<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
AUREAL SEMICONDUCTOR INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
AUREAL SEMICONDUCTOR INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MAY 20, 1998
Notice is hereby given that the Annual Meeting of Stockholders of Aureal
Semiconductor Inc. (the "Company") will be held on Wednesday, May 20, 1998 at
12:30 p.m., at the Company's headquarters at 4245 Technology Drive, Fremont,
California, for the following purposes:
1. To elect two class III Directors to hold office for a three-year term
and until their respective successors are elected and qualified or until
their earlier resignation or removal.
2. To ratify the appointment of Arthur Andersen LLP as the independent
accountants of the Company for the 1998 fiscal year.
3. To consider and transact such other business, if any, as may properly
come before the meeting or any adjournments or postponements thereof.
Only stockholders of record at the close of business on March 27, 1998 will
be entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof.
By Order of the Board of Directors
Brendan O'Flaherty
Secretary
Fremont, California
April 15, 1998
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN
THE ENCLOSED ENVELOPE.
<PAGE> 3
AUREAL SEMICONDUCTOR INC.
4245 TECHNOLOGY DRIVE
FREMONT, CALIFORNIA 94538
(510) 252-4245
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Aureal Semiconductor Inc., a Delaware corporation (the
"Company"), of proxies in the accompanying form, relating to the annual meeting
of stockholders (the "Annual Meeting") to be held on Wednesday, May 20, 1998 at
12:30 p.m., at 4245 Technology Drive, Fremont, California, or any adjournments
or postponements thereof. The Proxy Statement and the enclosed proxy are being
mailed to stockholders on or about April 17, 1998.
GENERAL INFORMATION
ANNUAL REPORT
An annual report on Form 10-K for the fiscal year ended December 28, 1997
is enclosed with this Proxy Statement.
RECORD DATE AND SHARES OUTSTANDING
Only stockholders of record at the close of business on March 27, 1998 are
entitled to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 42,082,938 shares of Common Stock, par value $0.001 per share,
of the Company (the "Common Stock").
REVOCABILITY OF PROXIES
Any stockholder giving a proxy for the meeting in the accompanying form may
revoke it at any time prior to it being voted, by filing with the Secretary of
the Company at the Company's principal executive office, 4245 Technology Drive,
Fremont, California 94538, an instrument of revocation or a duly executed proxy
bearing a later date, or by attending the Annual Meeting and voting in person.
VOTING AND SOLICITATION
Stockholders may vote in person or by proxy. Each share of Common Stock is
entitled to one vote on each proposal that comes before the Annual Meeting. The
Company's Bylaws provide that a majority of all of the shares of stock entitled
to vote, whether present in person or represented by proxy shall constitute a
quorum for the transaction of business at the meeting. Abstentions and broker
non-votes will be counted in determining whether a quorum is present at the
Annual Meeting.
If the enclosed proxy is properly executed and returned, the shares of
Common Stock represented thereby will be voted at the meeting in accordance with
the stockholder's instructions. If no instructions are given with respect to any
matter, the proxy will be voted in favor of such matter.
Directors, officers and other authorized employees of the Company may make
solicitation of proxies by personal interview, telephone or other means of
communication. No additional compensation will be paid for any such services.
Costs of solicitation, including preparation, assembly, printing and mailing of
this proxy statement, the proxy and any other information furnished to the
stockholders, will be borne by the Company. The Company will, upon request,
reimburse the reasonable charges and expenses of brokerage houses or other
nominees or fiduciaries for forwarding proxy materials to, and obtaining
authority to execute proxies from, beneficial owners for whose account they hold
shares of Common Stock.
1
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 12, 1998 by: (i) each person
who is known by the Company to own beneficially 5% or more of the outstanding
shares of Common Stock; (ii) each director and director-nominee of the Company;
(iii) the Chief Executive Officer and the four other most highly compensated
executive officers of the Company as of December 28, 1997 whose salary and bonus
for the year ended December 28, 1997 exceeded $100,000; and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
---------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) NUMBER PERCENT
---------------------------------------- ---------- -------
<S> <C> <C>
The TCW Group, Inc. and its affiliates(3)................... 19,533,648 43.4%
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
D. Richard Masson(4)................................... 21,863,981 48.3%
Thomas K. Smith, Jr.(5)................................ 19,533,648 43.4%
DDJ Capital Management, LLC(6).............................. 8,066,806 18.8%
141 Linden Street, Suite 4
Wellesley, MA 02181
Appaloosa Management L.P.(7)................................ 5,670,074 13.5%
51 JFK Parkway
Short Hills, NJ 07078
Kenneth A. Kokinakis(8)..................................... 1,360,000 3.1%
Richard E. Christopher(9)................................... 30,625 *
L. William Krause(10)....................................... 150,000 *
David J. Domeier(11)........................................ 373,686 *
Scott H. Foster(12)......................................... 1,877,144 4.3%
Michael L. Hunter(13)....................................... 396,419 *
Toni W. Schneider(14)....................................... 616,280 1.5%
All Directors and Executive Officers as a group (13
persons)(15).............................................. 28,300,258 55.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 4245 Technology Drive, Fremont, CA 94538.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options and warrants held by that person
that are currently exercisable or become exercisable within 60 days
following March 12, 1998 are deemed outstanding. However, such shares are
not deemed outstanding for purposes of computing the percentage ownership
of any other person. This table is based upon information supplied by
officers, directors and principal stockholders. Except as otherwise
indicated, the Company believes that the persons or entities named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
(3) The TCW Group, Inc. may be deemed to beneficially own 16,583,648 shares of
the Company's Common Stock. In addition, pursuant to warrants issued on
August 6, 1997 in conjunction with the purchase of shares of the Company's
Common Stock and renegotiation of the Company's line of credit, The TCW
Group, Inc. and its affiliates hold rights to acquire, in the aggregate, an
additional 2,950,000 shares of the Company's Common Stock. The total of
19,533,648 represents shares held or acquirable by limited partnerships,
trusts and third party separate accounts for which affiliates of The
2
<PAGE> 5
TCW Group, Inc. (collectively, "TCW") act as general partner, trustee or
investment advisor, respectively. TCW disclaims beneficial ownership of
such shares.
