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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999
REGISTRATION NO. 333-75631
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AUREAL SEMICONDUCTOR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3117385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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. [ ]
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.
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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
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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 April 22, 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
April 22, 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 May
21, 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.
Certain funds and accounts managed by Oaktree Capital Management, LLC,
referred to as Oaktree, or by TCW Special Credits, referred to as TCW, or any
combination of the funds and accounts managed by Oaktree and TCW, being
collectively referred to herein as the Standby Purchasers, have committed, on a
several and not a joint and several basis, to subscribe for any shares of common
stock that are not subscribed for by our other stockholders, up to an aggregate
of $20 million.
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.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 5
WHERE YOU CAN FIND MORE
INFORMATION....................... 12
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS........ 13
USE OF PROCEEDS..................... 13
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PRINCIPAL STOCKHOLDERS.............. 13
THE RIGHTS OFFERING................. 16
FEDERAL INCOME TAX CONSIDERATIONS... 22
LEGAL MATTERS....................... 24
EXPERTS............................. 24
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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;
- 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.
In addition, we have agreed to issue an additional 26.2 million shares of
common stock to holders of our series B preferred stock who convert their shares
into common stock upon the closing of the rights offering. These additional 26.1
million shares will not be registered but we will grant standard demand and
piggyback registration rights to the holders of these shares. We understand that
TCW and Oaktree, holders of all of our series B preferred stock, have agreed to
convert their shares of series B preferred stock into 20.5 million shares of
common stock upon the closing of the rights offering. Immediately following the
rights offering, the conversion of all outstanding series B preferred stock into
approximately 20.5 million shares of common stock, and the issuance of an
additional 26.2 million shares of our common stock to the holders of series B
preferred stock who convert those shares upon the closing of the rights
offering, we intend to effect, subject to stockholder approval, a
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. The Standby Purchasers have agreed to purchase their pro
rata portion of the rights offering and to purchase any rights our other
stockholders elect not to acquire. A special committee of disinterested
directors has approved the issuance of the additional 26.2 million shares of
common stock upon conversion of the series B preferred stock, and the rights
offering. Mr. Masson, a director of Aureal who, by virtue of his affiliations
with Oaktree and TCW, is deemed to have voting control of approximately 59% of
our voting stock, is not a member of the disinterested committee of directors
and did not vote on this matter.
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 April 22,
1999.
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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 April 22,
1999. The offering price is $0.60 per share.
(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: May 21, 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.
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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
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 STANDBY
PURCHASERS: The Standby Purchasers will receive
subscription rights to purchase
approximately 19.7 million shares of our
common stock. They have agreed to exercise
their respective subscription rights in
full. In addition, the Standby Purchasers
have agreed, subject to the terms and
conditions contained in a Standby Purchase
Agreement, 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, the
Standby Purchasers will, in the aggregate,
own between 73% and 81% of our outstanding
common stock depending on whether and to
what extent other stockholders exercise
their subscription rights and assuming
conversion of all outstanding preferred
stock.
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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.
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.
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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.
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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
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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.
A DIRECTOR OF AUREAL HAS VOTING CONTROL OVER A SUBSTANTIAL AMOUNT OF OUR STOCK
AND MAY, THEREFORE, INFLUENCE OUR AFFAIRS
As of March 22, 1999, Richard Masson, a director of Aureal, is deemed to
have voting control over approximately 59% of our common stock as a result of
his affiliations with Oaktree and TCW. As a result of the amount of our stock
deemed to be under the stockholder voting control of Mr. Masson, Mr. Masson may
directly and indirectly influence the affairs of Aureal requiring stockholders'
approval. Oaktree and TCW also own 100% of the outstanding shares of our series
B preferred stock, which, upon the closing of our rights offering, will convert
into approximately 20.5 million shares of our common stock. In addition, we have
agreed to issue an additional 26.2 million shares of our common stock to Oaktree
and TCW upon their conversion of our series B preferred stock on the closing of
the rights offering. In connection with the rights offering, Oaktree and TCW
have the right to subscribe for an aggregate of 19.7 million shares of our
common stock. Accordingly, Mr. Masson can be deemed to be, 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.
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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.
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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.
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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
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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
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<PAGE> 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.
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<PAGE> 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. 333-75631). 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 16, 1999.
(3) Aureal's Annual Report on Form 10-K/A for the fiscal year ended
January 3, 1999 filed on April 16, 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
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<PAGE> 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 stockholder 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 but not the issuance of
the 26.2 million additional shares to be issued to holders of those shares. 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
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<PAGE> 17
regulations require that we include stock options exercisable within 60 days 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 noted above, the Standby Purchasers
have 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.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO THE RIGHTS BENEFICIAL OWNERSHIP
OFFERING AFTER THE RIGHTS OFFERING
-------------------- -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES PERCENT SHARES PERCENT
------------------------------------- ---------- ------- ------------- ---------
<S> <C> <C> <C> <C>
Oaktree Capital Management, LLC(1)...... 23,018,617 34.6% 40,872,046 27.9%
333 South Grand Street, 28th Floor
Los Angeles, CA 90071
D. Richard Masson(2).................... 42,626,980 61.4% 109,033,430 72.9%
The TCW Group, Inc. and its
affiliates(3)......................... 19,608,363 28.7% 68,161,384 45.9%
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Thomas K. Smith(4)...................... 19,608,363 28.7% 68,161,384 45.9%
Appaloosa Management L.P................ 5,560,074 8.5% 8,391,643 5.8%
26 Main Street
Chatham, New Jersey 07928
Kenneth A. Kokinakis(5)................. 1,625,000 2.4% 1,637,732 1.1%
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 1.5%
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% 115,150,149 74.3%
</TABLE>
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<PAGE> 18
- -------------------------
* Less than 1%.
(1) Oaktree acts as an investment manager for certain funds and accounts,
including certain of the Standby Purchasers, and in that capacity, may be
deemed to beneficially own securities held by those funds and accounts.
Includes 1,075,000 shares of common stock that may be issued upon exercise
of warrants issued to Oaktree. Does not include 5,969 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 held by
Oaktree. As of March 22, 1999, the 5,969 shares of series B preferred stock
were convertible, at the option of the holder, into 2,396,738 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. Oaktree expressly disclaims beneficial ownership on the shares
referenced herein. The series C preferred stock have no voting rights.
(2) To the extent that Mr. Masson, as an authorized representative of Oaktree
and TCW, participates in the process to vote or dispose of any Oaktree or
TCW controlled shares, he may be deemed to be the beneficial owner of those
shares. Mr. Masson disclaims beneficial ownership of those shares.
(3) TCW acts as an investment manager of certain funds and accounts, including
certain of the Standby Purchasers and in that capacity, may be deemed to
beneficially own securities held by those funds and accounts. Includes
2,950,000 shares of common stock that may be issued upon exercise of
warrants issued to TCW. Does not include 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 TCW acts
as general partner, trustee and investment advisor respectively. TCW and
its affiliates expressly disclaim 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.
(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.
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<PAGE> 19
(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 April 22, 1999. The
rights offering is not open to anyone who did not own common stock on April 22,
1999.
We are offering stockholders the opportunity to purchase one share of
common stock for every shares of common stock they owned on April 22,
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
April 22, 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.
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
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<PAGE> 20
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 May 21, 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 April , 1999, we will distribute the subscription rights and
copies of this prospectus to individuals who owned shares of our common stock on
April 22, 1999. 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.
EXPIRATION DATE
The rights offering will expire at 5:00 p.m., Eastern Daylight Savings
Time, on May 21, 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.
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<PAGE> 21
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.
The subscription agreement and payment must be received by the subscription
agent before 5:00 p.m., Eastern Daylight Savings Time, on May 21, 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;"
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<PAGE> 22
- 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.
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.
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<PAGE> 23
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
April 22, 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.
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 THE STANDBY PURCHASERS
As of March 22, 1999, the Standby Purchasers owned, in the aggregate,
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. The Standby Purchasers have agreed,
severally and subject to the terms of and
20
<PAGE> 24
conditions to be contained in a definitive Standby Purchase Agreement, to
exercise their basic subscription privileges and over-subscription privileges up
to a total value of up to $20,000,000. In addition, we have agreed to issue up
to 20.5 million shares of our common stock for the conversion of our series B
preferred stock that is converted upon the closing of the rights offering. We
understand that TCW and Oaktree, holders of all of our series B preferred stock,
intend to convert their shares of series B preferred stock upon the closing of
the rights 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 assuming the issuance of 26.2 million additional shares of our
common stock to the holders of our series B preferred stock who convert those
shares upon the closing of the rights offering, 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 significantly 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.
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.
21
<PAGE> 25
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.
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.
22
<PAGE> 26
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
<PAGE> 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
<PAGE> 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 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.
