights offering. Stockholders who do not participate in the rights offering will continue to own the same number of shares, but will own a smaller percentage of the total shares outstanding to the extent that other stockholders participate in the rights offering. Your subscription rights are not transferable. The subscription rights will not be listed for trading on any stock exchange. Oaktree Capital Management LLC, a major stockholder of Aureal, has committed to subscribe for any shares of common stock that are not subscribed for by our other stockholders up to a total value of $20,000,000. Our common stock is quoted on the Over-the-Counter Electronic Bulletin Board under the symbol "AURL." INVESTING IN OUR SECURITIES INVOLVES CERTAIN RISKS. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DESCRIPTION OF SOME OF THESE RISKS. The shares have not been approved by the SEC or any state securities commission, nor have these organizations determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 3 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................. 1 RISK FACTORS........................ 5 WHERE YOU CAN FIND MORE INFORMATION....................... 12 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........ 13 USE OF PROCEEDS..................... 13
PAGE ---- PRINCIPAL STOCKHOLDERS.............. 13 THE RIGHTS OFFERING................. 16 FEDERAL INCOME TAX CONSIDERATIONS... 22 LEGAL MATTERS....................... 24 EXPERTS............................. 24
------------------------- 4 PROSPECTUS SUMMARY This section summarizes the information contained in this prospectus. You should read the following summary together with the information set forth under the heading "Risk Factors." BACKGROUND AND PURPOSE OF THE RIGHTS OFFERING The purpose of the rights offering is to raise funds for working capital and general purposes and to reduce our outstanding debt. However, the rights offering is also an integral part of the recapitalization of Aureal. On March 18, 1999, a special committee of disinterested directors approved the following matters: - this rights offering; - adjustment in the conversion price of the series B preferred stock from $2.50 per share to $0.90 per share; - a one-for-fifteen reverse stock split; and - an increase in the number of shares reserved for issuance under our 1995 Stock Option Plan from 1,666,666 shares to 5,000,000 shares, after giving effect to the one-for-fifteen reverse stock split. Immediately following the rights offering and subject to stockholder approval, we intend to effect the one-for-fifteen reverse stock split whereby each stockholder will receive one share of our common stock in exchange for every fifteen shares of our common stock they then hold. We also will be adjusting the conversion price of the series B preferred stock from $2.50 per share to $0.90 per share. Upon the adjustment of the conversion price of the series B preferred stock, Oaktree Capital Management LLC, the only holder of our series B preferred stock, will convert its shares of series B preferred stock into shares of our common stock. In exchange for our adjusting the conversion price of the series B preferred stock, Oaktree has agreed to exercise its subscription rights to purchase any rights our other stockholders elect not to acquire. We expect to hold an annual meeting on May 19, 1999 at our offices in Fremont, California, to have our stockholders vote on the one-for-fifteen reverse stock split, the increase in the share reserve under our 1995 Stock Option Plan, and on other matters. THE RIGHTS OFFERING ELIGIBLE STOCKHOLDERS: You will not be eligible to purchase stock through the rights offering unless you owned shares of our common stock on , 1999. SUBSCRIPTION RIGHTS: If you are an eligible stockholder, you will have two different subscription rights: (1) Basic subscription privilege. First, you will have the right to purchase one share of our common stock for every shares of common stock you owned as of , 1999. The offering price is $0.60 per share. 1 5 (2) Over-subscription privilege. If you exercise your basic subscription privilege in full, you also may offer to buy additional shares. In exercising this over-subscription privilege, you should specify the maximum number of shares of common stock that you are willing to buy at $0.60 per share. In determining the number of shares that we will issue to each stockholder pursuant to these rights, we will round up to the nearest whole number. ALLOCATION OF SHARES: If we receive subscriptions for more shares than are being offered, we will first fill all exercises of the basic subscription privilege. We will then allocate the remaining shares among those who exercise the over-subscription privilege, in proportion to the maximum number of shares that each subscriber offers to purchase within the permitted limit. EXPIRATION DATE: , 1999, at 5:00 p.m., Eastern Daylight Savings Time. SUBSCRIPTION PROCEDURES: To subscribe for shares, you should carefully complete and sign the subscription agreement for the rights offering and forward it to our subscription agent, ChaseMellon Shareholder Services, whose address appears below. Be sure to include a check or money order for the full amount of your subscription price, unless you elect to make payment by wire transfer. Checks and money orders will not be cashed until we accept your subscription. If your subscription is accepted in part and rejected in part, for example, due to over subscription, the subscription agent will send you a check for the difference. No interest will be paid on subscription funds. ONCE YOU HAVE SUBMITTED SUBSCRIPTION DOCUMENTS, YOUR EXERCISE OF SUBSCRIPTION RIGHTS MAY NOT BE REVOKED. SUBSCRIPTION AGENT: SUBSCRIPTION AGREEMENTS MAY BE DELIVERED TO: ChaseMellon Shareholder Services, L.L.C. By mail: P.O. Box 3301 South Hackensack, N.J. 07606 Attn: Reorganization Department 2 6 By overnight delivery: 85 Challenger Road Mail Drop-Reorg Ridgefield Park, N.J. 07660 Attn: Reorganization Department By hand: 120 Broadway, 13th Floor New York, N.Y. 10271 Attn: Reorganization Department PERSONS WISHING TO EXERCISE RIGHTS FOR THE BENEFIT OF OTHERS: Brokers, banks, trustees, and other individuals or entities that hold common stock for the account of others may, if authorized by the beneficial owner, complete the subscription agreement and submit it to the subscription agent with the proper payment. COMPLETION OF THE RIGHTS OFFERING: Certificates representing shares of the common stock will be delivered to subscribers as soon as practicable after the expiration date of the rights offering. We expect that this may take two weeks or longer, due to the need to allow checks to clear. NON-TRANSFERABILITY OF RIGHTS: Your subscription rights are not transferable. TERMINATION: We may cancel the rights offering at any time, in which case we will return your subscription payment without interest. AGREEMENT WITH PRINCIPAL STOCKHOLDER: Our principal stockholder, Oaktree Capital Management LLC, will receive subscription rights to purchase approximately 19.7 million shares of our common stock. Oaktree has agreed to exercise its subscription rights in full. In addition, Oaktree has agreed to purchase any shares not subscribed for by our other stockholders up to a total value of $20,000,000. Upon completion of the rights offering, Oaktree will own between 73% and 81% of our outstanding common stock depending on whether other stockholders exercise their subscription rights and assuming conversion of all outstanding preferred stock. USE OF PROCEEDS: We intend to use the proceeds of the rights offering to reduce our outstanding debt and for working capital and general purposes. RISK FACTORS: An investment in shares of our common stock involves a high degree of risk. Please see "Risk Factors" beginning on page 5. 3 7 CERTAIN FEDERAL INCOME TAX CONSEQUENCES: Your receipt or exercise of the subscription rights should not be treated as a taxable event for United States federal income tax purposes, but may have other tax effects. QUESTIONS: If you have any questions about the rights offering, including questions about subscription procedures and requests for additional copies of this prospectus or other documents, please contact ChaseMellon Shareholder Services, our information agent, by telephone at 1-800-648-8823. ------------------------- ABOUT AUREAL Aureal Semiconductor Inc. is a producer of audio products and advanced audio technologies for the personal computer and consumer electronics markets. Our primary business is the sale of audio-related semiconductor and board-level products and supporting software. We contract with independent silicon foundries and independent component manufacturers and assemblers for the production of our semiconductor and board-level products. The foundry that manufactures the majority of our semiconductor products is one of the three largest foundries in the world that manufactures products exclusively for other companies. Our objective is to be a leading provider of advanced digital audio solutions for the personal computer and consumer electronics markets. In May 1996, we acquired Crystal River Engineering, Inc., a leader in the field of 3D audio technology. Crystal River Engineering is now our wholly-owned subsidiary and offers hardware and software solutions optimized for 3D audio presentation. We are headquartered in Fremont, California, in a leased 36,000 square foot building. In January 1999, we leased an additional 8,000 square feet of office space in the vicinity. As of January 3, 1999, the last day of our fiscal 1998, we employed 111 people. Of this total, 74 were engaged in engineering functions, 26 were in sales and marketing activities, and 11 were engaged in administrative support. Aureal, Aureal 3D, A3D and the A3D logo are registered trademarks of Aureal Semiconductor Inc. Other trademarks referred to in this prospectus belong to their respective owners. 4 8 RISK FACTORS In addition to the other information in this prospectus or incorporated in this prospectus by reference, you should consider carefully the following factors in evaluating Aureal and our business before purchasing the common stock offered by this prospectus: RISKS RELATED TO THE RIGHTS OFFERING: IF YOU DO NOT EXERCISE YOUR SUBSCRIPTION RIGHTS, YOUR PERCENTAGE OWNERSHIP OF AUREAL WILL DECREASE If you chose not to exercise your subscription rights, your relative ownership interests in Aureal will be diluted by the issuance of shares of common stock to those stockholders who exercise their subscription rights. THE OFFERING PRICE WAS DETERMINED BY OUR BOARD OF DIRECTORS AND BEARS NO RELATIONSHIP TO THE VALUE OF OUR ASSETS, FINANCIAL CONDITION OR OTHER ESTABLISHED CRITERIA FOR VALUE Our board of directors determined the offering price without any independent appraisal of the value of the common stock. The price was set at a substantial discount to the actual trading price of our common stock as of the date the price was set. This discount is offered as an incentive for our current stockholders to participate in this offering. The offering price does not necessarily bear any relationship to the book value of our assets, past operations, cash flow, earnings, financial condition or any other established criteria for value and should not be considered an indication of our underlying value. Our common stock may trade at prices below the offering price at any time after the date of this prospectus. AFTER YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, THE TRADING PRICE OF OUR COMMON STOCK MAY DECLINE The public trading market price of our common stock may decline before the subscription rights expire. If you exercise your subscription rights and the public trading market price of our common stock decreases below $0.60, then you will have committed to buy shares of common stock at a price above the prevailing market price. Once you have exercised your subscription rights, you may not revoke your exercise. Moreover, you may be unable to sell your shares of common stock at a price equal to or greater than the offering price. Until certificates are delivered upon expiration of the rights offering, you will not be able to sell the shares of common stock that you purchase in the rights offering. We will deliver to you certificates representing shares of the common stock that you purchased as soon as practicable after expiration of the rights offering. We will not pay you interest on funds delivered to the subscription agent pursuant to the exercise of your subscription rights. YOU CANNOT REVOKE YOUR EXERCISE OF SUBSCRIPTION RIGHTS; WE MAY CANCEL THE RIGHTS OFFERING AT ANY TIME Once you exercise your subscription rights, you may not revoke the exercise for any reason. We may terminate the rights offering at any time. If we elect to withdraw or terminate the rights