(4) Includes 19,533,648 shares deemed beneficially owned by TCW and 2,330,333
shares (2,080,333 shares owned and 250,000 shares issuable pursuant to
warrants issued August 6, 1997 in conjunction with the purchase of the
Company's Common Stock and expansion of the Company's line of credit) held
by a third party separate account for which Oaktree Capital Management, LLC
("Oaktree") acts as an investment advisor.
(5) To the extent Mr. Smith, as an authorized representative of Trust Company
of the West or TAMCO participates in the process to vote or dispose of the
shares described in footnote (3) above, he may be deemed under certain
circumstances for the purpose of Section 13 of the Securities Exchange Act
of 1934, as amended, to be the beneficial owner of such shares. Mr. Smith
disclaims beneficial ownership of such shares.
(6) DDJ Capital Management, LLC ("DDJ") may be deemed to beneficially own
7,241,806 shares of the Company's Common Stock. In addition, pursuant to
warrants issued on August 6, 1997 in conjunction with the purchase of
shares of the Company's Common Stock and expansion of the Company's line of
credit, DDJ and its affiliates hold rights to acquire, in the aggregate, an
additional 825,000 shares of the Company's Common Stock. The total
8,066,806 represents shares held or acquirable by DDJ and its affiliates.
DDJ, through its control of certain affiliates, has sole power to vote and
dispose of all 8,066,806 shares of the Company's Common Stock.
(7) All of the 5,670,074 shares are beneficially owned by Appaloosa Management
L.P. ("Appaloosa"). Mr. David A. Tepper, through his control of Appaloosa,
may be deemed to beneficially own all of the shares of the Company's Common
Stock beneficially owned by Appaloosa. Both Appaloosa and Mr. Tepper have
sole voting and dispositive power with respect to all 5,670,074 shares of
the Company's Common Stock.
(8) Includes 1,350,000 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 762,500 are not vested and subject
to repurchase by the Company.
(9) Includes 10,625 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998.
(10) Includes 150,000 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998.
(11) Includes 363,686 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 144,523 are not vested and subject
to repurchase by the Company.
(12) Includes 1,581,896 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 164,167 are not vested and subject
to repurchase by the Company.
(13) Includes 396,419 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 182,619 are not vested and subject
to repurchase by the Company.
(14) Includes 423,900 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 132,083 are not vested and subject
to repurchase by the Company.
(15) Includes 9,052,749 shares subject to immediately exercisable options or
issuable upon exercise of outstanding stock options exercisable within 60
days of March 12, 1998. Of such shares, 2,185,745 are not vested and
subject to repurchase by the Company.
3
<PAGE> 6
PROPOSAL 1
ELECTION OF DIRECTORS
The Company has a classified Board of Directors currently consisting of one
Class I Director (Kenneth A. Kokinakis), two Class II Directors (D. Richard
Masson and Richard E. Christopher), and two Class III Directors (L. William
Krause and Thomas K. Smith, Jr.), who will serve until the annual meetings of
stockholders to be held in 1999, 2000 and 1998 respectively, and until their
respective successors are duly elected and qualified. At each annual meeting of
stockholders, directors are elected for a full term of three years to succeed
those directors whose terms expire on the annual meeting dates.
The nominees for election at the Annual Meeting to Class III of the Board
of Directors are L. William Krause and Thomas K. Smith, Jr. If elected, the
Class III nominees, Messrs. Krause and Smith, will serve as directors until the
Company's annual meeting in 2001 and until their successors are elected and
qualified or until their earlier resignation or removal. If a nominee declines
to serve or becomes unavailable for any reason, or if a vacancy occurs before
the election (although management knows of no reason to anticipate that this
will occur), the proxies may be voted for such substitute nominee as management
may designate.