<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
----------
<S> <C>
SEC registration.................................... $ 5,560
Accounting fees and expenses........................ 7,000
Legal fees and expenses............................. 15,000
Miscellaneous expenses.............................. 50,000
-------
Total............................................. $77,560
=======
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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)
3.1 Second Amended and Restated Certificate of Incorporation of
Aureal dated May 8, 1996(1)
3.2 Restated Bylaws of Aureal Semiconductor Inc.(10)
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)
4.20 Form of Registration Rights Agreement among Oaktree, TCW and
the Company
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)
</TABLE>
II-2
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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)
10.9 Manufacturing, Purchase and Distribution Agreement between
Diamond Multimedia Systems, Inc. and Aureal dated July 3,
1998(12)
10.10 Form of Standby Commitment Agreement among Oaktree, TCW and
the Company
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)
</TABLE>
- -------------------------
* Previously filed.
(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.
II-3
<PAGE> 32
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;
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
II-4
<PAGE> 33
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 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
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the 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 16th day of April, 1999.
AUREAL SEMICONDUCTOR INC.
By: /s/ DAVID J. DOMEIER
-----------------------------------
David J. Domeier
Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
April 16, 1999
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/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
/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
*By: /s/ DAVID J. DOMEIER
- -------------------------------------
David J. Domeier
Attorney-in-fact
</TABLE>
II-6
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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)
3.1 Second Amended and Restated Certificate of Incorporation of
Aureal dated May 8, 1996(1)
3.2 Restated Bylaws of Aureal Semiconductor Inc.(10)
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)
4.20 Form of Registration Rights Agreement among Oaktree, TCW and
the Company
5.1* Opinion of Gray Cary Ware & Freiderich 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)
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<C> <S>
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)
10.9 Manufacturing, Purchase and Distribution Agreement between
Diamond Multimedia Systems, Inc. and Aureal dated July 3,
1998(12)
10.10 Form of Standby Commitment Agreement among Oaktree, TCW and
the Company
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)
</TABLE>
- -------------------------
* Previously filed.
(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.
<PAGE> 1
EXHIBIT 4.20
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as of
___________, 1999, between Aureal Semiconductor Inc., a Delaware corporation
(the "Company"), and TCW Special Credits ("TCW"), as agent and on behalf of the
funds and accounts listed under the heading "TCW Holders" on Schedule 1 hereto
(the "TCW Holders") and Oaktree Capital Management, LLC ("OCM"), as agent and on
behalf of the funds and accounts under the heading "Oaktree Holders" on Schedule
1 hereto (the "Oaktree Holders" and, together with the TCW Holders,
collectively, the "Holders").
R E C I T A L S
WHEREAS, on the date hereof, each Holder is the owner of the respective
number of shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and other securities of the Company convertible into shares of
Common Stock set forth opposite the name of such Holder on the Schedule 1
hereto;
WHEREAS, in connection with the Company's recapitalization, the Holders
have (i) acted as standby purchasers in connection with the Company's offering
to its stockholders of rights to purchase a pro rata portion of up 33,333,333
shares of Common Stock (the "Rights Shares") for an aggregate purchase price of
up to $20,000,000 and (ii) converted all of the shares of 8% Series B
Convertible Preferred Stock (the "Series B Stock") held by the Holders and
received an aggregate of ________ shares (the "Recapitalization Shares") in
connection therewith;
WHEREAS, the parties hereto desire to provide for the registration under
the Securities Act of 1933, as amended, and the rules and regulations thereunder
as in effect from time to time (the "Securities Act"), of the shares of Common
Stock owned or acquired by the Holders, on the terms and conditions set forth
herein; and
WHEREAS, a Special Committee of the Board of Directors of the Company has
authorized the officers of the Company to execute and deliver this Agreement in
the name of and on behalf of the Company.
NOW, THEREFORE, in consideration of the mutual covenants, promises,
representations, warranties and conditions set forth in this Agreement, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, in addition to the
definitions set forth above and elsewhere herein, the following terms shall have
the following respective meanings:
"Affiliate" of a Holder shall mean a person who controls, is
controlled by or is under common control with such Holder or, the spouse or
children (or a trust exclusively for the benefit of a spouse and/or
children) of such Holder or, in the case of a Holder which is a trust, the
trustee and the beneficiaries of such trust.
<PAGE> 2
"Clearance Notice" shall have the meaning specified in the last
paragraph of Section 5.
"Commission" shall mean the United States Securities and Exchange
Commission and any successor agency thereto.
"Common Stock" shall have the meaning specified in the first Recital.
"Company" shall have the meaning specified in the Preamble.
"Demand Notice" shall have the meaning specified in Section 2(a).
"Demand Registration" shall have the meaning specified in Section
2(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Holder" shall mean a Holder or any transferee or assignee to whom the
rights under this Agreement are assigned in accordance with the provisions
of Section 10 hereof.
"Maximum Offering Size" shall have the meaning specified in Section
3(b)(ii).
"Occurrence Notice" shall have the meaning specified in the last
paragraph of Section 5.
"Person" shall mean an individual, partnership, corporation, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity.
"Registrable Stock" shall mean: (i) the Common Stock beneficially
owned by the Holders on the date hereof (including, without limitation, the
Rights Shares and the Recapitalization Shares) or otherwise issuable upon
exercise, conversion or surrender of securities of the Company beneficially
owned by the Holders on the date hereof; (ii) any Common Stock issued as
(or issuable upon the conversion or exercise of any warrant, right, option
or other convertible security which is issued as) a dividend or other
distribution with respect to, or in exchange for, or in replacement of, the
Common Stock owned by the Holders on the date hereof, (iii) any Common
Stock or other securities of the Company acquired by any Holder after the
date hereof and (iv) any Common Stock issued by way of a stock split of the
Common Stock referred to in clauses (i), (ii) or (iii) above. For purposes
of this Agreement, any Registrable Stock shall cease to be Registrable
Stock when
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<PAGE> 3
(x) a registration statement covering such Registrable Stock has been
declared effective and such Registrable Stock has been disposed of pursuant
to such effective registration statement or (y) such Registrable Stock is
sold or distributed pursuant to Rule 144 (or any similar or successor
provision (but not Rule 144A)) under the Securities Act.
"Requesting Holders" shall have the meaning specified in Section 2(a).
"Securities Act" shall have the meaning specified in the third
Recital.
"Shelf Registration" shall have the meaning specified in Section
2(b)(i).
"Shelf Registration Statement" shall have the meaning specified in
Section 2(b)(ii).
"Holder" or "Holders" shall have the meaning specified in the
Preamble.
"Underwritten Offering" or "Underwritten Registration" shall mean a
registration in which securities of the Company are sold to an underwriter
or underwriters for reoffering to the public.
2. DEMAND REGISTRATION.
(a) At any time commencing 180 days after the date of this Agreement,
the Holders of at least [10%] of the then outstanding Registrable Stock
(the "Requesting Holders") may request, in a written notice to the Company
(a "Demand Notice"), that the Company file a registration statement under
the Securities Act covering the registration of at least [10%] of the
Registrable Stock then outstanding in the manner specified in such notice
(a "Demand Registration"). Promptly following receipt of a Demand Notice
(such request to state the number of shares of Registrable Stock to be so
included and the intended method of distribution), the Company shall (x)
within twenty (20) days notify all other Holders of such request in writing
and (y) use its best efforts to cause to be registered under the Securities
Act all Registrable Stock that the Requesting Holders and such other
Holders have, within ten (10) days after the Company has given such notice,
requested be registered in accordance with the manner of distribution
specified in the Demand Notice by the Requesting Holders.
(b) (i) If any Demand Registration is requested to be a "shelf"
registration by the Requesting Holders of the Registrable Stock to be
included in such Demand Registration, the Company shall cause to be
filed pursuant to Rule 415 under the Securities Act a shelf
Registration Statement (a "Shelf Registration Statement") with respect
to the number of shares of Registrable Stock requested to be so
registered (a "Shelf Registration"). The Company shall keep such Shelf
Registration Statement continuously effective for a period of at least
two years following the date on which the Commission declares such
Shelf Registration Statement effective under the Securities Act
(subject to
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<PAGE> 4
extension pursuant to Section 4(a) and the last paragraph of
Section 5 hereof), or such shorter period ending when all of the
shares of Registrable Stock covered by such Shelf Registration
Statement have been sold.
(ii) Upon the occurrence of any event that would cause the Shelf
Registration Statement (A) to contain a material misstatement or
omission or (B) to be not effective and usable for resale of
Registrable Securities during the period that such Shelf Registration
Statement is required to be effective and usable, the Company shall
promptly file an amendment to the Shelf Registration Statement, in the
case of clause (A), correcting any such misstatement or omission and,
in the case of either clause (A) or (B), use its best efforts to cause
such amendment to be declared effective and such Shelf Registration
Statement to become usable as soon as practicable thereafter.