offering, neither we nor the subscription agent will have any obligation 5 9 with respect to the subscription rights except to return, without interest, any subscription payments. RISKS RELATED TO AUREAL: IF WE ANNOUNCE AND EFFECT A ONE-FOR-FIFTEEN REVERSE STOCK SPLIT, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE Our stock price may decline because we have announced our intentions to effect a one-for-fifteen reverse stock split. Many companies that have announced and effected reverse stock splits have seen their stock price fall, both before and after the reverse split is effected. On March 18, 1999, a special committee of disinterested directors approved a one-for-fifteen reverse split in our common stock. While a reverse stock split does not in any way affect the value of, or your investment in, Aureal, the markets may react negatively to it which will cause our stock price to decline further. We cannot assure you that, as a result of the reverse stock split, our stock price will not decline to a price that is less than fifteen times the price of our stock prior to the reverse stock split. WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE FUTURE We emerged from bankruptcy in December 1994. Since that time, we have recorded an accumulated deficit of $173 million as of January 3, 1999, the end of our fiscal 1998. This deficit is comprised of $157 million of incurred losses and $16 million of accretion and dividends on our preferred stock. We generated the majority of our revenues in 1997 and 1996 through technology licensing transactions. The majority of our revenues in 1998 came from the sale of advanced audio products. We expect that the majority of our future revenues will be derived from the sale of advanced audio products. However, we will not be profitable unless we sell significant volumes of our advanced audio products in the future. OAKTREE CAPITAL CONTROLS A SUBSTANTIAL AMOUNT OF OUR STOCK AND MAY, THEREFORE, INFLUENCE OUR AFFAIRS As of the date of this prospectus, Oaktree Capital owns approximately 59% of our common stock. In addition, Oaktree owns 100% of the outstanding shares of our series B preferred stock, which, upon adjustment of the conversion price to $0.90 per share, will convert into approximately an additional 46.6 million shares of common stock. Oaktree has agreed to convert all of its series B preferred stock at $0.90 per share immediately following the closing of the rights offering. Furthermore, in exchange for our agreement to adjust the conversion price of the series B preferred stock, Oaktree has committed to purchase all shares offered in the rights offering and not otherwise subscribed for by our other stockholders. Oaktree will also have the right to subscribe for at least 19.7 million shares of our common stock pursuant to the rights offering. Accordingly, Oaktree is, and after the rights offering will be able to, control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combinations. 6 10 INVESTORS MAY FIND IT DIFFICULT TO TRADE OUR COMMON STOCK ON THE OVER-THE- COUNTER ELECTRONIC BULLETIN BOARD Our common stock trades only on the Over-the-Counter Electronic Bulletin Board. We currently do not meet the requirements for listing on the Nasdaq National Market or any national stock exchange. However, we believe that our common stock will qualify for listing on the Nasdaq National Market after we effect a one-for-fifteen reverse stock split. Because our common stock trades on the Bulletin Board, an investor may find it very difficult to sell or to obtain accurate quotations as to the market value of our common stock. Furthermore, because our common stock is not listed on the Nasdaq National Market, trading in our common stock is also subject to certain rules promulgated by the SEC under the Securities Exchange Act of 1934. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock. Generally, a penny stock is any non-Nasdaq National Market listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Our common stock meets the definition of a penny stock. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from affecting transactions in our common stock and may limit the ability of purchasers of our common stock to resell our common stock in the secondary market. WE EXPECT THE AVERAGE SELLING PRICE OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE GROSS MARGINS AND REVENUES Product prices in the audio technology industry generally decrease over the life of a particular product. The willingness of prospective customers to design our products into their products depends to a significant extent upon our ability to price our products at levels that are cost-effective for these customers. As the markets for our products mature and competition increases, we anticipate that prices for our products will decline over time. If we are unable to reduce our costs sufficiently to offset declines in our product prices, or if we are unable to introduce new, higher performance products with higher product prices, our gross margins and revenues will decline. WE DEPEND ON A CREDIT FACILITY FROM TRANSAMERICA AND GOLDMAN SACHS TO FUND OUR BUSINESS OPERATIONS Because we have not been profitable to date, we have had to fund our losses through a combination of equity and debt financings. In June 1998, we entered into a credit facility with the Technology Finance Division of Transamerica Business Credit Corporation and Goldman Sachs Credit Partners LP. This credit facility provides for an aggregate maximum borrowing of $40 million. The interest rate on the credit facility is generally the prime rate plus 3% to 5%. Accordingly, while the credit facility provides us with needed working capital, the high cost of servicing any borrowing under it could negatively affect our liquidity. In addition, the credit facility may not be sufficient to meet our working capital requirements. In the event we must secure capital in addition to the line of credit and the proceeds we receive from this rights offering, there can be no assurance that such capital will be available on acceptable terms or at all. Our inability to secure such potential future financing, if necessary, would materially adversely affect our business, financial condition and results of operations. 7 11 TO COMPETE EFFECTIVELY IN THE AUDIO TECHNOLOGY MARKET, WE NEED TO DEVELOP NEW AUDIO TECHNOLOGIES THAT ARE WIDELY ACCEPTED BY OUR CUSTOMERS Our success depends on our ability to develop and market new audio technologies aimed at advancing the level of audio quality in personal computers and consumer electronics devices. To be successful, we must timely develop new products that we can sell at competitive prices to our customers who will design them into their products. In order for our customers to design our advanced audio products into their personal computers and consumer electronic products, we must: - anticipate market trends; - anticipate the performance and functionality requirements of our current and potential customers; - develop and produce products that meet the timing and pricing requirements of our current and potential customers; and - produce products that can be available in a timely manner consistent with our current and potential customers' development and production schedules. We are beginning to expand our business model to provide for an increased number of audio-related products, including audio cards and audio communications combination cards. We may require additional working capital funds for this expansion to provide for incremental inventory and broader marketing programs. A number of factors may limit the success of our expansion, and each could negatively impact our business and results of operations. These factors include: - the failure of the market for advanced audio products to grow; - reduced demand for our products as a result of increased competition in this market; - unforeseen technological change; and - our potential failure to introduce new versions of products that our customers and the market accept. A failure to develop new audio technologies that will be accepted by our customers could materially adversely affect our ability to generate revenues. NEW GENERATIONS OF MICROPROCESSORS AND OTHER NEW TECHNOLOGIES MAY DECREASE DEMAND FOR OUR PRODUCTS We also face the risk that new generations of microprocessors that are capable of performing the function of advanced audio products will greatly reduce demand for our products. Each successive generation of microprocessors has provided increased performance, which could, in the future, result in a microprocessor capable of performing advanced audio functions to an extent that diminishes or eliminates the need or preference for our products. In addition, each new generation of technology, including digital audio technology, generally requires increased processing power. The increased capabilities of microprocessors in the future may lower demand for our products which will materially adversely affect our business, financial condition and results of operations. 8 12 INTENSE COMPETITION IN THE MARKET FOR AUDIO PRODUCTS AND ADVANCED AUDIO TECHNOLOGIES COULD PREVENT AUREAL FROM INCREASING REVENUE AND PREVENT AUREAL FROM ACHIEVING PROFITABILITY The markets for audio products and advanced audio technologies are intensely competitive and are characterized by evolving industry standards that result in: - short product life cycles; - significant pressure to improve price and performance; and - frequent new product introductions. We expect competition to increase from existing competitors and from other companies that may enter the markets for advanced audio products with devices that may be less costly or provide higher performance or additional features than the products we currently offer. However, we are unable to predict the timing and nature of any such competitive product offerings. In addition, we anticipate that we will compete for the development of new technologies and for the sale of semiconductor products with a number of companies who have more extensive resources, including financial, manufacturing, technical, marketing and distribution. Furthermore, some of these competitors have greater intellectual property rights, broader product lines and longer-standing relationships with their customers than we do. In addition to our established competitors, we may also face competition from a number of emerging companies. To remain competitive, we believe we must, among other things, invest significant resources in developing new products and enhancing our current products and maintaining customer satisfaction. If we fail to do so, our products will not compete favorably with those of our competitors and our revenue could be materially adversely affected. WE MAY NOT HAVE AN ADEQUATE SUPPLY OF OUR PRODUCTS BECAUSE WE DEPEND ON FOUNDRIES TO PRODUCE OUR PRODUCTS AND OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE We do not manufacture our own products, and we depend on outside manufacturing resources for production of all of our products. Currently, we utilize one foreign semiconductor foundry and one contract manufacturer for production of our board-level products. These facilities have indicated to us that they have the manufacturing availability to provide for our planned levels of production of each of our products for the next 12 months; however, our production relationship with them is based only upon purchase orders. Consequently, they may not continue to adequately provide manufacturing capacity to us for our current level of production or any potential increases in our production levels. In the event that they cease to manufacture our products, we would have to contract with alternative facilities. However, we may not be able to timely contract with alternative facilities or to contract with them at all. Such a situation could materially adversely affect our ability to sell products to our customers, which in turn would hurt our financial condition and results of operations. The manufacture of semiconductor products is a highly complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in the masks used to print circuits on wafers, difficulties in the fabrication process and other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer not to function. Many of these problems are difficult to diagnose and 9 13 potentially time-consuming or expensive to remedy. The foundries that we employ may, in the future, experience irregularities or adverse yield fluctuations in the manufacturing processes of our products. In such event, our business, financial condition and results of operations may be materially adversely affected. OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER OF AUREAL Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include, among others: - the division of the board of directors into