If a quorum is present and voting, the nominees for directors receiving the
highest number of votes will be elected as directors.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
The name of and certain other information regarding the current directors
and nominees for director are set forth in the following table.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY DIRECTOR SINCE
---- --- --------------------- --------------
<S> <C> <C> <C>
CLASS III DIRECTORS TO BE ELECTED AT THE 1998 ANNUAL MEETING OF
STOCKHOLDERS:
L. William Krause 55 Director April 1995
Thomas K. Smith, Jr. 33 Director December 1994
CLASS I DIRECTOR WHOSE TERM EXPIRES AT THE 1999 ANNUAL MEETING OF
STOCKHOLDERS:
Kenneth A. Kokinakis 44 President, Chief Executive February 1996
Officer and Director
CLASS II DIRECTORS WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING OF
STOCKHOLDERS:
D. Richard Masson 39 Director December 1994
Richard E. Christopher 50 Director November 1996
</TABLE>
Mr. Krause has served as a director of the Company since April 1995. Since
1991, he has been the President, Chief Executive Officer and a director of Storm
Technology Inc., a supplier of computer peripherals and software for digital
imaging. Prior to that, Mr. Krause was President and Chief Executive Officer of
3Com Corporation from 1981 to 1990 and Chairman of the Board from 1987 to 1993.
Mr. Krause is also a director of Sybase, Inc., a client server software company
and Inforseek Corporation, an internet media company.
Mr. Smith has served as a director of the Company since December 1994. Mr.
Smith is a Senior Vice President of Trust Company of the West and TAMCO,
wholly-owned subsidiaries of The TCW Group, Inc., which he joined in 1991 as an
investment analyst for TCW Special Credits. TCW Special Credits serves as
general partner, trustee and investment advisor to certain limited partnerships,
trusts, and accounts invested in the securities and debt obligations of
financially distressed companies. TAMCO is the managing general partner of TCW
Special Credits.
Mr. Kokinakis was appointed President and Chief Executive Officer of the
Company effective January 15, 1996 and a director of the Company effective
February 7, 1996. Prior to joining the Company, Mr. Kokinakis served as the
Managing Director and Chief Executive Officer of Memec (Asia-Pacific), an
electronic component distributor, since January 1991. Prior to 1991, Mr.
Kokinakis held various executive sales and marketing positions at Xilinx, Inc.
and Microchip Technology Inc.
4
<PAGE> 7
Mr. Masson has served as a director of the Company since December 1994. Mr.
Masson has been a Principal of Oaktree since its founding in May 1995. Prior to
the founding of Oaktree, Mr. Masson was, and continues as, a partner of TCW
Special Credits and served as a Managing Director of Trust Company of the West
and TAMCO, wholly-owned subsidiaries of The TCW Group, Inc. Mr. Masson also
serves as a director of the Peregrine Real Estate Trust.
Mr. Christopher has served as a director of the Company since November
1996. Since July 1992, Mr. Christopher has been the Vice President of Worldwide
Sales for Chips and Technologies Inc., a supplier of advanced graphic
controllers and accelerators for notebook computers (a subsidiary of Intel
Corporation). Prior to joining Chips and Technologies Inc., Mr. Christopher
spent twelve years at Fujitsu Microelectronics where he became Senior Vice
President and General Manager.
BOARD COMPENSATION
Pursuant to the Company's 1996 Outside Directors Stock Option Plan (the
"1996 Plan"), Mr. Christopher and Mr. Krause receive automatic annual stock
option grants to purchase 5,000 shares of the Company's Common Stock. In
addition, pursuant to the 1996 Plan, when Mr. Christopher was appointed as a
director in November 1996, he received an initial stock option grant to purchase
30,000 shares of the Company's Common Stock. Each of the grants is priced at
market price on the date of grant and vests 25% on the one year anniversary of
the grant, with additional vesting at the rate of 2.08% per month thereafter for
the remaining term (total four year vesting). Prior to adoption of the 1996
Plan, as compensation for service on the Board, the Company granted, in April
1995 upon his appointment to the Board, to Mr. Krause an option to purchase
100,000 shares of the Company's Common Stock. In addition, the Company granted
an additional option to purchase 50,000 shares of the Company's Common Stock to
Mr. Krause in September 1995. Both options were granted at market price on the
date of grant and vested 25% upon grant and an additional 25% at the end of each
six-month period thereafter.
As cash compensation for services on the Board, Messrs. Krause and
Christopher receive $500 for each Board meeting attended. The other directors do
not receive any compensation for their services as members of the Board. All
non-management directors are reimbursed for their reasonable expenses incurred
in attending meetings of the Board and committees of the Board.
Messrs. Masson and Smith have declined to participate in the stock option
plans or receive payment for their attendance at Board meetings in connection
with their employment with Oaktree and TCW, respectively, both of which are
deemed beneficial owners of significant portions of the Company's Common Stock.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board held six meetings and acted three times by written consent during
fiscal 1997. Each incumbent director attended at least 75% of the aggregate
meetings of the Board of Directors and of the committees, if any, on which he
served in fiscal 1997 that were held while he was a director or a member of such
committee.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The current members of the Audit Committee are Messrs.
Krause and Christopher. The Audit Committee recommends engagement of the
Company's independent accountants, reviews the scope of the audit, considers
comments made by the independent accountants and reviews the non-audit services
provided by the Company's independent accountants. The Audit Committee held two
meetings during fiscal 1997.