(c) If the Requesting Holders intend to have the Registrable Stock
distributed by means of an Underwritten Offering, the Company shall include
such information in the written notice referred to in clause (x) of Section
2(a) above. In such event, the right of any Holder to include its
Registrable Stock in such registration shall be conditioned upon such
Holder's participation in such Underwritten Offering and the inclusion of
such Holder's Registrable Stock in the Underwritten Offering (unless
otherwise mutually agreed by a majority in interest of the Requesting
Holders and such Holder) to the extent provided below. All Holders
proposing to distribute Registrable Stock through such Underwritten
Offering shall enter into an underwriting agreement in customary form with
the underwriter or underwriters. Such underwriter or underwriters shall be
selected by a majority in interest of the Requesting Holders; provided,
that (i) all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Holders of
Registrable Stock, (ii) any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement shall be
conditions precedent to the obligations of such Holders of Registrable
Stock, and (iii) no Holder shall be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding such Holder, the
Registrable Stock of such Holder and such Holder's intended method of
distribution and any other representations required by law or reasonably
required by the underwriter. If any Holder of Registrable Stock disapproves
of the terms of the underwriting, such Holder may elect to withdraw all its
Registrable Stock by written notice to the Company, the managing
underwriter and the Initiating Holders. The securities so withdrawn shall
also be withdrawn from registration and shall remain Registrable Stock.
(d) The Company shall not be obligated to effect more than three
Demand Registrations; provided, however, that a Demand Registration shall
not be deemed to have been effected for purposes of this Section 2(e)
unless: (i) it has been declared effective by the Commission; (ii) it has
remained effective for the
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<PAGE> 5
period set forth in Section 5(a) and (iii) the offering of Registrable
Stock pursuant to such registration is not subject to any stop order,
injunction or other order or requirement of the Commission (other than any
such stop order, injunction or other requirement of the Commission prompted
by any act or omission of a Requesting Holder).
3. INCIDENTAL REGISTRATION.
(a) Subject to Section 8 and the other terms and conditions set forth
in this Section 3, if at any time the Company determines that it shall file
a registration statement under the Securities Act (other than a
registration statement on Form S-4 or S-8 or filed in connection with an
exchange offer or an offering of securities solely to the Company's
existing stockholders) on any form that would also permit the registration
of the Registrable Stock and such filing is to be on the Company's behalf
and/or on behalf of selling holders (including Requesting Holders) of its
securities for the sale of shares of Common Stock, the Company shall each
such time promptly give each Holder written notice of such determination
setting forth the date on which the Company proposes to file such
registration statement, which date shall be no earlier than 30 days from
the date of such notice, and advising such Holders of their right to have
Registrable Stock included in such registration. Upon the written request
of any Holder received by the Company no later than 30 days after the date
of the Company's notice, the Company shall use its best efforts to cause to
be registered under the Securities Act all of the Registrable Stock that
each such Holder has so requested to be registered.
(b) The Company's obligation to include Registrable Stock in a
registration statement pursuant to Section 3(a) above is subject to the
following limitations, conditions and qualifications:
(i) If, at any time after giving written notice of its
determination to register its securities and prior to the effective
date of any registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holders and thereupon the
Company shall be relieved of its obligation to use any efforts to
register any Registrable Stock in connection with such aborted
registration; provided, that the provisions of this clause (i) shall
not affect the obligations of the Company with respect to a Demand
Registration.
(ii) If, in the written opinion of the managing underwriter, the
total amount of such securities to be so registered, including such
Registrable Stock, will exceed the maximum amount (the "Maximum
Offering Size") of the Company's securities that can be sold in such
offering, then the Company shall include in such registration, in the
following priority up to the Maximum Offering Size: (x) first, all of
the
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<PAGE> 6
securities proposed to be registered for offer and sale by the
Company, (y) second, all of the Registrable Stock requested to be
included in such registration by the Holders pursuant to this Section,
allocated, if necessary for such offering not to exceed the Maximum
Offering Size, pro rata among the Holders requesting registration of
such Registrable Stock on the basis of the relative number of shares
of Registrable Stock each such Holder has requested to be included in
such registration, and (z) third, any other securities of the Company
requested to be registered by any other parties.
4. HOLDBACK AGREEMENTS.
(a) Each Holder of Registrable Stock agrees, if so required (pursuant
to a timely notice) by the Company or the managing underwriter in any
Underwritten Offering, not to effect any public sale of distribution of
securities of the Company of the same class as the securities included in
such Underwritten Registration, or any securities convertible into or
exchangeable to exercisable therefor, during the 7 days prior to and the 90
days after any Underwritten Registration pursuant to Section 2 or Section 3
has become effective, except as part of such Underwritten Registration;
provided, that no Holder shall be so required unless the officers and
directors of the Company and each holder of 5% or more (on a fully diluted
basis) of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, so agree. Notwithstanding
the foregoing sentence, each Holder of Registrable Stock subject to the
foregoing sentence shall be entitled to sell securities during the
foregoing period in a private sale. If a request is made pursuant to this
Section 4(a), then the time period during which a Shelf Registration is
required to remain continuously effective for such Holders of Registrable
Stock pursuant to the terms of this Agreement shall be extended 210 days.
None of the foregoing provisions of this Section 4(a) shall apply to
any Holder of Registrable Stock if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, that
any such Holder shall undertake not to effect any public sale or
distribution of the Registrable Stock unless such Holder has provided 15
days' prior written notice of such sale or distribution to the underwriter
or underwriters.
(b) The Company agrees (i) if so required by the managing underwriter
of any Underwritten Offering, not to effect any public sale or distribution
of securities of the same class as the securities included in such
Underwritten Registration or securities convertible into or exchangeable or
exercisable therefor during the 7 days prior to and the 90 days after any
Underwritten Registration pursuant to Section 2 or Section 3 has become
effective, except as part of such Underwritten Registration and except
pursuant to registrations on Form S-4 or S-8 or any successor form to such
Forms, and (ii) to use its best efforts to cause each holder of equity
securities included in any Underwritten Registration or any securities
convertible into or exchangeable or
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<PAGE> 7
exercisable therefor, in each case purchased from the Company at any
time after the date of this Agreement (other than in a public offering) to
agree not to effect any public sale or distribution of or otherwise dispose
of shares of equity securities (or such other securities) during such
period except as part of such Underwritten Registration.
5. REGISTRATION PROCEDURES. Whenever required under Section 2 or Section 3
of this Agreement to use its best efforts to effect the registration of any
Registrable Stock, the Company shall, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Stock and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all Registrable Stock
covered by such registration statement;
(c) furnish to each Holder such numbers of copies of the registration
statement and each prospectus included therein (including each preliminary
prospectus and any amendments or supplements thereto) in conformity with
the requirements of the Securities Act and such other documents and
information as they may reasonably request;
(d) use its best efforts to register or qualify the Registrable Stock
covered by such registration statement under the securities or blue sky
laws of such jurisdictions as shall be reasonably appropriate for the
distribution of the Registrable Stock covered by the registration
statement; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business in
or to file a general consent to service of process in any jurisdiction
wherein it would not but for the requirements of this paragraph (d) be
obligated to do so;
(e) promptly notify (but in any event within five business days) the
selling Holders of Registrable Stock, their counsel and the managing
underwriters, if any, and confirm such notice in writing, (i) when a
prospectus or any prospectus supplement has been filed and, with respect to
a registration statement or any post-effective amendment, when the same has
become effective, (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to a
registration statement or related prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of a registration statement or of any order preventing or
suspending the use of any prospectus or the initiation of any proceedings
by any Person for that purpose, (iv) if at any time the
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<PAGE> 8
representations and warranties of the Company contained in any
agreement (including any underwriting agreement) contemplated by Section
6(l) below ease to be true and correct, (v) of the receipt by the Company
of any notification with respect to the suspension of the qualification of
exempting from qualification of a registration statement or any of the
Registrable Stock for offer or sale under the securities or blue sky laws
of any jurisdiction, or the contemplation, initiation or threatening of any
proceeding for such purpose, (vi) of the happening of any event that makes
any statement made in such registration statement or related prospectus or
any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes
in such registration statement, prospectus or documents so that it will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made (in the case of the prospectus only) not misleading, and (vii) of the
Company's reasonable determination that a post-effective amendment to a
registration statement would be appropriate;
(f) furnish, at the request of any Holder requesting registration of
Registrable Stock pursuant to Section 2, if the method of distribution is
by means of an Underwritten Offering, on the date that the shares of
Registrable Stock are delivered to the underwriters for sale pursuant to
such registration, or if such Registrable Stock is not being sold through
underwriters, on the date that the registration statement with respect to
such shares of Registrable Stock becomes effective: (i) a signed opinion,
dated such date, of the independent legal counsel representing the Company
for the purpose of such registration, addressed to the underwriters, if
any, and if such Registrable Stock is not being sold through underwriters,
then to the Holders making such request, as to such matters as such
underwriters or the Holders holding a majority of the Registrable Stock
included in such registration, as the case may be, may reasonably request
and as would be customary in such a transaction and (ii) letters dated such
date and the date the offering is priced from the independent certified
public accountants of the Company, addressed to the underwriters, if any,
and if such Registrable Stock is not being sold through underwriters, then
to the Holders making such request (1) stating that they are independent
certified public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements and
other financial data of the Company included in the registration statement
or the prospectus, or any amendment or supplement thereto, comply as to
form in all material respects with the applicable accounting requirements
of the Securities Act and (2) covering such other financial matters
(including information as to the period ending not more than five business
days prior to the date of such letters) as such underwriters or the Holders
holding a majority of the Registrable Stock included in such registration,
as the case may be, may reasonably request and as would be customary in
such a transaction;
(g) enter into customary agreements (including, if the method of
distribution is by means of an Underwritten Offering an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order
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<PAGE> 9
to expedite or facilitate the disposition of the Registrable Stock to
be so included in the registration statement;
(h) As promptly as practicable upon the occurrence of any event
contemplated by paragraph (e)(vi) above, prepare a supplement or
post-effective amendment to the registration statement or a supplement to
the related prospectus or any documents incorporated or deemed to be
incorporated therein by reference, or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable Stock
being sold thereunder, such prospectus will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances;
(i) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission; and
(j) use its best efforts to list the Registrable Stock covered by such
registration statement with any securities exchange on which the Common
Stock of the Company is then listed.