three separate classes; - the right of the board to elect the director to fill a space created by the expansion of the board; - the ability of the board to alter our bylaws; and - the requirement that at least 10% of the outstanding shares are needed to call a special meeting of stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of section 203 of the Delaware General Corporation Law. These provisions prohibit certain large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless (1) 66 2/3% of the shares of voting stock not owned by this large stockholder approve the merger or combination or (2) the board of directors approves the merger or combination or the transaction which resulted in the large stockholder owning 15% or more of our outstanding voting stock. WE MAY NOT BE ABLE TO RETAIN OUR KEY ENGINEERING, MARKETING, SALES AND MANAGEMENT PERSONNEL THAT WE NEED TO SUCCESSFULLY MANAGE OUR BUSINESS Our success depends to a significant extent upon the continued services of key engineering, marketing, sales and management personnel. Our employees may voluntarily terminate their employment with us at any time. We recognize the value of the contributions of each of our employees, and we have developed compensation programs, including stock programs open to all employees, designed to retain our employees. However, competition for these employees is intense, particularly in Silicon Valley, and the loss of the services of any one of these employees could materially adversely affect our business, financial condition and results of operations. OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY AND THIS TECHNOLOGY MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES Our ability to compete successfully will depend, in part, on our ability to protect our proprietary technology. We rely on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our proprietary rights. Nevertheless, such measures may not be adequate or safeguard the proprietary technology underlying our advanced audio products. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we 10 14 may not have adequate remedies for any such breach. We also realize that our proprietary information and trade secrets may become known through other means not currently foreseen by us. Moreover, notwithstanding our efforts to protect our intellectual property, our competitors may be able to develop products that are equal or superior to our products without infringing on any of our intellectual property rights. In addition, we may not be able to effectively protect our intellectual property rights in certain countries. Our failure to protect our proprietary technology may materially adversely affect our financial condition and results of operations. Although we do not believe that our products infringe the proprietary rights of any third parties, third parties may still assert infringement or invalidity claims, or claims for indemnification resulting from infringement claims, against us. The assertion of these claims could materially adversely affect our business, financial condition and results of operations. In addition, irrespective of the validity or the successful assertion of any claims, we could incur significant costs in defending against these claims. In defending claims of alleged infringement, we could incur significant expenses and waste resources that could have a material adverse affect on our business, financial condition and results of operations. WE ARE INVOLVED IN LAWSUITS WITH CREATIVE AND E-MU WHICH COULD NEGATIVELY IMPACT OUR BUSINESS In February 1998, Creative Technology Ltd. and its subsidiary, E-MU Systems, Inc., served us with a lawsuit for patent infringement that Creative and E-MU filed in the U.S. District Court, Northern District of California. The lawsuit asserts that our original Vortex product infringes on a patent that describes a specific implementation for an electronic musical instrument designed by E-MU. Creative and E-MU seek, among other things, a preliminary and permanent injunction against alleged continuing acts of infringement by us and an accounting of damages plus interest. In response, we filed a motion for summary judgment. In August 1998, E-MU and Creative filed a motion for a preliminary injunction with respect to our original and updated Vortex product. In October 1998, the court denied Creative's motion for preliminary injunction. In addition, our motion for summary judgment was also denied. We believe that the actions that Creative and E-MU filed are without merit, and we are vigorously defending against these actions. In December 1998, we filed a lawsuit alleging patent infringement against Creative and E-MU. Aureal believes that Creative and E-MU have infringed on two of their patents, Patent No. 5,596,644 entitled "Method and Apparatus for Efficient Presentation of Hi-Quality 3-Dimensional Audio" and Patent No. 5,802,180 entitled "Method and Apparatus for Efficient Presentation of 3-Dimensional Audio Including Ambient Effects." Additional litigation may be necessary to resolve the claims asserted by Creative and E-MU and to resolve our claims against Creative and E-MU and any other claims asserted in the future to defend against claims of infringement or invalidity or to enforce and protect our intellectual property rights. We cannot assure you that we will prevail in any litigation with either of them. Also, any litigation, whether or not determined in our favor or settled by us, would be costly and would divert the efforts and attention of our management and technical personnel from normal business operations; this could materially adversely affect our business, financial condition and results of operations. Adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from licensing our technology. Any of these results could have a material adverse affect on our business, financial condition and results of operations. 11 15 THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS We use a number of computer software programs and operating systems in our internal operations, including applications used in financial business systems and various administration functions. To the extent that these software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000," some level of modification or even possible replacement of such source code or applications could be necessary. Given the current information, we currently do not anticipate that such year 2000 costs will have a material impact upon us. We have requested and obtained information regarding year 2000 compliance from suppliers and providers of all of our mission critical software systems. Based on the information we currently have, all mission critical systems appear to be year 2000 compliant. We are currently contacting major vendors and customers to obtain year 2000 compliance certificates. The failure of any of our key suppliers or customers to be year 2000 compliant could have a material adverse effect on our business, financial condition and results of operations. WHERE YOU CAN FIND MORE INFORMATION 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 public reference facilities of the SEC 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. The SEC allows us to "incorporate by reference" the information we have filed with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus. We incorporate by reference the documents listed below. This prospectus is part of a registration statement we filed with the SEC (Registration Statement No. 333- ). The documents we incorporate by reference are: (1) Aureal's Registration Statement on Form S-2/A-2 (Registration No. 333-66867) filed on December 21, 1998. (2) Aureal's Definitive Proxy for the Annual Meeting of Stockholders filed on April , 1999. (3) Aureal's Annual Report on Form 10-K for the fiscal year ended January 3, 1999 filed on April , 1999. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Stockholder Services Aureal Semiconductor Inc. 4245 Technology Drive Fremont, California 94538 (510) 252-4245 12 16 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this prospectus, including the above risk factors section, contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed above, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, operating results and financial condition. USE OF PROCEEDS We intend to use the proceeds from the rights offering to reduce our outstanding debt and for working capital and general purposes. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 22, 1999 by: - each person who is known to us to own beneficially 5% or more of the outstanding shares of common stock; - each director and director-nominee of Aureal; - the Chief Executive Officer and the other executive officers of Aureal as of January 3, 1999, whose salary and bonus for the year ended January 3, 1999 exceeded $100,000; and - all of our directors and executive officers as a group. The percentages set forth in the percent column under the beneficial ownership after the rights offering heading have been calculated based on the assumption that each of the principal stockholders would subscribe for its pro-rata portion, determined as of March 22, 1999, of this rights offering, and assuming the conversion of all outstanding series B preferred stock. In the event each stockholder subscribes for its pro-rata portion of the rights offering, its beneficial ownership percentage of Aureal after the rights offering will not be identical to its beneficial ownership percentage of Aureal prior to the rights offering because SEC regulations require that we include stock options exercisable within 60 days 13 17 of March 22, 1999, for purposes of the calculations in this table. However, for determining each stockholder's pro-rata portion of the rights offering, we only include the Aureal common stock owned by each stockholder and did not include exercisable or unexercisable options. To the extent any stockholder elects not to subscribe for its pro-rata portion of the rights offering, its beneficial ownership of Aureal after the rights offering will be less than is indicated in this table. Likewise, if any stockholder elects to subscribe for more that its pro-rata portion of the rights offering, its beneficial ownership of Aureal after the rights offering will be greater than is indicated in this table. As note above, Oaktree has committed to purchase any portion of the rights offering that other stockholders elect not to subscribe for, up to the entire $20 million. Except as otherwise indicated, the address of each beneficial owner is c/o Aureal Semiconductor Inc., 4245 Technology Drive, Fremont, California 94538. The table is based upon information supplied to Aureal by the officers, directors and principal stockholders. Except as otherwise indicated, we believe that the persons or entities named in the table have sole voting and investment power with respect to all shares of common stock and preferred stock shown as beneficially owned by them, subject to community property laws where applicable. The share amounts set forth in this table have not been adjusted to reflect the one-for-fifteen reverse stock split which Aureal's board of directors approved on March 18, 1999 and which is to be voted upon by our stockholders at the 1999 annual meeting.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THE RIGHTS AFTER THE RIGHTS OFFERING OFFERING -------------------- -------------------- NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES PERCENT SHARES PERCENT ------------------------------------- ---------- ------- ---------- ------- Oaktree Capital Management, LLC(1)....... 42,626,980 61.4% 79,062,912 76.9% 333 South Grand Street, 28th Floor Los Angeles, CA 90071 D. Richard Masson(2)..................... 42,626,980 61.4% 79,062,912 76.9% The TCW Group, Inc. and its affiliates(3).......................... 19,608,363 28.7% 42,472,369 41.8% 11100 Santa Monica Blvd., Suite 2000 Los Angeles, CA 90025 Thomas K. Smith(4)....................... 19,608,363 28.7% 42,472,369 41.8% Appaloosa Management L.P................. 5,560,074 8.5% 8,391,643 8.5% 26 Main Street Chatham, New Jersey 07928 Kenneth A. Kokinakis(5).................. 1,625,000 2.4% 1,637,732 1.6% Richard E. Christopher(6)................ 40,625 * 50,810 * L. William Krause(7)..................... 151,875 * 151,875 * David J. Domeier(8)...................... 497,500 * 510,232 * Scott H. Foster(9)....................... 1,948,372 2.9% 2,149,751 2.1% Michael L. Hunter(10).................... 500,000 * 500,000 * Sanjay Iyer(11).......................... 602,500 * 602,500 * Brendan R. O'Flaherty(12)................ 510,000 * 513,820 * All directors and executive officers as a group (10 persons)(13)................. 48,502,852 64.8% 85,179,631 78.7%