The Compensation Committee determines the compensation for the Company's
senior management and administers the Company's stock option plans for officers,
directors, employees and consultants. The current members of the Compensation
Committee are Messrs. Masson and Smith. The Compensation Committee held one
meeting and acted eight times by written consent, for the purpose of approving
stock option grants, during fiscal 1997. For additional information concerning
the Compensation Committee, see "REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION".
During 1997, the Board of Directors established a Special Committee of
Disinterested Directors with authority to review and approve all documents
prepared in connection with equity transactions involving any
5
<PAGE> 8
parties related to members of the Board of Directors. This Special Committee
(consisting of Messrs. Christopher and Krause) met twice to review and approve
documents related to the August 1997 sale of 1,910,000 units (the units
consisting of one share of Common Stock of the Company and one half of one
warrant to buy an additional share of the Company's Common Stock). The Company
sold 1,910,000 units of which Oaktree and TCW each purchased 500,000 units.
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company as of December 28, 1997 whose
total salary for the year ended December 28, 1997 exceeded $100,000 for services
in all capacities to the Company during fiscal 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- ----------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(10) BONUS OPTIONS COMPENSATION(1)
--------------------------- ----- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Kenneth A. Kokinakis(2)................... 1997 $200,000 $100,000 350,000 $ 4,750
President and Chief 1996 $184,615 $100,000 1,000,000 $ 47,240(3)
Executive Officer
David J. Domeier(4)....................... 1997 $175,000 110,000 $ 4,750
Vice President, Finance 1996 $174,327 87,500 $ 4,750
And Chief Financial Officer 1995 $119,808 175,000 $ 2,432
Scott H. Foster(5)........................ 1997 $180,000 70,000 $104,750(6)
Chief Technical Officer 1996 $ 97,789 200,000 $ 54,750
Michael L. Hunter(7)...................... 1997 $140,000 $ 30,000 140,000 $ 4,750
Vice President, Sales 1996 $138,600 $ 22,500 137,500 $ 4,750
1995 $112,385 $ 30,000 125,000 $ 4,620
Toni W. Schneider(8)...................... 1997 $130,365 90,000 $ 79,750
Vice President, Advanced 1996 $ 60,231 100,000 $ 41,619
Audio Products
</TABLE>
- ---------------
(1) Unless otherwise noted, represents the Company's contribution to the
employee's 401(k) plan account as a partial match to the employee's
contributions for the year noted.
(2) Mr. Kokinakis joined the Company in January 1996; compensation indicated
for 1996 was for the partial year. The bonuses indicated were paid early in
the following year for services in the year noted.
(3) Includes moving and other associated expenses incurred by Mr. Kokinakis for
his transfer from Hong Kong to join the Company.
(4) Mr. Domeier joined the Company in March 1995; compensation indicated for
1995 was for the partial year.
(5) Mr. Foster joined the Company in May 1996 through the merger with Crystal
River Engineering Inc. ("CRE"), of which he was the Chief Executive
Officer; compensation indicated for 1996 was for the partial year.
(6) Payments totaling $100,000 and $50,000 were made to Mr. Foster during 1997
and 1996 respectively, related to the merger with CRE and his continued
involvement with the merged companies. No further related payments are to
be made.
6
<PAGE> 9
(7) Mr. Hunter joined the Company in January 1995; compensation indicated for
1995 was for the partial year. Mr. Hunter's bonus payments for 1997 and
1996 reflected guaranteed commissions while the Company was largely engaged
in product development and "pre-sales" customer contact efforts.
(8) Mr. Schneider joined the Company in May 1996 through the merger with CRE,
of which he was Vice President, Marketing; compensation indicated for 1996
was for the partial year.
(9) Payments totaling $75,000 and $37,500 were made to Mr. Schneider during
1997 and 1996 respectively, related to the merger with CRE and his
continued involvement with the merged companies. No further related
payments are to be made.
(10) As part of the Company's restructuring efforts in 1995, all officers
employed at July 1, 1995 voluntarily took a 10% reduction in pay.
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table sets forth information with respect to the options to
purchase Common Stock granted to the executive officers named in the Summary
Compensation Table during the year ended December 28, 1997. The Company did not
grant any stock appreciation rights during fiscal 1997.
OPTIONS GRANTED IN FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(4)
OPTIONS IN FISCAL EXERCISE EXPIRATION ----------------------------
NAME GRANTED (1) YEAR(2) PRICE(3) DATE 5% 10%
---- ----------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Kokinakis..... 150,000 5.0% $2.19 04/29/07 $206,592 $523,544
200,000 6.7% $1.75 12/08/07 $220,113 $557,810
David J. Domeier......... 40,000 1.3% $2.19 04/29/07 $ 55,091 $139,612
70,000 2.3% $1.75 12/08/07 $ 77,040 $195,233
Scott H. Foster.......... 40,000 1.3% $2.19 04/29/07 $ 55,091 $139,612
30,000 1.0% $1.75 12/08/07 $ 33,017 $ 83,671
Michael L. Hunter........ 40,000 1.3% $2.19 04/29/07 $ 55,091 $139,612
100,000 3.3% $1.75 12/08/07 $110,057 $278,905
Toni W. Schneider........ 40,000 1.3% $2.19 04/29/07 $ 55,091 $139,612
50,000 1.7% $1.75 12/08/07 $ 55,028 $139,452
</TABLE>
- ---------------
(1) These options are immediately exercisable at the date of grant, but shares
purchased upon exercise of unvested options are subject to repurchase at the
option of the Company at their original issuance price. All options in this
table have exercise prices equal to the fair market value on the date of
grant. The options vest over a period of four years and expire ten years
from the original date of grant.