For purposes of Sections 5(a) and 5(b), the period of distribution of
Registrable Stock in a firm commitment Underwritten Offering shall be deemed to
extend until each underwriter has completed the distribution of all securities
purchased by it, and the period of distribution of Registrable Stock in any
other registration shall be deemed to extend until the earlier of the sale of
all Registrable Stock covered thereby and one year after the effective date
thereof.
Each Holder of Registrable Stock agrees that, upon receipt of written
notice from the Company of the happening of any event of the kind described in
Section 5(e)(ii), 5(e)(iii), 5(e)(v), 5(e)(vi) or 5(e)(vii) (an "Occurrence
Notice"), such Holder will forthwith discontinue disposition of such Registrable
Stock covered by such registration statement or prospectus until such Holder's
receipt of the copies of the supplemented or amended registration statement or
prospectus contemplated by Section 5(h), or until it receives notice in writing
(a "Clearance Notice") from the Company that the use of the applicable
prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such prospectus, and, if so directed by the Company, such Holder
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Stock current at the time of receipt of such notice.
If the Company shall deliver an Occurrence Notice in connection with any
registered sale of Registered Stock, the time periods mentioned in Section 2
hereof shall be extended by the number of days during such periods from and
including the date of delivery of such Occurrence Notice to and including the
date when each seller of Registrable Stock covered by such registration
statement receives (x) the copies of the supplemented or amended prospectus
contemplated by Section 5(h) hereof or (y) a Clearance Notice, as the case may
be.
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<PAGE> 10
6. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the Holders shall furnish to the Company such information regarding themselves,
the Registrable Stock held by them, and the intended method of disposition of
such securities as the Company shall reasonably request and as shall be required
in connection with the action to be taken by the Company.
7. EXPENSES OF REGISTRATION. All expenses incurred in connection with each
registration pursuant to Section 2 and Section 3 of this Agreement, excluding
underwriters' discounts and commissions, but including without limitation all
registration, filing and qualification fees, word processing, duplicating,
printers' and accounting fees (including the expenses of any special audits or
"cold comfort" letters required by or incident to such performance and
compliance), fees of the National Association of Securities Dealers, Inc. or
listing fees, messenger and delivery expenses, all fees and expenses of
complying with state securities or blue sky laws, fees and disbursements of
counsel for the Company, and the fees and disbursements of one counsel for the
selling Holders (which counsel shall be selected by the Holders holding a
majority in interest of the Registrable Stock being registered), shall be paid
by the Company. The Holders shall bear and pay the underwriting commissions and
discounts applicable to securities offered for their account in connection with
any registrations, filings and qualifications made pursuant to this Agreement.
8. UNDERWRITING REQUIREMENTS. In connection with any Underwritten Offering,
the Company shall not be required under Section 3 to include shares of
Registrable Stock in such Underwritten Offering unless the Holders of such
Registrable Stock accept the terms of the underwriting of such offering that
have been reasonably agreed upon between the Company and the underwriters
selected by the Company.
9. RULE 144 AND RULE 144A INFORMATION. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Stock to the public without
registration,
(a) at all times after ninety (90) days after any registration
statement covering a public offering of securities of the Company under the
Securities Act shall have become effective, the Company agrees to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(ii) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act; and
(iii) furnish to each Holder of Registrable Stock promptly upon
request a written statement by the Company as to its compliance with
the
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<PAGE> 11
reporting requirements of such Rule 144 and of the Securities Act
and the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed
by the Company as such Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing such
Holder to sell any Registrable Stock without registration; and
(b) at all times during which the Company is neither subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, nor
exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, it
will provide, upon the written request of any Holder of Registrable Stock
in written form (as promptly as practicable and in any event within 15
business days), to any prospective buyer of such stock designated by such
Holder, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the Commission under the Securities Act.
10. INDEMNIFICATION. In the event any Registrable Stock is included in a
registration statement under this Agreement:
(a) The Company shall indemnify and hold harmless each Holder and its
directors and officers, each person who participates in the offering of
such Registrable Stock, including underwriters (as defined in the
Securities Act), and each person, if any, who controls such Holder or
participating person within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, as incurred, to
which they may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or proceedings in
respect thereof) arise out of or are based on any untrue or alleged untrue
statement of any material fact contained in such registration statement on
the effective date thereof (including any prospectus filed under Rule 424
under the Securities Act or any amendments or supplements thereto) or arise
out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse each such Holder and
its directors and officers, such participating person or controlling person
for any legal or other expenses as reasonably incurred by them (but not in
excess of expenses incurred in respect of one counsel for all of them
unless there is an actual conflict of interest between any indemnified
parties, which indemnified parties may be represented by separate counsel)
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that subject to Section 10(e), the
indemnity agreement contained in this Section 10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any such Holder, its directors and
officers, participating person or controlling person, and shall survive the
transfer of such securities by such Holder.
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(b) Each Holder requesting or joining in a registration shall,
severally and not jointly, indemnify and hold harmless the Company, each of
its directors and officers, each person, if any, who controls the Company
within the meaning of the Securities Act, and any underwriter against any
losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer, controlling person or underwriter
may become subject, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in such registration statement on
the effective date thereof (including any prospectus filed under Rule 424
under the Securities Act or any amendments or supplements thereto) or arise
out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with information furnished by or on behalf of such Holder expressly for use
in connection with such registration; and each such Holder shall reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling person or underwriter (but not in excess of
expenses incurred in respect of one counsel for all of them unless there is
an actual conflict of interest between any indemnified parties, which
indemnified parties may be represented by separate counsel) in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that, subject to Section 10(e), the indemnity
agreement contained in this Section 10(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Holder, and provided,
further, that the liability of each Holder hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which
is equal to the proportion that the net proceeds from the sale of the
Registrable Stock sold by such Holder under such registration statement
bears to the total net proceeds from the sale of all securities sold
thereunder, but not in any event to exceed the net proceeds received by
such Holder from the sale of Registrable Stock covered by such registration
statement.
(c) Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 10, notify the indemnifying party in writing of
the commencement thereof and the indemnifying party shall have the right to
participate in and assume the defense thereof with counsel selected by the
indemnifying party and reasonably satisfactory to the indemnified party;
provided, however, that an indemnified party shall have the right to retain
its own counsel, with all fees and expenses thereof to be paid by such
indemnified party, and to be apprised of all progress in any proceeding the
defense of which has been assumed by the indemnifying party. The failure to
notify an indemnifying party promptly of the commencement of any such
action shall relieve such indemnifying party of any liability to the
indemnified party under this Section to
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the extent such failure to so notify materially prejudices the
indemnifying party's ability to defend such action.
(d) To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified party in
connection with the actions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified party shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of material fact
or omission or alleged omission to state a material fact, has been made by,
or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages or
liabilities referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 10(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees
and expenses of counsel, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by Section 10(a) or
10(b) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least 30 days prior to such
settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request
prior to the date of such settlement.
11. TRANSFER OF REGISTRATION RIGHTS. The registration rights of any Holder
under this Agreement with respect to any Registrable Stock may be transferred to
(a) any transferee of such Registrable Stock who at any time acquires at least
ten per cent (10%) of such Holder's shares of Registrable Stock (adjusted for
stock splits and stock consolidations after the effective date of this
Agreement) or (b) any Affiliate of such Holder; provided, however that (i) the
transferring Holder shall give the Company written notice at or prior to the
time of such transfer stating the name and
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<PAGE> 14
address of the transferee and identifying the securities with respect to
which the rights under this Agreement are being transferred; (ii) such
transferee shall agree in writing, in form and substance reasonably satisfactory
to the Company, to be bound as a Holder by the provisions of this Agreement; and
(iii) immediately following such transfer the further disposition of such
securities by such transferee is restricted under the Securities Act. Except as
set forth in this Section 11, no transfer of Registrable Stock shall cause such
Registrable Stock to lose such status.
12. SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the consent
or approval of Holders of a specified percentage of Registrable Stock is
required hereunder, Registrable Stock held by the Company or its affiliates (as
such term is defined in Rule 405 under the Securities Act) (other than the
Holders) shall not be counted in determining whether such consent or approval
was given by the Holders of such required percentage.
13. SUCCESSORS AND ASSIGNS. Subject to Section 11, the terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties hereto. Except as expressly
provided in this Agreement, nothing in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. TITLES. The titles of the Sections of this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
17. NOTICES. Any notice required or permitted under this Agreement shall be
in writing and shall be delivered in person, by hand-delivery, mailed by
certified or registered mail, next-day air courier faxed:
(a) if to the Company, at
Aureal Semiconductor Inc.
4525 Technology Drive
Fremont, California 94538
Fax:
Attention:
(b) to each Holder at the address set forth on Schedule 1 hereto, or
if such Holder shall not be listed on Schedule 1 hereto, at the address
therefor as set
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<PAGE> 15
forth in the Company's records or, in any such case, at such other
address or addresses as shall have been furnished in writing by such party
to the others.
The giving of any notice required hereunder may be waived in writing by the
parties hereto. Every notice or other communication hereunder shall be deemed to
have been duly given or served on the date on which personally delivered, or on
the date actually received, if sent by mail or fax, with receipt acknowledged.
18. AMENDMENTS AND WAIVERS. Any provision of this Agreement may be amended
and the observance of any provision of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and each Holder of
Registrable Stock. Any amendment or waiver effected in accordance with this
Section 17 shall be binding upon each Holder of Registrable Securities, each
future Holder and the Company.
19. SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provisions shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provisions were so excluded and shall be enforceable in accordance with its
terms.
20. ENTIRE AGREEMENT. All prior agreements of the parties concerning the
subject matter of this Agreement are expressly superseded by this Agreement.
This Agreement contains the entire Agreement of the parties concerning the
subject matter hereof. Any oral representations or modifications of this
Agreement shall be of no effect.
[Signature pages follow]
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AUREAL SEMICONDUCTOR INC.
By:
---------------------------------------
Name:
Title:
TCW SPECIAL CREDITS, on behalf of and as
agent for the TCW Holders and not in its
individual capacity
By:
--------------------------------------
Name:
Authorized Signatory
OAKTREE CAPITAL MANAGEMENT, LLC, on behalf
of and as agent for the Oaktree Holders
and not in its individual capacity
By:
--------------------------------------
Name:
Authorized Signatory
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AUREAL SEMICONDUCTOR INC.
By:
---------------------------------------
Name:
Title:
TCW SPECIAL CREDITS, on behalf of and as
agent for the TCW Holders and not in its
individual capacity
By:
--------------------------------------
Name:
Authorized Signatory
OAKTREE CAPITAL MANAGEMENT, LLC, on behalf
of and as agent for the Oaktree Holders
and not in its individual capacity
By:
--------------------------------------
Name:
Authorized Signatory
<PAGE> 18
Schedule 1
[TO COME]
<PAGE> 1
EXHIBIT 10.10
STANDBY PURCHASE AGREEMENT
dated as of ____________, 1999
between
AUREAL SEMICONDUCTOR, INC.
and
OAKTREE CAPITAL MANAGEMENT, LLC,
ON BEHALF OF THE ENTITIES NAMED HEREIN
$20,000,000
Rights to Purchase Shares of Common Stock
<PAGE> 2
STANDBY PURCHASE AGREEMENT
This Standby Purchase Agreement, dated as of __________, 1999
(the "Agreement"), is entered into by and between Oaktree Capital Management,
LLC, a California limited liability company (together with its affiliates,
"Oaktree"), on behalf of each of the entities set forth on Annex A hereto
(collectively [with Oaktree], the "Investors") and Aureal Semiconductor, Inc., a
Delaware corporation (the "Company").
WHEREAS, as part of its recapitalization, the Company proposes
to distribute to its stockholders rights ("Rights") to purchase an aggregate
33,333,333 shares (the "Rights Shares") of its common stock, par value $.001 per
share (the "Common Stock"), at a purchase price of $0.60 per share (the offering
of the Rights Shares pursuant to the Rights being referred to herein as the
"Rights Offering");
WHEREAS, each Right will include a Basic Subscription Privilege,
pursuant to which each stockholder will have the right to purchase its pro rata
portion of Rights Shares at the subscription price of $0.60 per Rights Share
(the "Subscription Price") and an Oversubscription Privilege by which persons
who exercise their Basic Subscription Privilege in full may subscribe to
purchase Rights Shares not purchased by other holders of Rights, subject to
proration;
WHEREAS, the Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No.
333-_____) covering the registration of the Rights and the Rights Shares under
the Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "1933 Act"), including the related preliminary prospectus or
prospectuses. Promptly after the Registration Statement is declared effective by
the Commission, the Company will prepare and file a prospectus in accordance
with the provisions of Rule 430A under the 1933 Act ("Rule 430A") and paragraph
(b) of Rule 424 under the 1933 Act ("Rule 424(b)"). The information included in
such prospectus that is omitted from such registration statement at the time it
becomes effective but that will be deemed to be part of such registration
statement pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information." Each prospectus used before such registration statement becomes
effective is herein called a "preliminary prospectus." Such registration
statement, including the exhibits and schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it becomes effective, and including the Rule
430A Information, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) under the 1933 Act is
herein referred to as the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall be deemed to include the Rule
462(b) Registration Statement. The final prospectus, including the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933
Act, in the form that it was first furnished to stockholders of the Company in
connection with the Rights Offering is herein called the "Prospectus." [For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the Prospectus or any amendment or supplement to any of
the foregoing shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR").] All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement, any preliminary prospectus or the Prospectus (and
all other
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<PAGE> 3
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is or is deemed
to be incorporated by reference in the Registration Statement, any preliminary
prospectus or the Prospectus, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to mean and include the
filing of any document under the Securities Exchange Act of 1934, as amended,
together with the rules and regulations thereunder (collectively, the "1934
Act"), incorporated by reference in the Registration Statement, such preliminary
prospectus or the Prospectus, as the case may be;
WHEREAS, the Investors are the holders of all of the issued and
outstanding shares of the Company's 8% Series B Convertible Preferred Stock (the
"Series B Stock"), which is currently convertible into Common Stock at the
conversion price of $2.50 per share of Common Stock; and
WHEREAS, the Company, as part of its recapitalization, has
agreed to issue _____ shares of Common Stock in respect of each share of Series
B Stock submitted for conversion prior to the consummation of the Rights
Offering, up to an aggregate of ______ shares of Common Stock (the "Additional
Shares" and, together with the Rights Shares, collectively, the
"Recapitalization Shares");
WHEREAS, in order to help assure the success of the Rights
Offering, the Investors listed on Annex B hereto (the "Rights Investors") are
willing to commit, on a several and not a joint and several basis, to exercise
all of their Basic Subscription Privileges and their Oversubscription Privileges
to subscribe for a portion of the aggregate of 33,333,333 Rights Shares equal to
the respective percentages appearing next to their names on Annex B hereto,
subject to the terms and conditions set forth herein; and
NOW THEREFORE, in consideration of the mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Investors do
hereby agree as follows:
SECTION 1.
The Rights Offering; Standby Purchase Commitment; Additional
Shares.
(a) Subject to the terms and conditions set forth herein, on or before
5:00 p.m. on the expiration date of the Rights (the "Expiration Date"), each of
the Rights Investors will take all such action as may be required to duly and
effectively exercise all of the Basic Subscription Privileges to which it may be
entitled, and to exercise such Rights Investor's proportionate share of the
Oversubscription Privileges such that the aggregate amount of Rights Shares for
which the Oversubscription Privileges are exercised by the Rights Investors is
equal to the Rights Shares less the Rights Investors' aggregate Basic
Subscription Privileges.
(b) The Company will issue ______ Additional Shares in respect of each
share of Series B Stock converted into shares of Common Stock in accordance with
the terms of the Series B Stock prior to the [Expiration Date].
2
<PAGE> 4
SECTION 2.
Representations and Warranties.