14 18 - ------------------------- * Less than 1%. (1) Oaktree acts as an investment manager for certain entities, and in that capacity, may be deemed to beneficially own securities held by those entities. In addition, Oaktree provides sub-advisory services to certain entities affiliated with The Trust Company of the West ("TCW"), and in that capacity, may be deemed to beneficially own securities held by those TCW entities. As a result, Oaktree may be deemed to own 38,601,980 shares of common stock. In addition, pursuant to warrants issued in August 1997, Oaktree holds rights to acquire 4,025,000 shares of common stock. Oaktree also beneficially owns 41,785 shares of series B preferred stock and 100 shares of series C preferred stock. Series B preferred stock have voting rights on an "as converted" basis. As of March 22, 1999, the 41,785 shares of series B preferred stock were convertible, at the option of the holder, into 16,777,168 shares of common stock and the 100 shares of series C preferred stock were convertible, at the option of the holder, into 2,553,202 shares of common stock. The series C preferred stock have no voting rights. (2) To the extent that Mr. Masson, as an authorized representative of Oaktree, participates in the process to vote or dispose of any Oaktree controlled shares, he may be deemed to be the beneficial owner of those shares. Mr. Masson disclaims beneficial ownership of those shares. (3) The TCW Group, Inc. may be deemed to beneficially own 16,658,363 shares of common stock as well as warrants to purchase 2,950,000 additional shares of common stock. Also under the same beneficial ownership are 35,816 shares of series B preferred stock which as of March 22, 1999 were convertible into 14,380,430 shares of common stock. All of these securities are held by limited partnerships, trusts and third party separate accounts for which The TCW Group, Inc. acts as general partner, trustee and investment advisor respectively. The TCW Group, Inc. expressly disclaims beneficial ownership of these securities. (4) To the extent Mr. Smith, as either a Senior Vice President or authorized representative of TCW or TCW Asset Management Company, participates in the process to vote or dispose of the shares described in note (3) above, Mr. Smith may be deemed to be the beneficial owner of those shares. Mr. Smith disclaims beneficial ownership of those shares. (5) Includes 1,600,000 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 654,167 are not vested and subject to repurchase by Aureal. (6) Includes 20,625 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. (7) Includes 151,875 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. (8) Includes 472,500 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 178,303 are not vested and subject to repurchase by Aureal. 15 19 (9) Includes 1,522,944 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 193,542 are not vested and subject to repurchase by Aureal. (10) Includes 500,000 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 197,559 are not vested and subject to repurchase by Aureal. (11) Includes 602,500 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 233,988 are not vested and subject to repurchase by Aureal. (12) Includes 502,500 shares subject to exercise of outstanding stock options exercisable within 60 days of March 22, 1999. Of those shares, 200,060 are not vested and subject to repurchase by Aureal. (13) Includes 9,427,944 shares subject to exercise of outstanding stock options and warrants exercisable within 60 days of March 22, 1999. Of those shares, 1,657,619 are not vested and subject to repurchase by Aureal. Includes 38,601,980 shares that may be deemed beneficially owned by Mr. Masson, and 16,658,363 shares which may be deemed beneficially owned by Mr. Smith. In addition, 41,785 shares of series B preferred stock, convertible into 16,777,168 shares of common stock with "as converted" voting rights, and 100 shares of series C preferred stock, convertible into 2,553,202 shares of common stock, are held by the parties indicated. THE RIGHTS OFFERING THE SUBSCRIPTION RIGHTS We are offering our stockholders the right to subscribe for and purchase up to 33,333,333 shares of common stock at $0.60 per share. The rights offering is open only to those stockholders who owned common stock on , 1999. The rights offering is not open to anyone who did not own common stock on , 1999. We are offering stockholders the opportunity to purchase one share of common stock for every shares of common stock they owned on , 1999. In determining the number of shares of common stock we will issue to each stockholder pursuant to the subscription rights offered by this prospectus, we will round up to the nearest whole number. We will not issue fractional subscription rights and we will not pay cash in place of subscription rights. BASIC SUBSCRIPTION PRIVILEGE Each subscription right entitles you to purchase one share of common stock for every shares of common stock you owned at the close of business on , 1999. You will receive certificates representing the shares that you purchase pursuant to your basic subscription privilege as soon as practicable after the expiration date, whether you exercise your subscription rights immediately prior to the expiration date or earlier. 16 20 OVER-SUBSCRIPTION PRIVILEGE Each subscription right also grants you an over-subscription privilege to purchase additional shares of common stock that are not purchased by other stockholders. You are entitled to exercise your over-subscription privilege only if you exercise your basic subscription privilege in full. If you wish to exercise your over-subscription privilege, you should indicate the number of additional shares that you would like to purchase in the space provided on your subscription agreement. When you send in your subscription agreement, you must also send the full purchase price for the number of additional shares that you have requested to purchase in addition to the payment due for shares purchased through your basic subscription privilege. If the number of shares remaining after the exercise of all basic subscription privileges is not sufficient to satisfy all over-subscription privileges, you will be allocated shares pro rata subject to elimination of fractional shares, in proportion to the number of shares you purchased through your basic subscription privilege. However, if your pro rata allocation exceeds the number of shares you requested on your subscription certificate, then you will receive only the number of shares that you requested, and the remaining shares from your pro rata allocation will be divided among other stockholders exercising their over-subscription privileges. In addition, we have the discretion to issue less than the total number of shares that may be available for over-subscription requests. As soon as practicable after , 1999, ChaseMellon Shareholder Services, the subscription agent, will determine the number of shares of common stock that you may purchase pursuant to the over-subscription privilege. You will receive certificates representing these shares as soon as practicable after the expiration date. If you request and pay for more shares than are allocated to you, we will refund that overpayment, without interest to you. In connection with the exercise of the over-subscription privilege, banks, brokers and other nominee holders of subscription rights who act on behalf of beneficial owners will be required to certify to the subscription agent and us as to the aggregate number of subscription rights that have been exercised, and the number of shares of common stock that are being requested through the over-subscription privilege, by each beneficial owner on whose behalf such nominee holder is acting. PLAN OF DISTRIBUTION On or about , 1999, we will distribute the subscription rights and copies of this prospectus to individuals who owned shares of our common stock on . If you wish to exercise your subscription rights and purchase shares of common stock, you should complete the subscription agreement and return it, with payment for the shares, to the subscription agent, ChaseMellon Shareholder Services. If you have any questions, you should contact our information agent, ChaseMellon Shareholder Services, at the telephone number and address on page 20. See "The Rights Offering -- Subscription procedures." We have retained our transfer agent, ChaseMellon Shareholder Services, to assist with the rights offering in the role of the subscription agent. The subscription agent will hold all subscription agreements received from stockholders, and will be responsible for delivering stock certificates and refunds, in case of over-subscription or cancellation of the offering, to stockholders. We will pay all fees and expenses of the subscription agent in connection with the rights offering, which we estimate will be approximately $35,000. You are responsible for paying any other commissions, fees, taxes or other expenses incurred in connection with the exercise of the subscription rights. 17 21 EXPIRATION DATE The rights offering will expire at 5:00 p.m., Eastern Daylight Savings Time, on , 1999. IF YOU DO NOT EXERCISE YOUR BASIC SUBSCRIPTION PRIVILEGE OR OVER-SUBSCRIPTION PRIVILEGE PRIOR TO SUCH TIME, YOUR SUBSCRIPTION RIGHTS WILL BE NULL AND VOID. We will reject any subscription agreements that the subscription agent receives after 5:00 p.m. on the expiration date, regardless of when the documents were originally mailed. Stockholders who wish to participate in the rights offering should submit all subscription agreements to ChaseMellon by the expiration date, or to their broker or bank at least 10 days before the expiration date, to allow the broker or bank sufficient time to carry out those instructions. The rights offering is not conditioned upon our receipt of subscriptions for any minimum number of shares. However, the rights offering may be canceled at any time prior to its completion, in which case all subscription payments will be returned without interest. SUBSCRIPTION PAYMENTS Each subscription agreement submitted pursuant to this rights offering must be accompanied by the full amount of the purchase price for all of the shares of common stock subscribed for by the stockholder. If a stockholder submits less than the full purchase price, we will limit such stockholder's maximum subscription to the number of shares purchasable with those funds, rounded down to the nearest whole number of shares. If a subscription is rejected in whole or in part, the subscription agent will promptly refund payment for any unpurchased shares. We will not pay interest on any subscription funds. DETERMINATION OF OFFERING PRICE Our board of directors determined the offering price without any independent appraisal of the value of the common stock. The price was set at a substantial discount to the actual trading price of our common stock as of the date the price was set. This discount is offered as an incentive for our current stockholders to participate in this offering. The offering price does not necessarily bear any relationship to the book value of our assets, past operations, cash flow, earnings, financial condition or any other established criteria for value and should not be considered an indication of our underlying value. SUBSCRIPTION PROCEDURES To participate in the rights offering, you must submit a properly completed subscription agreement, together with full payment of the offering price for all shares for which you subscribe. Those who hold common stock for the account of others, such as brokers, banks, trustees or depositories, should notify the beneficial owners of those shares as soon as possible to ascertain the beneficial owners' intentions and to obtain instructions with respect to the rights offering. 18 22 The subscription agreement and payment must be received by the subscription agent before 5:00 p.m., Eastern Daylight Savings Time, on , 1999. Payment of the offering price must be made: - by check or bank draft drawn upon a U.S. bank or postal, telegraphic, or express money order payable to "ChaseMellon Shareholder Services, as Subscription Agent;" - by wire transfer of same day funds to the account maintained by the subscription agent for such purpose; or - by notice of guaranteed delivery of payment from a bank, a trust company or a New York Stock Exchange member. Payment of the offering price will be deemed made only upon (1) the subscription agent's receipt of a certified check or bank draft drawn upon a U.S. bank or any postal, telegraphic or express money order, (2) the clearance of any uncertified check or (3) the receipt of good funds in the wire transfer account maintained by the subscription agent. If you wish to pay by uncertified personal check, please note that your check may take five business days or more to clear and, therefore, you should make payment sufficiently in advance of the expiration date to ensure that payment is received and clears by the expiration date. Subscription agreements and any checks in payment of the offering price should be delivered by mail, hand delivery, or overnight courier, to: ChaseMellon Shareholder Services, L.L.C. By mail: P.O. Box 3301 South Hackensack, N.J. 07606 Attn: Reorganization Department By overnight delivery: 85 Challenger Road Mail Drop-Reorg Ridgefield Park, N.J. 07660 Attn: Reorganization Department By hand: 120 Broadway, 13th Floor New York, N.Y. 10271 Attn: Reorganization Department By Facsimile Transmissions: (for eligible institutions only). (201) 296-4293 Confirm by telephone (201) 296-4860 If you do not indicate the number of shares to be purchased or do not forward full payment of the offering price, then you will be deemed to have exercised the basic subscription privilege to the full extent of the payment received and, if any funds remain, will be deemed to have exercised the over-subscription privilege to the extent of the remaining funds. In each case, share amounts will be rounded down to the nearest whole number. 