(2) The Company granted options for 2,992,000 shares of Common Stock to
employees in fiscal 1997 under the 1995 Stock Option Plan.
(3) The exercise price may be paid in cash or by delivery of already-owned
shares subject to certain conditions.
(4) The potential gain is determined by comparing the grant price to the assumed
values as calculated utilizing the annual stock price appreciation rates
indicated. These amounts represent only certain assumed rates of
appreciation as established by the Securities and Exchange Commission for
such disclosure, and do not represent the Company's estimates or projections
of future stock prices. Actual gains, if any, on stock option exercises and
Common Stock holdings are dependent upon the future performance of the
Company and overall stock market conditions. There can be no assurance that
the amounts reflected in this table or the associated rates of appreciation
will be achieved.
7
<PAGE> 10
OPTION EXERCISES AND FISCAL 1997 YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value
of unexercised options held by the executive officers named in the Summary
Compensation Table on December 28, 1997. In addition, it sets forth the number
of shares acquired and value realized upon exercise of stock options during
fiscal 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE --------------------------------------- -----------------------
NAME EXERCISE (#) REALIZED EXERCISABLE VESTED UNEXERCISABLE VESTED UNVESTED
---- ------------ -------- ----------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth A Kokinakis 0 $ 0 1,350,000 462,500 0 $ 596,722 $838,603
David J. Domeier 0 $ 0 359,679 194,679 12,821 $ 153,353 $122,852
Scott H. Foster 100,000 $242,650 1,489,799 1,294,799 213,145 $2,603,847 $517,674
Michael L. Hunter 0 $ 0 393,041 188,041 9,459 $ 151,907 $146,320
Toni W. Schneider 192,380 $454,228 349,200 196,700 112,050 $ 341,882 $299,937
</TABLE>
- ---------------
(1) Value per share is defined as the market price of the Company's Common Stock
at year-end minus the per share exercise price of the option. The per share
price of the Common Stock at December 28, 1997 was $2.375 as reported on the
OTC Bulletin Board.
REPRICED OPTIONS
The following table provides the specified information concerning all
repricings of options to purchase the Company's Common Stock held by any
executive officer of the Company since November 11, 1992, the date of the
Company's initial public offering.
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE EXERCISE OPTION TERM
UNDERLYING OF STOCK AT PRICE AT REMAINING AT
OPTIONS TIME OF TIME OF DATE OF
REPRICING REPRICED OR REPRICING OR REPRICING OR NEW EXERCISE REPRICING OR
NAME AND POSITION DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
----------------- --------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sanjay Iyer, 04/04/95 40,000 $1.875 $4.00 $1.875 117 months
Vice President, PC Products
Brendan O'Flaherty, 04/04/95 75,000 $1.875 $4.00 $1.875 117 months
Vice President, Consumer
Products & General Counsel
Gary M. Catlin, 04/04/95 30,000 $1.875 $4.00 $1.875 117 months
Vice President, Engineering
Former Executive Officers
Leonard L. Backus (1) 04/04/95 75,000 $1.875 $4.00 $1.875 117 months
Robert G. Brownell (2) 04/04/95 300,000 $1.875 $4.00 $1.875 117 months
Bharat Sastri (3) 04/04/95 200,000 $1.875 $4.00 $1.875 117 months
</TABLE>
- ---------------
(1) Mr. Backus resigned as Vice President, International Sales and Marketing of
the Company on October 6, 1995.
(2) Mr. Brownell resigned as President and Chief Executive Officer of the
Company on December 31, 1995.
(3) Mr. Sastri resigned as Vice President, Technology of the Company on August
9, 1995.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with the Company's acquisition of CRE, Messrs. Scott H.
Foster and Toni W. Schneider entered into employment agreements with the
Company. The agreements contained certain provisions regarding termination of
their employment with the Company within the first twelve months of their
employment, which commenced on May 29, 1996.
8
<PAGE> 11
The Company's 1994 Stock Option Plan and the 1996 Plan contain provisions
pursuant to which all outstanding options granted under the plans will become
fully vested and immediately exercisable upon certain changes of control and
related events.
Options granted under the Company's 1995 Stock Option Plan (the "1995
Plan") generally are immediately exercisable, subject to the right of the
Company to repurchase, at the optionee's original purchase price, any shares
acquired upon exercise of unvested options that are held by the optionee upon
termination of service with the Company (the "Company Repurchase Right"). The
Company Repurchase Right lapses over time while the optionee remains in
continuous service with the Company in accordance with a vesting schedule
established for each option granted. In addition, option agreements entered into
with each optionee under the 1995 Plan generally provide that in the event of
certain changes in control, the Company Repurchase Right will automatically
terminate unless the option is assumed by the acquiring party or such party
substitutes equivalent options for the acquiring party's stock. In the event an
option is assumed or substituted for by the acquiring party, option agreements
under the 1995 Plan generally further provide for automatic termination of the
Company Repurchase Right if the optionee is terminated without cause or resigns
for good cause within twelve months following certain changes in control of the
Company.