(a) The Company represents and warrants to each Investor and agrees with
each Investor, as follows:
(i) The Company meets the requirements for use of Form S-3 under
the 1933 Act. The Registration Statement and Rule 462(b) Registration Statement
will be prepared by the Company in conformity with the requirements of the 1933
Act and will be filed with the Commission under the 1933 Act. Prior to the
commencement of the Rights Offering, each of the Registration Statement and any
Rule 462(b) Registration Statement will become effective under the 1933 Act and
no stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement will have been issued and no proceedings for
that purpose will have been instituted or be pending or, to the knowledge of the
Company, contemplated by the Commission, and any request on the part of the
Commission for additional information will have been complied with. A copy of
each of the Registration Statement and the Rule 462(b) Registration Statement
will be delivered by the Company to each Investor. At the respective times the
Registration Statement or any Rule 462(b) Registration Statement become
effective, the Registration Statement and the Rule 462(b) Registration Statement
will comply in all material respects with the requirements of the 1933 Act and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and at the time any post-effective amendments to the
Registration Statement or any Rule 462(b) Registration Statement become
effective, any such post-effective amendments will comply in all material
respects with the requirements of the 1933 Act and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
Neither the Prospectus nor any amendments or supplements thereto, at the time
the Prospectus or any such amendment or supplement is issued, will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented, at the Expiration Date will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or when filed pursuant to Rule 424 under the 1933 Act, will comply when so filed
in all material respects with the 1933 Act and each preliminary prospectus and
the final Prospectus will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) The accountants who certify the financial statements and
supporting schedules included in the Registration Statement will be independent
public accountants as required by the 1933 Act.
(iii) The financial statements and the supporting schedules
included in the Registration Statement and the Prospectus will present fairly
the financial position of the Company and its consolidated subsidiaries as at
the dates indicated and the results of their
3
<PAGE> 5
operations for the periods specified; said financial statements will have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis (except as may otherwise be indicated therein) ("GAAP"); and
the supporting schedules included in the Registration Statement will present
fairly the information required to be stated therein.
(iv) Since [January 3, 1999], (A) there has been no material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business, (B) there have been no transactions entered into by the Company or its
subsidiaries, other than those in the ordinary course of business, which are
material with respect to the Company and its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any kind
(other than the distribution of the Rights and dividends declared and paid with
respect to the Series B Stock) declared, paid or made by the Company on any
class of its capital stock.
(v) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise (a "Material Adverse
Effect").
(vi) Each subsidiary of the Company (as such term is defined in
Rule 405 under the 1933 Act) (each a "Subsidiary" and collectively, the
"Subsidiaries"), has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business and is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to so
qualify would not have a Material Adverse Effect; except as otherwise disclosed
in the Registration Statement, all of the issued and outstanding capital stock
of each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(vii) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Company's annual report on Form 10-K for the
period ended January 3, 1999, filed with the Commission (except for subsequent
issuances, if any, of additional Series B Stock in payment of dividends payable
with respect to the Series B Stock and issuances pursuant to this Agreement,
pursuant to reservations, agreements or employee benefit plans referred to in
the Registration Statement or pursuant to the exercise of convertible
securities, options or warrants referred to in the Registration Statement). The
shares of issued and outstanding Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable; the Common Stock conforms
to all statements relating thereto contained in
4
<PAGE> 6
the Registration Statement; and the issuance of the Recapitalization Shares will
not be subject to preemptive or other similar rights.
(viii) The Rights Shares to be issued and sold pursuant to the
Rights have been duly authorized, and when issued and delivered pursuant to the
Rights, against payment of the Subscription Price, will be duly and validly
issued, fully paid and non-assessable.
(ix) The Additional Shares have been duly authorized, and when
issued and delivered in accordance with this Agreement, will be validly issued,
fully paid and non-assessable; and
(x) Neither the Company nor any of its Subsidiaries is in
violation of its charter or by-laws or, except where such default would not have
a Material Adverse Effect, in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to which
the Company or any of its subsidiaries is a party or by which it or any of them
may be bound, or to which any of the material property or assets of the Company
or any subsidiary is subject; and the execution, delivery and performance of
this Agreement and the Rights and the consummation of the transactions
contemplated herein and therein and compliance by the Company with its
obligations hereunder and thereunder have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any material property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Company or any of its subsidiaries
is a party or by which it or any of them may be bound, or to which any of the
material property or assets of the Company or any subsidiary is subject, nor
will such action result in any violation of the provisions of the charter or
by-laws of the Company or any applicable law, rule, regulation, judgment, order
or administrative or court decree.
(xi) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the Company or
any of its subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein); all pending legal or governmental
proceedings to which the Company or any of its subsidiaries is a party or of
which any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine litigation
incidental to the business, are, considered in the aggregate, not material to
the Company and its subsidiaries considered as one enterprise; and there are no
contracts or documents of the Company or any of its subsidiaries which are
required to be filed as exhibits to the Registration Statement by the 1933 Act
which have not been so filed.
(xii) No authorization, approval or consent of any court or
governmental authority or agency is necessary in connection with the offering,
issuance or sale of the Rights Shares hereunder or the issuance of the
Additional Shares, except such as may be required under the 1933 Act or state
securities laws.
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<PAGE> 7
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company. This Agreement constitutes a valid and binding
obligation of the Company enforceable in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' right generally. The Board of Directors
of the Company, by action of the Special _______ Committee, has authorized and
approved this Agreement and the transactions relating thereto.
(xiv) The Company and its subsidiaries have good title to all
real and personal properties owned by them, in each case free and clear of all
liens, encumbrances and debts except (A) for property pledged and/or mortgaged
pursuant to the Loan and Security Agreement among the Company and Transamerica
Business Credit Corporation and Goldman Sachs Credit Partners LP[and the other
lenders thereunder], as amended (the "Credit Agreement"), (B) as do not
materially interfere with the use made and proposed to be made of such
properties, (C) as set forth in the Registration Statement or (D) as could not
reasonably be expected to have a Material Adverse Effect.
(xv) Except as set forth in the Registration Statement or this
Agreement, there are no persons with registration or other similar rights to
have any securities (debt or equity) of the Company registered pursuant to the
Registration Statement or otherwise registered by the Company under the 1933
Act.
(xvi) The documents to be incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or are filed
with the Commission, complied and will comply as to form in all material
respects with the requirements of the 1934 Act, and, when read together with the
other information in the Prospectus, at the time the Registration Statement and
any amendments thereto becomes effective and at the Closing, will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
(xvii) Except as disclosed in the Registration Statement, and
except as to matters which, individually or in the aggregate, would not have a
Material Adverse Effect, neither the Company nor any of its subsidiaries has any
material liabilities or obligations (absolute, accrued, contingent or otherwise,
known or unknown), other than liabilities incurred in the ordinary course of
business subsequent to January 3, 1999.
(xviii)Except for such matters as would not, individually or in
the aggregate, have a Material Adverse Effect; (i) the Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals (the "Permits") of all governmental entities necessary for the
operation of the businesses of the Company and its subsidiaries, (ii) the
Company and its Subsidiaries are in compliance with the terms of the Permits and
(iii) except as disclosed in the Registration Statement, the businesses of the
Company and its Subsidiaries are not being conducted in violation of any law,
ordinance, or regulation of any governmental entity.
(xix) Each of the Company and its Subsidiaries has filed all tax
returns required to be filed by any of them and has paid (or the Company has
paid on its behalf) or has set up an adequate reserve for the payment of, all
taxes required to be paid in respect of the periods covered by such returns. The
information contained in such tax returns is true, complete
6
<PAGE> 8
and accurate in all material respects. Neither the Company nor any of its
Subsidiaries is delinquent in the payment of any tax, assessment or governmental
charge except to the extent of reserves established therefor. No deficiencies
for any taxes have been proposed, asserted or assessed against the Company or
any of its subsidiaries that have not been finally settled or paid in full
except to the extent of reserves established therefor. No requests for waivers
of the time to assess any such tax are pending and there are no outstanding
audit examinations, deficiency litigations or refund litigations with respect to
the Company or any of its subsidiaries. The federal income tax returns of the
Company and each of its Subsidiaries consolidated in such returns have been
examined by and settled with the Internal Revenue Service for all years through
December 31, 1997.
(xx) Except as set forth in the Registration Statement, and
except for such matters as will not, individually or in the aggregate, have a
Material Adverse Effect, the Company and each of its Subsidiaries (i) have
obtained all applicable permits, licenses and other authorizations which are
required to be obtained under all applicable Environmental Laws, (ii) are in
compliance with all terms and conditions of such required permits, licenses and
authorizations and also are in compliance with all other applicable requirements
of Environmental Laws and (iii) and are not aware of nor have received notice of
any past activity, practice, incident or action which will give rise to any
common law or statutory liability or otherwise form the basis of any claim,
action, suit or proceeding, against the Company or any of its Subsidiaries based
on or resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling or the emission, discharge or release
into the environment, of any pollutant, contaminant or hazardous or toxic
material or waste.
(xxi) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar businesses in
similar industries.
(b) Any certificate identified as a certificate under this Agreement and
signed by any officer of the Company and delivered to the Investors or to
counsel for the Investors shall be deemed a representation and warranty by the
Company to each Investor as to the matters covered thereby.
(c) Each Investor severally represents and warrants to the Company as of
the date hereof, and agrees with the Company, as follows:
(i) This Agreement has been duly authorized, executed and
delivered by such Investor.