19 23 The method of delivery of the subscription agreement and payment of the offering price will be at your election and risk. If sent by mail, it is recommended that your subscription agreement and payment be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the subscription agent and clearance of payment prior to the expiration date. Because uncertified personal checks may take at least five business days to clear, you are urged to arrange for payment by certified or cashier's check, money order or wire transfer of funds. Our answers to all questions concerning the timeliness, validity, form and eligibility of any subscription will be final and binding. We may, in our sole discretion, waive any defect or irregularity, permit a defect or irregularity to be corrected within any time as we may determine, or reject the purported exercise of any right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within the time that we determine in our discretion. Neither we nor the subscription agent will be under any duty to notify you of any defect or irregularity in connection with the submission of your subscription agreement or incur any liability for failure to give notification. If you have any questions concerning the rights offering or these subscription procedures, or if you would like additional copies of this prospectus or other documents, please contact our information agent: ChaseMellon Shareholder Services, 450 West 33rd Street, 14th Floor, New York, N.Y. 10001. Banks and Brokers call collect: (212) 273-8083. All others call toll free (800) 684-8823. NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS Only you may exercise the basic subscription privilege and the over-subscription privilege. You may not sell, give away or otherwise transfer the basic subscription privilege or the over-subscription privilege. NO REVOCATION After you have exercised your basic subscription privilege or over-subscription privilege, you may not revoke that exercise. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of our common stock. AMENDMENT AND TERMINATION OF RIGHTS OFFERING We reserve the right to amend the terms and conditions of the rights offering. If we make an amendment that we consider significant, we will (1) mail notice of the amendment to all stockholders who owned shares of common stock on , 1999, (2) extend the expiration date by at least 14 days and (3) offer all subscribers not less than 10 days to revoke any prior subscriptions, in whole or in part. In all other cases, subscriptions will be irrevocable. We also reserve the right to terminate the rights offering at any time, in our discretion, in which case all subscriptions will be canceled, and we will return all subscription payments to subscribers without interest. 20 24 Upon the occurrence of any change in or cancellation of the rights offering, we will issue a press release to that effect, and we will file a post-effective amendment to the registration statement covering this prospectus. PURCHASE OF SHARES BY OUR PRINCIPAL STOCKHOLDER As of March 22, 1999, Oaktree Capital Management LLC owned approximately 59% of the outstanding shares of our common stock and, therefore, will receive rights to subscribe for approximately 19.7 million shares of our common stock in the rights offering. In exchange for Aureal adjusting the conversion price of the shares of series B preferred stock owned by Oaktree from $2.50 to $0.90, Oaktree has agreed to exercise its basic subscription privilege and over-subscription privilege up to a total value of $20,000,000. In addition, Oaktree has agreed to convert all of its series B preferred stock into common stock immediately following the completion of the subscription offering. SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING Assuming we issue all of the shares of common stock offered in the rights offering and adjust the conversion price of the series B preferred stock from $2.50 per share to $0.90 per share, approximately 150,000,000 shares of common stock will be issued and outstanding following the rights offering and conversion of the Series B preferred stock. This would represent a 73% increase in the number of outstanding shares of our common stock. If you do not exercise your basic subscription privilege, the percentage of Aureal common stock that you hold will decrease. CERTAIN OWNERSHIP LIMITS AND REPORTING REQUIREMENTS Any person or group that acquires direct or indirect beneficial ownership of more than 5% of the outstanding shares of our common stock will be subject to special reporting requirements under Section 13(d) or 13(g) of the Securities Exchange Act of 1934. Any person or group that acquires direct or indirect beneficial ownership of more than 10% of the outstanding shares of our common stock will be subject to special reporting requirements under Section 16(a) of the Exchange Act and may become liable under Section 16(b) of the Exchange Act for reimbursement of any "short-swing profits." Please consult with your attorney to see if these rules will apply to you. STATE AND FOREIGN SECURITIES LAWS The rights offering is not being made in any state or foreign country in which it is unlawful to do so, nor are we selling or accepting subscriptions from holders who are residents of any such state or country. We may delay the commencement of the rights offering in certain states or other jurisdictions in order to comply with the securities law requirements of those states or other jurisdictions. It is not anticipated that there will be any changes in the terms of the rights offering. We may decline, in our sole discretion, to make modifications to the terms of the rights offering requested by certain states or other jurisdictions, in which case stockholders who live in those states or jurisdictions will not be eligible to participate in the rights offering. 21 25 NO RECOMMENDATIONS We are not making any recommendation as to whether or not you should exercise your subscription rights. You should make your decision based on your own assessment of your best interests. FEDERAL INCOME TAX CONSIDERATIONS The following summarizes the material federal income tax consequences of the rights offering. This summary is based on current law, which is subject to change at any time, possibly with retroactive effect. This summary is not a complete discussion of all federal income tax consequences of the rights offering, and, in particular, may not address federal income tax consequences applicable to stockholders subject to special treatment under federal income tax law. In addition, this summary does not address the tax consequences of the rights offering under applicable state, local or foreign tax laws. This discussion assumes that your shares of Aureal stock and the subscription rights and shares issued to you pursuant to the rights offering constitute capital assets. Receipt and exercise of the subscription rights distributed pursuant to the rights offering is intended to be nontaxable to stockholders, and the following summary assumes you will qualify for such nontaxable treatment. We have not sought, nor do we intend to seek, any ruling from the IRS or an opinion of counsel related to the tax matters described below. This discussion is included for your general information only. You should consult your tax advisor to determine the tax consequences to you of the rights offering in light of your particular circumstances, including any state, local and foreign tax consequences. TAXATION OF STOCKHOLDERS Receipt of a subscription right: You will not recognize any gain or other income upon receipt of a subscription right. Tax basis of subscription rights: Your tax basis in each subscription right will depend on whether you exercise the subscription right or allow the subscription right to expire. If you exercise a subscription right, your tax basis in the subscription right will be determined by allocating the tax basis of your Aureal stock on which the subscription right is distributed between the Aureal stock and the subscription right, in proportion to their relative fair market values on the date of distribution of the subscription right. However, if the fair market value of your subscription rights is less than 15% of the fair market value of your existing shares of Aureal stock, then the tax basis of each subscription right will be deemed to be zero, unless you elect, by attaching an election statement to your federal income tax return for 1999, to allocate tax basis to your subscription rights. If you allow a subscription right to expire, it will be treated as having no tax basis. Holding period of subscription rights: Your holding period for a subscription right will include your holding period for the shares of common stock upon which the subscription right is issued. Expiration of subscription rights: You will not recognize any loss upon the expiration of a subscription right. 22 26 Exercise of subscription rights: You generally will not recognize a gain or loss on the exercise of a subscription right. The tax basis of any share of common stock that you purchase through the rights offering will be equal to the sum of your tax basis, if any, in the subscription right exercised and the price paid for the share. The holding period of the shares of common stock purchased through the rights offering will begin on the date that you exercise your subscription rights. If treated as a taxable distribution: If, contrary to Aureal's intent, the rights offering does not qualify as nontaxable, you would be treated as receiving a taxable distribution equal to the fair market value of the subscription rights on their distribution date. The distribution would be taxed as a dividend to the extent made out of our current or accumulated earnings and profits; and any excess would be treated first as a return of your basis (investment) in your Aureal stock and then as a capital gain. You would have a tax basis in the rights equal to the fair market value of the rights on the date of the rights distribution and your holding period in the rights would begin on the date of distribution of the rights. Expiration of the subscription rights would result in a capital loss. You generally will not recognize gain or loss on the exercise of a subscription right. The tax basis of any share of common stock that you purchase through the rights offering will be equal to the sum of your tax basis, if any, in the subscription right exercised and the price paid for the share. The holding period of the shares of common stock purchased through the rights offering will begin on the date that you exercise your subscription rights. TAXATION OF AUREAL We will not recognize any gain, other income or loss upon the issuance of the subscription rights, the lapse of the subscription rights, or the receipt of payment for shares of common stock upon exercise of the subscription rights. 23 27 LEGAL MATTERS Gray Cary Ware & Freidenrich LLP will deliver an opinion to us about the validity of the issuance of the shares of our common stock. EXPERTS The audited consolidated financial statements incorporated by reference in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. 24 28 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO ONE (INCLUDING ANY SALESMAN OR BROKER) IS AUTHORIZED TO PROVIDE ORAL OR WRITTEN INFORMATION ABOUT THIS OFFERING THAT IS NOT INCLUDED IN THIS PROSPECTUS. AUREAL SEMICONDUCTOR INC. 33,333,333 RIGHTS TO PURCHASE SHARES OF COMMON STOCK 33,333,333 SHARES OF COMMON STOCK ---------------- PROSPECTUS ---------------- APRIL , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 29 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimates except the Securities and Exchange Commission registration fees.