CHANGES TO BENEFIT PLANS
At the annual stockholders meeting on May 21, 1997, the stockholders
approved adoption of the 1996 Plan. The terms of the 1996 Plan include
provisions which provide for automatic granting of options to purchase 30,000
shares of the Company's Common Stock to outside directors upon their initial
appointment or election to the Board, as well as automatic granting of options
to purchase 5,000 shares of the Company's Common Stock provided each person
remains a director on their anniversary date. Employee directors are not
eligible to participate in the 1996 Plan. Messrs. Masson and Smith, because of
their employment with Oaktree and TCW, respectively, both of which are deemed
beneficial owners of significant portions of the Company's Common Stock, have
declined to participate in the 1996 Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TCW maintains beneficial ownership of approximately 43% of the outstanding
shares of Common Stock of the Company. Mr. Masson, a director of the Company, is
a principal of Oaktree which provides investment sub-advisory services to a TCW
affiliate. Mr. Smith, also a director of the Company, is a Senior Vice President
of Trust Company of the West and TAMCO, wholly-owned subsidiaries of the TCW
Group, Inc. TAMCO is the managing general partner of TCW Special Credits.
In addition to its beneficial ownership position in the Common Stock of the
Company, TCW acts as the managing agent and primary lender under a line of
credit to the Company. The amount of available credit and the terms of the line
of credit (including its maturity date) have been amended over time since the
line was first established in 1994. The available line has ranged from $10
million to its current level of $31.5 million. As the availability has been
increased and the maturity date extended over time, the Company has paid the
lenders various fees. These fees included $200,000 in 1995 to increase the line
from $15 million to $22 million, and to extend the maturity date through March
1996, and $220,000 in 1996 to extend the maturity date through March 1998.
In August 1997, in conjunction with a private placement of $3.8 million of
the Company's Common Stock, including sales to both TCW and DDJ, the Company's
line of credit was expanded from $22 million to $31.5 million. DDJ became a
participating lender under the line of credit for up to $4.5 million of the
total of $31.5 million. At that time, the maturity date of the line of credit
was also extended to March 1999. For the expansion of the line of credit and the
extension of the maturity date, the Company paid the lenders $630,000 and also
issued to the lenders 3.15 million warrants to purchase the Company's Common
Stock at an exercise price of $2.00 per share. The Company has the right to
extend the maturity date for the line of credit through March 2000 upon the
payment of a fee of $630,000. Borrowings under the line of credit bear interest
at the prime rate to borrowers of Bank of America plus 5% and the lenders have
the benefit of certain covenants. On March 12, 1998, the outstanding balance
under the line of credit was $23.2 million.
9
<PAGE> 12
In August 1997, the Company sold 1.910 million units (the units consisting
of one share of Common Stock of the Company and one-half of one warrant to buy
an additional share of the Company's Common Stock) in a private placement to a
limited number of pre-existing stockholders of the Company. The individual units
were priced at $2.00, and the exercise price for the warrants was $2.00 per
share. Oaktree, TCW and DDJ purchased 500,000, 500,000 and 750,000 units,
respectively, in the transaction. In September 1997, the Company amended its
pre-existing (Form S-3) shelf registration statement to include registration of
the shares sold and subject to issuance upon exercise of the warrants.
The Company's Bylaws provide that the Company shall indemnify its officers,
directors and employees to the fullest extent permitted by law. The Bylaws
expressly authorize the use of indemnity agreements and the Company has entered
into such agreements with each of its directors and officers. The Company also
maintains insurance policies, which cover the officers and directors for any
liability arising out of their actions in such capacities.
The Company believes that all transactions described above were on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
outstanding shares of the Company's Common Stock, to file with the Securities
and Exchange Commission initial reports of ownership (Form 3) and changes in
ownership of such stock and other equity securities of the Company (Forms 4 and
5). Such persons are also required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon review of the copies of such
reports and certain representations furnished to it, all Section 16 filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial holders were complied with on a timely basis during the
fiscal year ended December 28, 1997.
10
<PAGE> 13
COMPARISON OF STOCKHOLDER RETURN
SEC regulations require presentation of information relative to the return
to stockholders based on the share price of the Company's Common Stock over the
last five years. For the Company, that five year period encompasses two distinct
and separate periods of stock ownership. The first period ran from the Company's
initial public offering in November 1992 through December 1994 when the Company
exited Chapter 11 Bankruptcy proceedings and all of the previously outstanding
Common Stock of the Company ("Company's Old Common Stock") was canceled. During
that time, the Company, operating under the name Media Vision Technology, Inc.,
competed to sell PC upgrade products in the retail marketplace, and thus its
stock price was compared against an index for computer manufacturers. These
results are shown in the first chart below. The second period of the Company's
stock price comparisons began in January 1995 when new Common Stock was issued
and began to trade post-Chapter 11 exit. During this time, the Company has
focused it primary efforts on the development and marketing of audio
technologies and related semiconductor devices for sale to manufacturers of PC
and consumer electronics products; therefore the stock price comparisons include
the semiconductor industry index.