(ii) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and compliance by
such Investor with its obligations hereunder have been duly authorized by all
necessary action and will not conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any material property or assets of such Investor or any of its
subsidiaries pursuant to, any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which such Investor is a party or
by which it may be bound, or to which
7
<PAGE> 9
any of the material property or assets of such Investor is subject, nor will
such action result in any violation of the provisions of the charter or by-laws,
or comparable governing documents of such Investor or any applicable law, rule,
regulation, judgment, order or administrative or court decree.
(iii) Such Investor has, or has available to it, sufficient
funds for the performance of its obligations pursuant to this Agreement.
SECTION 3.
Closing.
(a) On or prior to 10:00 a.m. on the Expiration Date, a closing (the
"Closing") shall be had at the offices of Milbank, Tweed, Hadley & McCloy,
counsel for the Investors, at 601 South Figueroa Street, 30th Floor, Los
Angeles, California or at such other place as the parties may agree. At the
Closing, (i) the Company shall deliver, or cause to be delivered, to the
Investors (A) each of the documents and agreements necessary to evidence
satisfaction of the conditions to the Investors' obligations as set forth
herein, including the documents required to be delivered pursuant to Section 5
hereof; and (ii) each Rights Investor shall (A) deliver to the Company all
documents necessary for the exercise of its Basic Subscription Privileges and
Oversubscription Privileges in accordance with Section 1 hereof and (B) make
payment in full of the exercise price for its Basic Subscription Privileges, by
wire transfer of funds to the subscription agent for the Rights Offering.
(b) As promptly as practicable, but in no event later than [five]
business days following the Expiration Date, the Company shall notify each
Rights Investor of the amount of Rights Shares required to be purchased by it
pursuant to its Oversubscription Privileges. Not later than [three] business
days following receipt of such notice, each Rights Investor shall make payment
in full of the full purchase price for the foregoing Rights Shares by wire
transfer of funds to the subscription agent for the Rights Offering.
(c) Delivery of the Rights Shares to the Rights Investors shall by made
by the subscription agent for the Rights Offering in accordance with the terms
and provisions of the Rights Offering. Delivery of the Additional Shares shall
be made to the Investors at the Closing through [delivery of certificates
evidencing such Additional Shares with all applicable tax stamps attached,
registered in the name or names requested in writing by the Investors at least
one business day prior to the Closing].
SECTION 4.
Covenants of the Company.
The Company covenants with each Investor as follows:
(a) The Company shall make all necessary filings with respect to the
transactions contemplated by this Agreement, under the 1933 Act and the 1934
Act, under applicable blue sky or similar securities laws and shall use all
reasonable efforts to obtain required approvals and clearances with respect
thereto. The Company will comply with the
8
<PAGE> 10
requirements of Rule 430A and will notify the Investors immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission on the Registration Statement, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose,
and (v) of the suspension of the qualification of the Rights Shares for offering
or sale in any jurisdiction, or the initiation or threatening of any proceedings
for any such purpose. The Company will promptly effect the filings necessary
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of prospectus transmitted for filing under
Rule 424(b) was received by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Company will prepare and file the Registration Statement or any
amendments thereto (including any filing under Rule 462(b)) or any amendment or
supplement to either the prospectus included in the Registration Statement at
the time it becomes effective or to the Prospectus, whether pursuant to the 1933
Act, the 1934 Act or otherwise, will furnish the Investors with copies of the
Registration Statement and any such amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such amendment or supplement or use any such prospectus to which any
Investor or counsel for the Investors shall reasonably object, provided that
such objection shall not prevent the filing of any such amendment or supplement
which, in the opinion of counsel for the Company, is required to be filed by the
requirements of the 1933 Act or the 1933 Act Regulations.
(c) If any event shall occur as a result of which it is necessary, in
the opinion of counsel for the Investors, to amend or supplement the Prospectus
in order to make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, or if for any other reason
it shall be necessary to amend or supplement the Prospectus in order to comply
with the 1933 Act or the 1934 Act, the Company will forthwith amend or
supplement the Prospectus (in form and substance satisfactory to counsel for the
Investors and in compliance with the 1933 Act) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary to make the statement therein,
in the light of the circumstances existing at the time it is delivered to a
purchaser, not misleading and will comply with the 1933 Act and the 1934 Act,
and the Company will furnish to the Investors a reasonable number of copies of
such amendment or supplement.
(d) The Company will use the net proceeds received by it from the sale
of the Rights Shares to repay amounts outstanding under the Credit Agreement.
(e) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the 1933 Act, then immediately following the execution of this Agreement,
the Company will prepare, and file
9
<PAGE> 11
or transmit for filing with the Commission in accordance with such Rule 430A and
Rule 424(b) of the 1933 Act Regulations, copies of an amended Prospectus, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(f) The Company and its Subsidiaries shall afford to the Investors and
their accountants, counsel and other representatives reasonable access during
normal business hours (and at such other times as the parties may mutually
agree) throughout the period prior to the Closing to all of its properties,
books, contracts, commitments, records and personnel and, during such period,
the Company shall furnish promptly to the Investors (i) a copy of each report,
schedule and other document filed or received by it pursuant to the requirements
of federal or state securities laws and (ii) all other information concerning
its business, properties and personnel as such Investor may reasonably request.
(g) [The Company shall enter into an amendment to its Credit Agreement
with the other parties thereto on substantially the terms set forth on Annex C.
The Company also shall seek to amend the Credit Agreement as it deems necessary
or appropriate so that none of the transactions contemplated hereby, including,
without limitation, the issuance and sale of the Rights Shares and the issuance
of the Additional Shares, will constitute or result in a Default ( as defined in
the Credit Agreement) or an Event of Default ( as defined in the Credit
Agreement) under the Credit Agreement as so amended and otherwise as the Company
or the Investors may deem appropriate.]
(h) The Company shall take all action necessary to (i) amend its
[DESCRIBE STOCK OPTION PLAN] so that the number of shares available for grant
thereunder and all other stock-based compensation plans of the Company shall be
increased to an aggregate amount not to exceed 25% of the outstanding shares of
Common Stock on a fully-diluted basis and to provide that no right to exercise
with respect to any awards granted thereunder shall or may be accelerated as a
result of the transactions contemplated under this Agreement and (ii) effect a
one-for-fifteen reverse stock split immediately following consummation of the
Rights Offering pursuant to the terms hereof.
(i) In addition to and without limiting the Company's covenants
contained in Section 5(a), the Company will (i) take promptly all actions
necessary to make the filings required of the Company under Section 7A of the
Clayton Act (Title II of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended) and the rules and the regulations thereunder (collectively,
the "HSR Act"), (ii) comply at the earliest practicable date with any request
for additional information received by the Company from the Federal Trade
Commission or the Antitrust Division of the Department of Justice pursuant to
the HSR Act and (iii) cooperate with the Rights Investors in connection with
Rights Investors' filing under the HSR Act and in connection with resolving any
investigation or other regulatory inquiry concerning the transactions
contemplated by this Agreement commenced by either the Federal Trade Commission
or the Antitrust Division of the Department of Justice or state attorneys
general.
(j) [The Company will reimburse the Investors for all out-of-pocket
expenses reasonably incurred by them in connection with this Agreement and the
consummation of the transactions contemplated hereby, whether or not the
transactions contemplated in this
10
<PAGE> 12
Agreement are consummated, including without limitation reasonable fees and
disbursements of counsel.]
SECTION 5.
Conditions of Investors' Obligations.
The obligations of the Investors hereunder are subject to the
satisfaction or waiver, on or prior to the date of the Closing (the "Closing
Date"), of the following conditions:
(a) The Registration Statement, including any Rule 462(b) Registration
Statement, has become effective and at the Closing Date no stop order suspending
the effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission. A
prospectus containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) under the 1933 Act within the
prescribed time period and prior to the Closing Date the Company shall have
provided evidence satisfactory to the Investors of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A
under the 1933 Act.
(b) The representations and warranties made by the Company shall be true
and correct in all material respects and the Company shall have performed in all
material respects all obligations required to be performed by it prior to the
Closing.
(c) On the Closing Date the Investors shall have received:
(i) The favorable opinion, dated as of the Closing Date, of Gray
Cary Ware & Freidenrich LLP, in form and substance satisfactory to the
Investors.
(ii) A certificate of the Chairman, the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Date, to the effect that (i) there has
been no Material Adverse Effect since the execution of this Agreement, (ii) the
representations and warranties in Section 2 hereof are true and correct in all
material respects with the same force and effect as though expressly made at and
as of Closing Date, (iii) the Company has complied with all agreements and
satisfied all conditions required on its part to be performed or satisfied at or
prior to Closing Date pursuant to this Agreement.