TO BE PAID BY THE REGISTRANT ---------- SEC registration.................................... $ 5,560 Accounting fees and expenses........................ 7,000 Legal fees and expenses............................. 15,000 Miscellaneous expenses.............................. 50,000 ------- Total............................................. $77,560 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law (the "DGCL"), the Registrant's Certificate of Incorporation provides that each person who is or was or who had agreed to become a director or officer of the Registrant or who had agreed at the request of the Registrant's Board of Directors or an officer of the Registrant to serve as an employee or agent of the Registrant or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Registrant to the full extent permitted by the DGCL or any other applicable laws. Such Certificate of Incorporation also provides that no amendment or repeal of such Certificate of Incorporation shall apply to or have any effect on the right to indemnification permitted or authorized thereunder for or with respect to claims asserted before or after such amendment or repeal arising from acts or omissions occurring in whole or in part before the effective date of such amendment or repeal. The Registrant's Bylaws provide that the Registrant shall indemnify to the full extent authorized by law any person made or threatened to be made a party to an action or a proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate was or is a director, officer or employee of the Registrant or any predecessor of the Registrant or serves or served any other enterprise as a director, officer or employee at the request of the Registrant or an predecessor of the Registrant. The Registrant's Bylaws also provide that the Registrant may enter into one or more agreements with any person which provides for indemnification greater or different than that provided in such Certificate of Incorporation. The Registrant has entered into indemnification agreements with its directors and its officers. The Registrant intends to purchase and maintain insurance on behalf of any person who is a director or officer against any loss arising from any claim asserted against him and incurred by him in any such capacity, subject to certain exclusions. II-1 30 See also the undertakings set out in response to Item 17 herein. ITEM 16. EXHIBITS. The following exhibits are filed with this Registration Statement:
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ----------------------- 2.1 Agreement and Plan of Reorganization among the Company, Aureal Acquisition Corporation, a wholly-owned subsidiary of the Company and Crystal River Engineering, Inc., dated as of May 7, 1996(1) 2.2 Second Amended Joint Plan of Reorganization dated November 10, 1994(13) 4.1 Common Stock Purchase Agreement by and among the Company and certain beneficial owners of 5% or more of the Company's Common Stock, as amended(2) 4.2 Common Stock Purchase Agreement by and among the Company and certain entities and individuals dated June 10, 1996(3) 4.3 Common Stock Purchase Agreement by and among the Company and certain entities and individuals dated August 6, 1997(4) 4.4 Preferred Stock Regulation D Subscription Agreement(5) 4.5 Certificate of Designation of Series A Preferred Stock of Aureal Semiconductor Inc.(5) 4.6 Preferred Stock Registration Rights Agreement(5) 4.7 Aureal Semiconductor Inc. Regulation D Subscription Agreement for Series C Preferred Stock(6) 4.8 Certificate of Designation of Series C Preferred Stock of Aureal Semiconductor Inc.(6) 4.9 Registration Rights Agreement (Common Stock underlying Series C Preferred Stock)(6) 4.10 Loan and Security Agreement (Goldman and TBCC Credit Facility)(7) 4.11 Form of Warrant (Goldman and TBCC Warrants)(7) 4.12 8% Series B Convertible Preferred Stock Purchase Agreement(7) 4.13 Certificate of Designation of 8% Series B Convertible Preferred Stock for Aureal Semiconductor Inc.(7) 4.14 Amendment Number 4 to Registration Rights Agreement(7) 4.15 Form of Subscription Agreement 4.16 Form of Instructions to Stockholders 4.17 Form of Letter to Common Stockholders (Record) 4.18 Form of Letter to Banks and Brokers 4.19 Form of Letter to Common Stockholders (Beneficial) 10.1 Second Amended and Restated Loan Agreement between TCW Special Credits and the Company dated August 6, 1997 increasing the loan commitment from $20 million to $31.5 million(8) 10.2 1995 Stock Option Plan(9) 10.3 Form of incentive option agreement and non-statutory stock option agreement used under 1995 Stock Option Plan(2) 10.4 1994 Stock Option Plan(13) 10.5 Form of incentive option agreement and non-statutory stock option agreement used under 1994 Stock Option Plan(13) 10.6 Industrial Space Sublease with Chemical Waste Management, Inc. dated September 13, 1995(2)
II-2 31
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ----------------------- 10.7 Form of Indemnity Agreement for Directors and Officers(10) 10.8 1996 Outside Directors Stock Option Plan(11) 10.9 Manufacturing, Purchase and Distribution Agreement between Diamond Multimedia Systems, Inc. and Aureal dated July 3, 1998(12) 23.1 Consent of Arthur Andersen, LLP 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6 of the Registration Statement)
- ------------------------- (1) Incorporated by reference to the exhibits filed with Form 8-K dated May 22, 1996. (2) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to the exhibits filed with Form S-3 (Registration number 333-3870) filed June 26, 1996. (4) Incorporated by reference to the exhibits filed with Form S-3 (as amended by Post-Effective Amendment No. 1, Registration number 333-3870) filed September 12, 1997. (5) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on March 16, 1998. (6) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on June 15, 1998. (7) Incorporated by reference to the exhibits filed with Form 8-K dated June 15, 1998. (8) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended September 28, 1997. (9) Incorporated by reference to the exhibits filed with Aureal's preliminary proxy on November 5, 1998. (10) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended September 29, 1996. (11) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 29, 1996. (12) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended June 28, 1998. (13) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 31, 1994. ITEM 17. UNDERTAKINGS. I. The undersigned Registrant hereby undertakes: A. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; II-3 32 1. To include any prospectus required by section 10(a)(3) of the Securities Act; 2. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee "table in the effective registration statement; 3. 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; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. B. That, for the purpose of determining any liability under the Securities 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. C. 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. II. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities 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 that is incorporated by reference in the registration statement 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. III. The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. IV. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as II-4 33 expressed in The Securities 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 Securities Act and will be governed by the final adjudication of such issue. V. The undersigned Registrant hereby undertakes that: A. For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. B. For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus 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. II-5 34 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fremont, State of California on the 1st day of April, 1999. AUREAL SEMICONDUCTOR INC. By: /s/ DAVID J. DOMEIER ----------------------------------- David J. Domeier Vice President, Finance and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make, constitute and appoint Kenneth A. Kokinakas and David J. Domeier and each of them, acting together or alone, his true and lawful attorneys-in-fact and agents with full power of substitution, in his name, place and stead to execute on his behalf, in his capacity as a director and/or officer of AUREAL SEMICONDUCTOR INC. (the "Company"), a registration statement on Form S-3 or other appropriate form and any and all amendments thereto (including post-effective amendments), registering shares of the common stock of the Company, to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act and any and all instruments which said attorneys-in-fact and agents deem necessary or advisable to enable the Company to comply with the Securities Act and the rules, regulations and requirements of the Commission in respect thereof, giving and granting to said attorneys-in-fact and agents, and each of them, acting together or alone, full power and authority to do and perform each and every act and thing whatsoever necessary or appropriate to be done in and about the premises as fully to all intents as he might or would do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that his said attorneys-in-fact or substitutes may or shall lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the date indicated: April 1, 1999
SIGNATURE TITLE --------- ----- /s/ KENNETH A. KOKINAKAS President, Chief Executive Officer - ------------------------------------- Kenneth A. Kokinakas /s/ DAVID J. DOMEIER Vice President, Chief Financial - ------------------------------------- Officer and Chief Accounting Officer David J. Domeier Director - ------------------------------------- L. William Krause
II-6 35
SIGNATURE TITLE --------- ----- /s/ D. RICHARD MASSON Director - ------------------------------------- D. Richard Masson /s/ THOMAS K. SMITH, JR. Director - ------------------------------------- Thomas K. Smith, Jr. /s/ RICHARD E. CHRISTOPHER Director - ------------------------------------- Richard E. Christopher