The chart below compares the cumulative total return on the Company's Old
Common Stock with the cumulative return of the CRSP Total Return Index for the
NASDAQ National Market and the CRSP Total Return Index for Computer
Manufacturers for the period commencing on November 11, 1992 (the date trading
of the Company's Old Common Stock began) and ending on December 30, 1994 (the
date at which the Company's Old Common Stock was canceled pursuant to the Plan
of Reorganization). The chart assumes that $100.00 was invested in the Company's
Old Common Stock and each of the Indexes on November 11, 1992 and that
dividends, if any, were reinvested. As the Company's Old Common Stock was
canceled and no longer trades on any market system, this stock is not tracked on
the performance chart after December 30, 1994.
<TABLE>
<CAPTION>
MEDIA VISION COMPUTER
Measurement Period (Old Common NASDAQ MANUFACTURER'S
(Fiscal Year Covered) Stock) MARKET INDEX INDEX
<S> <C> <C> <C>
11/11/92 100.00 100.00 100.00
12/31/92 109.10 103.68 106.00
12/31/93 198.90 119.01 100.46
12/30/94 0.00 116.34 110.34
</TABLE>
<TABLE>
<CAPTION>
11/11/92 12/31/92 12/31/93 12/30/94
-------- -------- -------- --------
<S> <C> <C> <C> <C>
MEDIA VISION (Old Common Stock)..................... $100.00 $109.10 $198.90 $ 0.00
NASDAQ MARKET INDEX................................. $100.00 $103.68 $119.01 $116.34
COMPUTER MANUFACTURER'S INDEX....................... $100.00 $106.00 $100.46 $110.34
</TABLE>
11
<PAGE> 14
The Company's new Common Stock was initially issued on December 30, 1994 to
the creditors of the Company and initially traded on the OTC Bulletin Board on
January 6, 1995. The closing price of the Common Stock on that date was $2.75.
The closing price of the Company's Common Stock on the last trading day of
fiscal 1997 was $2.375. The chart below compares the cumulative total return on
the Company's Common Stock with the cumulative return of the NASDAQ Market Index
and a Semiconductor Index (118 companies with the 3674 SIC
Code -- Semiconductors and Related Devices). The chart assumes that $100 was
invested in the Company's Common Stock and each of the Indexes on January 6,
1995 and that dividends, if any, were reinvested.
<TABLE>
<CAPTION>
AUREAL
Measurement Period COMMON NASDAQ SEMICONDUCTOR
(Fiscal Year Covered) STOCK MARKET INDEX
<S> <C> <C> <C>
1/6/95 100.00 100.00 100.00
12/29/95 50.00 129.71 162.40
12/29/96 71.59 161.18 261.45
12/28/97 86.36 197.16 272.45
</TABLE>
<TABLE>
<CAPTION>
1/6/95 12/29/95 12/29/96 12/28/97
------- -------- -------- --------
<S> <C> <C> <C> <C>
AUREAL COMMON....................................... $100.00 $ 50.00 $ 71.59 $ 86.36
NASDAQ MARKET INDEX................................. $100.00 $129.71 $161.18 $197.16
SEMICONDUCTOR INDEX................................. $100.00 $162.40 $261.45 $272.45
</TABLE>
12
<PAGE> 15
REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION
The Compensation Committee is comprised of two outside directors of the
Board of Directors, Messrs. Masson and Smith. The Committee reviews and
determines the Company's executive compensation objectives and policies and
administers the Company's stock option plans. The Committee reviews and sets the
compensation of the Company's Chief Executive Officer, and taking into account
recommendations of the Chief Executive Officer, sets the compensation for all
other executive officers. The Company's compensation program for executive
officers is designed to attract and retain highly talented and productive
individuals, and to align the interests of the executive officers with the
interests of the Company's stockholders by basing a significant portion of
compensation on stock value, via stock option grants.
SALARY
The Committee annually reviews the salaries of the Company's executive
officers. When setting salary levels, the Committee considers competitive market
conditions, Company performance and individual performance. Market competitive
salary levels are reviewed relative to external data provided for comparable
positions in companies in the same industry of similar size and geographic
location. The base salary and bonus for Mr. Kokinakis, the Company's President
and Chief Executive Officer was unchanged from 1996 to 1997.
BONUSES
The Company did not have a bonus plan and did not pay any cash bonuses to
executive officers for services in 1997, except for a bonus of $100,000 to Mr.
Kokinakis in connection with his employment agreement. The Committee believes
that his services met the requirements of his employment agreement and that the
Company has achieved significant progress in 1997.
As shown on the Summary Compensation Table (see Executive Compensation),
Messrs. Foster and Schneider received payments indicated as other compensation
during 1997 and 1996. These payments were not made pursuant to any Company bonus
plan, but rather were payments made per the terms of their individual employment
agreements entered into simultaneously with their commencement of employment
with the Company and the merger of their former firm, Crystal River Engineering,
Inc. with the Company on May 29, 1996. The payments were made in connection with
their continued employment with the Company through November 29, 1997. No
further payments are to be made per these agreements.
STOCK OPTIONS
The Compensation Committee and the Company's management strongly believe
that employee equity ownership provides significant motivation to executive
officers and all Company employees to maximize value for the Company's
stockholders. In addition, such equity ownership helps retain key employees in a
competitive marketplace. Therefore, the Committee periodically grants options
under the Company's option plans. To date, all employees have been granted stock
options upon initial employment with the Company. The Committee has also made
incremental stock option grants, upon the recommendation of management, to some
individuals. All stock options are granted by the Committee at the then current
market price of the Company's Common Stock and have value only as the price of
the Company's Common stock increases over the granted exercise price.
The Compensation Committee believes that it is standard industry practice,
and in the best interests of the Company and its stockholders, for approximately
20% of the Company's Common Stock, on a fully diluted basis, to be available for
employees as a group. Consequently, the Company has instituted stock option
plans that provide for this availability. The Company and the Compensation
Committee are strongly committed to providing competitive compensation packages
to its employees to ensure a continuation of attracting and retaining top
quality technical, management and support personnel.
13
<PAGE> 16
CEO COMPENSATION
Mr. Kokinakis commenced employment with the Company in January, 1996
pursuant to a letter agreement that provided a base salary of $200,000 per year,
with the potential to earn an annual cash incentive bonus of up to 50% of his
base salary. The Compensation Committee approved his bonus of $100,000 for 1997
in recognition of the Company's significant achievements during the year. In
addition, during 1997, Mr. Kokinakis was granted stock options to purchase
350,000 shares of Common Stock as part of grants to all employees.
THE COMPENSATION COMMITTEE
D. Richard Masson
Thomas K. Smith, Jr.
14
<PAGE> 17
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, upon the recommendation of management, has selected
Arthur Andersen LLP as independent accountants to audit the financial statements
of the Company for the 1998 fiscal year. Arthur Andersen LLP has acted in such
capacity since its appointment effective January 30, 1995 to audit the Company's
financial statements for the 1994 fiscal year. Representatives of Arthur
Andersen LLP are expected to be present at the Annual Meeting and will have an
opportunity to make a statement, if they desire to do so, and be available to
respond to questions raised during the meeting.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
Approval of this proposal requires the affirmative vote of a majority of
the votes present or represented by proxy and entitled to vote at the Annual
Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present and voting, either
in person or by proxy. Abstentions and broker non-votes will each be counted as
present for purposes of determining the presence of a quorum but will not be
counted as having been voted on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR FISCAL YEAR 1998.
STOCKHOLDER PROPOSALS
Under the rules of the Securities and Exchange Commission, stockholders who
wish to submit proposals for inclusion in the Proxy Statement for the annual
meeting of stockholders to be held in 1999 must submit such proposals so as to
be received by the Company at 4245 Technology Drive, Fremont, California 94538,
Attention: Shareholder Relations, not later than December 22, 1998, and satisfy
the conditions established by the Securities and Exchange Commission for
stockholder proposals to be included in the Company's proxy statement for that
meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting,
is as set forth above. If any other matters are properly brought before the
meeting or any adjournment thereof, it is the intention of the persons named in
the accompanying form of proxy to vote the proxy on such matters in accordance
with their best judgment.
By Order of the Board of Directors
Brendan O'Flaherty
Secretary
April 15, 1998
15
<PAGE> 18
PROXY
AUREAL SEMICONDUCTOR INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD WEDNESDAY, MAY 20, 1998
The undersigned hereby appoints David J. Domeier and Brendan R. O'Flaherty, or
either of them, each with full power of substitution, as the proxyholder(s) of
the undersigned to represent the undersigned and vote all shares of the Common
Stock of Aureal Semiconductor Inc. (the "Company") which the undersigned would
be entitled to vote if personally present at the annual meeting of
stockholders of the Company on Wednesday, May 20, 1998, and at any adjournments
or postponements of such meeting, as follows:
(Continued and to be signed on reverse side.)
* FOLD AND DETACH HERE *
<PAGE> 19
Please mark
your votes as
indicated on [ X ]
this example.
FOR all nominees WITHHOLD
listed except those AUTHORITY
whose names are to vote for all
handwritten below. listed nominees.
1. To elect L. William Krause
and Thomas K. Smith, Jr. [ ] [ ]
as Class III Directors to
hold office for a three year
term and until their successors
are elected.
To withhold authority to vote
for any of the above nominees,
write the nominee's name below:
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To ratify the appointment of
Arthur Andersen LLP
as independent accountants of
the Company for the 1998 fiscal
year.
The Board recommends that you vote FOR the above proposals.
This proxy, when properly executed, will be voted in the
manner directed above. WHEN NO CHOICE IS INDICATED, THIS
PROXY WILL BE VOTED FOR THE ABOVE PROPOSALS. This proxy may
be revoked by the undersigned at any time, prior to the time
it is voted by any of the means described in the
accompanying proxy statement.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE.
Signature(s) ___________________________________________ Date: __________, 1998
Date and sign exactly as name(s) appear(s) on this proxy. If signing for
estates, trusts, corporations or other entities, title or capacity should be
stated. If shares are held jointly, each holder should sign.
* FOLD AND DETACH HERE *