II-7 36 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ----------------------- 2.1 Agreement and Plan of Reorganization among the Company, Aureal Acquisition Corporation, a wholly-owned subsidiary of the Company and Crystal River Engineering, Inc., dated as of May 7, 1996(1) 2.2 Second Amended Joint Plan of Reorganization dated November 10, 1994(13) 4.1 Common Stock Purchase Agreement by and among the Company and certain beneficial owners of 5% or more of the Company's Common Stock, as amended(2) 4.2 Common Stock Purchase Agreement by and among the Company and certain entities and individuals dated June 10, 1996(3) 4.3 Common Stock Purchase Agreement by and among the Company and certain entities and individuals dated August 6, 1997(4) 4.4 Preferred Stock Regulation D Subscription Agreement(5) 4.5 Certificate of Designation of Series A Preferred Stock of Aureal Semiconductor Inc.(5) 4.6 Preferred Stock Registration Rights Agreement(5) 4.7 Aureal Semiconductor Inc. Regulation D Subscription Agreement for Series C Preferred Stock(6) 4.8 Certificate of Designation of Series C Preferred Stock of Aureal Semiconductor Inc.(6) 4.9 Registration Rights Agreement (Common Stock underlying Series C Preferred Stock)(6) 4.10 Loan and Security Agreement (Goldman and TBCC Credit Facility)(7) 4.11 Form of Warrant (Goldman and TBCC Warrants)(7) 4.12 8% Series B Convertible Preferred Stock Purchase Agreement(7) 4.13 Certificate of Designation of 8% Series B Convertible Preferred Stock for Aureal Semiconductor Inc.(7) 4.14 Amendment Number 4 to Registration Rights Agreement(7) 4.15 Form of Subscription Agreement 4.16 Form of Instructions to Stockholders 4.17 Form of Letter to Common Stockholders (Record) 4.18 Form of Letter to Banks and Brokers 4.19 Form of Letter to Common Stockholders (Beneficial) 5.1 Opinion of Gray Cary Ware & Freidenrich LLP 10.1 Second Amended and Restated Loan Agreement between TCW Special Credits and the Company dated August 6, 1997 increasing the loan commitment from $20 million to $31.5 million(8) 10.2 1995 Stock Option Plan(9) 10.3 Form of incentive option agreement and non-statutory stock option agreement used under 1995 Stock Option Plan(2) 10.4 1994 Stock Option Plan(13) 10.5 Form of incentive option agreement and non-statutory stock option agreement used under 1994 Stock Option Plan(13) 10.6 Industrial Space Sublease with Chemical Waste Management, Inc. dated September 13, 1995(2) 10.7 Form of Indemnity Agreement for Directors and Officers(10) 10.8 1996 Outside Directors Stock Option Plan(11)
37
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ----------------------- 10.9 Manufacturing, Purchase and Distribution Agreement between Diamond Multimedia Systems, Inc. and Aureal dated July 3, 1998(12) 23.1 Consent of Arthur Andersen, LLP 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6 of the Registration Statement)
- ------------------------- (1) Incorporated by reference to the exhibits filed with Form 8-K dated May 22, 1996. (2) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to the exhibits filed with Form S-3 (Registration number 333-3870) filed June 26, 1996. (4) Incorporated by reference to the exhibits filed with Form S-3 (as amended by Post-Effective Amendment No. 1, Registration number 333-3870) filed September 12, 1997. (5) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on March 16, 1998. (6) Incorporated by reference to the exhibits filed with Aureal's Form 8-K on June 15, 1998. (7) Incorporated by reference to the exhibits filed with Form 8-K dated June 15, 1998. (8) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended September 28, 1997. (9) Incorporated by reference to the exhibits filed with Aureal's preliminary proxy on November 5, 1998. (10) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended September 29, 1996. (11) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 29, 1996. (12) Incorporated by reference to the exhibits filed with Form 10-Q for the quarter ended June 28, 1998. (13) Incorporated by reference to the exhibits filed with Form 10-K for the year ended December 31, 1994. EX-4.15 2 FORM OF SUBSCRIPTION AGREEMENT 1 Exhibit 4.15 Form of Subscription Agreement ___________________________________ Expiration Date: __________, 1999, Number Shares You May Subscribe For unless extended at the sole discretion of the Company AUREAL SEMICONDUCTOR INC. SUBSCRIPTION AGREEMENT FOR RIGHTS OFFERING OF SHARES OF COMMON STOCK Aureal Semiconductor Inc. (the "Company") is conducting a rights offering which entitles holders of the Company's common stock $0.001 par value per share (the "Common Stock"), as of the close of business on ________, 1999 (the "Record Date") to purchase one share of Common Stock for every ____ shares of Common Stock held on the Record Date. Set forth above is the number of shares of Common Stock that you are entitled to purchase at a subscription price of $0.60 per share (the "Basic Subscription Privilege"). If any shares of Common Stock are not purchased by other stockholders pursuant to their Basic Subscription Privileges (the "Excess Shares"), any stockholder purchasing all of the shares of Common Stock available to it may purchase an additional number of the Excess Shares, if so specified in these subscription documents, subject to proration (the "Over-Subscription Privilege"). No fractional shares or cash in lieu thereof will be issued or paid. FOR A MORE COMPLETE DESCRIPTION OF THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING, PLEASE REFER TO THE PROSPECTUS DATED ____________, 1999 (THE "PROSPECTUS"), WHICH IS INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM CHASEMELLON SHAREHOLDER SERVICES, L.L.C. (TOLL FREE (800) 684-8823). To subscribe for shares of Common Stock, a stockholder must present to ChaseMellon Shareholder Services, L.L.C., the Subscription Agent, prior to 5:00 p.m., Eastern Daylight Savings Time, on the Expiration Date, a properly completed and executed copy of this Subscription Agreement, together with a money order or check drawn on a bank located in the United States of America and payable to "ChaseMellon Shareholder Services, L.L.C.," as Subscription Agent or a wire transfer of funds for an amount equal to the number of shares subscribed for multiplied by $0.60. ANY RIGHTS NOT EXERCISED PRIOR TO THE EXPIRATION DATE WILL BE NULL AND VOID. ANY SUBSCRIPTION FOR SHARES OF COMMON STOCK IN THE RIGHTS OFFERING MADE HEREBY IS IRREVOCABLE. EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably subscribes for the number of shares of Common Stock indicated below, on the terms and subject to the conditions specified in the Prospectus, receipt of which is hereby acknowledged. (a) Number of shares subscribed for pursuant to the basic subscription privilege: ___ X $0.60 = $___ payment. (b) Number of shares subscribed for pursuant to the over- subscription 2 privilege: ___ X $0.60 = $___ payment. (c) Total Subscription (total number of shares on lines (a) and (b) multiplied by the subscription price) = $_______ payment. (d) METHOD OF PAYMENT (CHECK AND COMPLETE APPROPRIATE BOX(ES)) [ ] Check or money order payable to "ChaseMellon Shareholder Services, L.L.C., as Subscription Agent"; or [ ] Wire transfer directed to ______________ ABA No.________ Attention: ChaseMellon Shareholder Services, L.L.C. If the aggregate amount enclosed or transmitted is insufficient to purchase the total number of shares included in lines (a) and (b), or if the number of shares being subscribed for is not specified, the holder of this Subscription Agreement shall be deemed to have subscribed for the maximum amount of shares that could be subscribed for upon payment of such amount. If the number of shares to be subscribed for pursuant to the Over-Subscription Privilege is not specified and the amount of funds enclosed or transmitted exceeds in the aggregate the subscription price for all shares represented by this Subscription Agreement (the "Subscription Excess"), the holder of this Subscription Agreement shall be deemed to have exercised the Over-Subscription Privilege to purchase, to the extent available, that number of whole shares of Common Stock equal to the quotient obtained by dividing the Subscription Excess by the subscription price, subject to the limit on the number of shares as the holder may purchase pursuant to the Over-Subscription Privilege. To the extent any portion of the aggregate subscription price enclosed or transmitted remains after the foregoing procedures, such funds shall be mailed to the subscriber without interest as soon as practicable. If the undersigned does not make payment of any amounts due, the Company reserves the right to (i) find other purchasers for the subscribed-for and unpaid-for shares; (ii) apply any payment actually received by it toward the purchase of the greatest number of shares which could be acquired by the undersigned upon exercise of the undersigned's rights; and/or (iii) exercise any and all other rights and remedies to which it may be entitled. Subscriber's Signature: ________________________ Name (please print): ___________________________ Telephone No.: (___)____________________________ -2- EX-4.16 3 FORM OF INSTRUCTIONS TO STOCKHOLDERS 1 Exhibit 4.16 Form of Instructions to Stockholders AUREAL SEMICONDUCTOR INC. RIGHTS OFFERING INSTRUCTIONS FOR COMPLETING THE SUBSCRIPTION AGREEMENT The enclosed Subscription Agreement entitles you to purchase the number of shares of common stock, par value $0.001 (the "Common Stock"), of Aureal Semiconductor Inc. (the "Company") as set forth in the Subscription Agreement. To subscribe for shares of Common Stock, you must present to ChaseMellon Shareholder Services, L.L.C. (the "Subscription Agent") prior to 5:00 p.m., Eastern Daylight Savings time, on ____________, 1999, a properly completed and executed Subscription Agreement and a money order or check drawn on a bank located in the United States of America and payable to "ChaseMellon Shareholder Services, L.L.C." or a wire transfer of funds for an amount equal to the number of shares subscribed for multiplied by $0.60, the subscription price. As soon as practical following the Expiration Date and after payment for any shares of Common Stock subscribed for has cleared (which clearance may take up to 15 days from receipt of the payment), subscribers will receive from the Subscription Agent stock certificates for the number of shares of Common Stock acquired. EX-4.17 4 FORM OF LETTER TO COMMON STOCKHOLDERS(RECORD) 1 Exhibit 4.17 Form of Letter to Common Stockholders (Record) AUREAL SEMICONDUCTOR INC. 4245 Technology Drive Fremont, CA 94538 ________, 1999 Dear Stockholder: On behalf of the Board of Directors of Aureal Semiconductor Inc. (the "Company"), we are pleased to provide details on the Company's rights offering to purchase shares of the Company's common stock, par value $0.001 (the "Common Stock"). The shares of Common Stock are being offered at the subscription price of $0.60 per share. Each beneficial owner of Common Stock has the right to purchase one share of Common Stock for every _________ shares of the Common Stock that they owned on _______, 1999. All fractional shares will be rounded up to the nearest whole number. Enclosed are copies of the following documents: 1. the Prospectus; 2. the "Instructions for Completing the Subscription Agreement"; 3. the Subscription Agreement; and 4. a return envelope addressed to ChaseMellon Shareholder Services, L.L.C., the Subscription Agent. The enclosed Prospectus describes the rights offering and the procedure to follow if you choose to exercise your rights. Please read the Prospectus and other enclosed materials carefully. Your prompt action is requested. The rights offering will expire at 5:00 p.m., on __________, 1999, unless extended by the Company in its sole discretion (the "Expiration Date"). To exercise your rights, a properly completed and executed Subscription Agreement and payment in full for all of the shares purchased must be delivered to the Subscription Agent as indicated in the Prospectus prior to 5:00 p.m., Eastern Daylight Savings Time, on the Expiration Date. Additional copies of the enclosed materials may be obtained from ChaseMellon Shareholder Services, L.L.C. Their toll-free telephone number is (800) 684-8823. 2 We are pleased to offer you this opportunity and hope that you will consider a further investment in the Company. Sincerely, Aureal Semiconductor Inc. EX-4.18 5 FORM OF LETTER TO BANKS AND BROKERS 1 Exhibit 4.18 Form of Letter to Banks and Brokers AUREAL SEMICONDUCTOR INC. 4245 Technology Drive Fremont, CA 94538 ___________, 1999 To Securities Dealers, Commercial Banks, Trust Companies and Other Nominees: RE: RIGHTS OFFERING FOR SHARES OF COMMON STOCK OF AUREAL SEMICONDUCTOR INC. Aureal Semiconductor Inc. (the "Company") is offering, upon the terms and subject to the conditions set forth in the enclosed Prospectus dated __________, 1999 (the "Prospectus"), rights to purchase shares of its common stock, par value $0.001 (the "Common Stock"), to holders of record ("Holders") of its Common Stock on __________, 1999 (the "Record Date"). Pursuant to the rights offering, each Holder will have the right to purchase one share of Common Stock for every _____ shares of Common Stock held by such Holder on the Record Date at the subscription price of $0.60 per share. We are asking you to contact your clients, for whom you hold shares of Common Stock registered in your name or in the name of your nominee or who hold shares of Common Stock registered in their own names, to obtain instructions as to whether your clients would like you to purchase shares of our common stock pursuant to the rights offering. Enclosed are copies of the following documents: 1. the Prospectus; 3. "Instructions for Completing the Subscription Agreement"; 2. the Subscription Agreement; 4. a form of a letter which may be sent to your clients for whose accounts you hold shares of Common Stock registered in your name or the name of your nominee; and 5. a return envelope addressed to Chase Mellon Shareholder Services, L.L.C., as Subscription Agent. 2 Your prompt action is requested. The rights offering will expire at 5:00 p.m., Eastern Daylight Savings Time, on __________, 1999, unless extended by the Company in its sole discretion (the "Expiration Date"). To participate in the rights offering, properly completed and executed Subscription Agreements and payments in full for all shares of Common Stock purchased must be delivered to the Subscription Agent as indicated in the Subscription Agreement and the Prospectus prior to 5:00 p.m., Eastern Daylight Savings Time, on the Expiration Date. Additional copies of the enclosed materials may be obtained from ChaseMellon Shareholder Services, L.L.C. Their toll-free telephone number is (800) 684-8823. Very truly yours, AUREAL SEMICONDUCTOR INC. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANY OR THE SUBSCRIPTION AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON, TO MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE RIGHTS OFFERING, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS. EX-4.19 6 FORM OF LETTER TO COMMON STOCKHOLDERS(BENEFICIAL) 1 Exhibit 4.19 Form of Letter to Common Stockholders (Beneficial) AUREAL SEMICONDUCTOR INC. RIGHTS OFFERING To Our Clients: Enclosed for your consideration is a prospectus, dated April ____, 1999 (the "Prospectus"), and an instruction form (the "Instruction Form") relating to the rights offering by Aureal Semiconductor Inc. (the "Company") of rights to purchase shares of its common stock, par value $0.001 per share ("Common Stock"), to holders of record ("Holders") of Common Stock on _________, 1999 (the "Record Date"). Pursuant to the rights offering, each Holder is entitled to purchase one share of Common Stock for every ___ shares of Common Stock held by such Holder on the Record Date at the subscription price of $0.60 per share (the "Basic Subscription Privilege"). Holders are entitled to subscribe for all or any portion of the shares underlying their Basic Subscription Privilege. Holders also have the right (the "Over-Subscription Privilege"), subject to proration, to subscribe for shares of the Common Stock available after satisfaction of all subscriptions pursuant to Basic Subscription Privilege ("Excess Shares"), at the subscription price of $0.60 per share. If there are insufficient Excess Shares to satisfy all exercised Over-Subscription Privileges, Excess Shares will be allocated pro rata among all the holders exercising Over-Subscription Privileges, in proportion to the number of shares each such holder has purchased pursuant to his or her respective Basic Subscription Privilege. A Holder's election to exercise the Over-Subscription Privilege must be made at the time such Holder exercises the Basic Subscription Privilege in full. The materials enclosed are being forwarded to you as the beneficial owner of shares of Common Stock carried by us in your account but not registered in your name. Exercises of subscription rights may only be made by us as the Holder of record and pursuant to your instructions. Accordingly, we request instructions as to whether you wish us to subscribe for any Shares for which you are entitled to subscribe for pursuant to the terms and conditions set forth in the enclosed Prospectus. HOWEVER, WE URGE YOU TO READ THESE DOCUMENTS CAREFULLY BEFORE INSTRUCTING US TO EXERCISE ANY SUBSCRIPTION RIGHTS. Your instructions to us should be forwarded as promptly as possible in order to permit us to exercise the subscription rights on your behalf in accordance with the provisions of the rights offering. The rights offering will expire at 5:00 p.m., Eastern Daylight Savings Time, on __________, 1999, unless extended by the Company in its sole discretion. ONCE YOU HAVE EXERCISED YOUR SUBSCRIPTION RIGHTS, YOU MAY NOT REVOKE YOUR ELECTION FOR ANY REASON. 2 If you wish to have us exercise, on your behalf, your right to purchase shares of Common Stock for which you are entitled to subscribe, please so instruct us by completing, executing, detaching and returning to us, and not the Subscription Agent, the attached Instruction Form along with proper payment for the number of shares for which you are subscribing at the subscription price. ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING SHOULD BE DIRECTED TO CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AT THE FOLLOWING TELEPHONE NUMBER: (800) 684-8823. 3 Aureal Semiconductor Inc. Instructions To Subscribe for Common Stock Pursuant to Rights Offering The undersigned acknowledges receipt of your letter and the enclosed materials referred to therein relating to the offering of rights to purchase shares of common stock, par value $0.001 (the "Common Stock"), of Aureal Semiconductor Inc. (the "Company"). This will instruct you on whether to purchase the Common Stock distributed with respect to the Company's Common Stock held by you for the account of the undersigned, pursuant to the terms and conditions set forth in the Prospectus. box 1. [ ] Please do not exercise my rights to purchase shares of Common Stock of the Company. box 2. [ ] Please exercise my rights to purchase _______ shares of the Common Stock of the Company as set forth below:
NUMBER OF SUBSCRIPTION SHARES PRICE PAYMENT ------------------------------------------------------------ Basic Subscription Privilege: X $0.60 = $ (Line 1) Oversubscription Privilege: X $0.60 = $ (Line 2) TOTAL PAYMENT REQUIRED = $ (Sum of Line 1 and Line 2)
Payment in the following amount is enclosed: $____________________ Signature(s) of Beneficial Owner: Date: _______________________ _________________________________ Address: ____________________ Print Name:______________________ _____________________________ Title or Capacity:_______________ (if applicable) Telephone (day):_________________________ (evening):_________________________ EX-5.1 7 OPINION OF GRAY CARY WARE & FREIDENRICH LLP 1 Exhibit 5.1 [Letterhead of Gray Cary Ware & Freidenrich LLP] April 1, 1999 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Aureal Semiconductor Inc. Registration Statement on Form S-3 Ladies and Gentlemen: As legal counsel to Aureal Semiconductor Inc., a Delaware corporation (the "Company"), we are rendering this opinion in connection with a proposed sale of those certain shares of the Company's Common Stock as set forth in the Registration Statement on Form S-3 to which this opinion is being filed as Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. We express no opinion with respect to (i) the availability of equitable remedies, including specific performance or (ii) the effect of bankruptcy, insolvency, reorganization, moratorium or equitable principles relating to or limiting creditors' rights generally. Based on such examination, we are of the opinion that the Shares identified in the above-referenced Registration Statement will be, upon effectiveness of the Registration Statement and when sold in accordance with the Registration Statement and the Subscription Agreement, validly authorized, legally issued, fully paid and nonassessable. 2 Securities and Exchange Commission April 1, 1999 Page Two We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and to the use of our name wherever it appears in said Registration Statement, including the Prospectus constituting a part thereof, as originally filed or as subsequently amended. Respectfully submitted, /s/ Gray Cary Ware & Freidenrich -------------------------------- GRAY CARY WARE & FREIDENRICH LLP EX-23.1 8 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form S-3 of our report dated March 31, 1999 included in Aureal Semiconductor Inc.'s Form 10-K for the year end January 3, 1999 and to all references to our Firm included in this registration statement. It should be noted that we have not audited any financial statements of the company subsequent to January 3, 1999 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP -------------------------------------- ARTHUR ANDERSEN LLP San Jose, California April 1, 1999 -----END PRIVACY-ENHANCED MESSAGE-----