(iii) From Arthur Andersen LLP, a letter dated such date, in
form and substance satisfactory to the Investors, to the effect that (i) they
are independent certified public accountants with respect to the Company and its
subsidiaries within the meaning of the 1933 Act; (ii) it is their opinion that
the consolidated financial statements and supporting schedules included in the
Registration Statement and covered by their opinions therein comply as to form
in all material respects with the applicable accounting requirements of the 1933
Act; (iii) based upon limited procedures set forth in detail in such letter,
nothing has come to their attention which causes them to believe that [(A) the
interim unaudited financial statements of the Company and its subsidiaries
included in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act or are not
11
<PAGE> 13
presented in conformity with GAAP applied on a basis substantially consistent
with that of the audited consolidated financial statements included in the
Registration Statement (except as may otherwise be indicated therein), (B) the
unaudited amounts of revenue, earnings and earnings per common and equivalent
share set forth under "Selected Consolidated Financial Data" in the Prospectus
were not determined on a basis consistent with that of the audited consolidated
financial statements included in the Registration Statement, or (C) at a
specified date not more than three days prior to the Closing Date, there has
been any change in the capital stock of the Company or any increase in the
consolidated long-term debt of the Company and its subsidiary or any decrease in
consolidated net current assets or net assets as compared with the amounts shown
in the balance sheet incorporated by reference in the Registration Statement or,
during the period from January 3, 1999 to a specified date not more than three
days prior to the Closing Date, there were any decreases, as compared with the
corresponding period in the preceding year, in consolidated revenues, net income
or net income per share of the Company and its subsidiaries, except in all
instances for changes, increases or decreases which the Registration Statement
and the Prospectus disclose have occurred or may occur and except as otherwise
set forth in such letter;] and (iv) in addition to the examination referred to
in their opinions and the limited procedures referred to in clause (iii) above,
they have carried out certain specified procedures, not constituting an audit,
with respect to certain amounts, percentages and financial information which are
included in the Registration Statement and Prospectus and which are specified by
the Investors, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company and its Subsidiaries identified in such letter.
(d) At the Closing Date:
(i) No preliminary or permanent injunction or other order by any
court or other judicial or administrative body of competent jurisdiction which
prohibits or prevents the consummation of the transactions contemplated by this
Agreement shall have been issued and remain in effect.
(ii) [An amendment to the Credit Agreement shall have been
executed and delivered by all parties thereto and the Investors and the Company
shall be reasonably satisfied that none of the transactions contemplated hereby,
including, without limitation, the issuance of the Recapitalization Shares, will
constitute a Default or an Event of Default under the Credit Agreement as so
amended.
(iii) The Company shall have (i) obtained all consents and
approvals from and shall have made all filings and registrations with, any
person, including but not limited to any governmental entity, necessary to be
obtained or made in order to consummate the transactions contemplated by this
Agreement and (ii) satisfied or obtained a valid waiver of any conditions to the
effectiveness of any such consents or approvals. All such consents or approvals
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any governmental or regulatory authority necessary
for the consummation of the transactions contemplated by this Agreement,
including the HSR Act, shall have occurred.
12
<PAGE> 14
(iv) The Company shall have issued certificates evidencing the
Rights Shares and the Additional Shares and executed and delivered to each
Rights Investor a receipt of payment for the amount of Rights Shares subscribed
for by such Rights Investor.
(v) The Company shall have executed and delivered or caused to
be delivered the Registration Rights Agreement substantially in the form of
Annex D hereto.
(e) At the Closing Date, the Recapitalization Shares shall have been
approved for listing on the Nasdaq Stock Market, subject only to official notice
of insurance.
SECTION 6.
Indemnification.
(a) The Company agrees to indemnify and hold harmless Oaktree,
each Investor and each person, if any, who controls Oaktree or any Investor
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
as follows:
(i) against any and all loss, liability, claim, damage or
expense whatsoever, promptly after submission for payment, arising out of or
resulting from the transactions contemplated hereunder, including, but not
limited to, (A) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment thereto),
including the Rule 430A Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statement therein, in the light of the
circumstances under which they were made, not misleading; (B) any breach or
default by the Company of any of the representations or warranties under this
Agreement or any other document contemplated hereby, (C) any breach by the
Company of any of the covenants or agreements (other than breaches of covenants
to be performed by the Company after the Closing) of the Company under this
Agreement or any other document contemplated hereby or (D) any litigation or
proceedings brought by any shareholder of the Company (whether such action is
brought in such shareholder's name or derivatively on behalf of the Company) in
respect of the transactions contemplated by this Agreement or the Registration
Statement or any other document contemplated hereby (collectively, the
"Indemnifiable Investor Claims").
(ii) against any and all loss, liability, claim, damage or
expense whatsoever, promptly after submission for payment, to the extent of the
aggregate amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or of
any claim whatsoever based upon any Indemnifiable Investor Claim; provided that
(subject to Section 6(d) below) any such settlement is effected with the written
consent of the Company (which shall not be unreasonably withheld); and
(iii) against any and all expense whatsoever, promptly after
submission for payment (including, subject to Section 6(c) hereof, the
reasonable fees and disbursements of counsel for the indemnified party),
reasonably incurred in investigating, preparing or defending
13
<PAGE> 15
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
Indemnifiable Investor Claim, to the extent that any such expense is not paid
under (i) or (ii) above.
(b) Each [Rights] Investor severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all, liability, claim, damage or expense described in the indemnity
contained in subsection (a)(i)(A) of this Section, promptly after submission for
payment, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
except to the extent the indemnifying party is materially prejudiced thereby,
and the indemnifying party may participate at its own expense in the defense of
any such action. If the indemnifying party so elects within a reasonable time
after receipt of such notice, it may assume the defense of such action, with
counsel chosen by it and approved by the indemnified parties in such action,
unless such indemnified parties reasonably object to such assumption on the
ground that there may be legal defenses available to them which are different
from, conflicting with or in addition to those available to such indemnifying
party. Absent any difference or conflict referred to in the preceding sentence,
if an indemnifying party assumes the defense of such action, the indemnifying
parties shall not be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel retained for local procedural
and practice matters) separate from their own counsel for any indemnified
parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification could be sought under this
Section 6 (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act by or
on behalf of any indemnified party, (iii) does not impugn the reputation of any
indemnified party and (iv) does not restrict any indemnified party from engaging
in any activity.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel, such
14
<PAGE> 16
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Expenses incurred by an indemnified party in defense or settlement
of any claim that shall be subject to a right of indemnification hereunder shall
be advanced by the Company promptly upon submission for payment, provided that
the Company shall have received an undertaking by or on behalf of such
indemnified party to repay such amount to the extent that it shall be determined
ultimately that the indemnified party is not entitled to be indemnified
hereunder.
SECTION 7.
Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company submitted
pursuant hereto and identified as such, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any Investor
or controlling person, or by or on behalf of the Company, and shall survive
delivery of the Recapitalization Shares to the Investors.
SECTION 8.
Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Closing
Date:
(i) by written agreement of the Company and the Investors;
(ii) by either the Company or any Investor, by giving written
notice of such termination to other parties, if Closing shall not have occurred
on or prior to ___________, 1999 (unless the failure to consummate the Closing
by such date shall be due to the failure of the party seeking to terminate this
Agreement to have fulfilled any of its obligations under this Agreement);
(iii) by any Investor, by giving written notice to the Company,
if since the date of this Agreement or since the respective dates as of which
information is given in the Prospectus, any event has occurred or failed to
occur which would have a Material Adverse Effect, whether or not arising in the
ordinary course of business, or if there has been a breach by the Company of any
representation, warranty, covenant or agreement that would give rise to the
failure of the conditions to the obligations of the Investors set forth in
Section 5(b); or
(iv) by either the Company or any Investor in the event that any
governmental authority shall have issued a final, non-appealable order, decree
or ruling or taken
15
<PAGE> 17
any other final, non-appealable action restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable.
(b) If this Agreement is terminated pursuant to this Section 8 such
termination shall be without liability of any party to any other party except as
provided in Section 4(j) and Section 8(c) hereof, except that nothing herein
will relieve any party from liability for breach of this Agreement prior to such
termination.
(c) If this Agreement is terminated by either party prior to the
effective date of the Registration Statement, then, [provided that the Investors
shall not be in breach of their obligations as set forth herein,] the Investors
shall be entitled to reimbursement of their expenses as set forth in Section
4(j)
SECTION 9.
Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given when delivered personally to the
recipient, one day after being sent to the recipient by reputable overnight
express courier service (charges prepaid), five days after being mailed to the
recipient (postage prepaid) or upon confirmation if transmitted by any standard
form of telecommunication. Notices shall be directed as follows:
To Oaktree Capital Management, LLC:
Oaktree Capital Management, LLC
333 South Grand Avenue,
28th Floor
Los Angeles, California 90071
Telephone: (213) 830-6300
Telecopy: (213) 830-_____
Attn: Kenneth Liang, Esq.
with a copy to:
Milbank, Tweed, Hadley & McCloy
601 South Figueroa
31st Floor
Los Angeles, California 90017
Telephone: (213) 892-4000
Telecopy: (213) 629-5063
Attn: Eric H. Schunk, Esq.
16
<PAGE> 18
To the Company:
Aureal Semiconductor, Inc.
4525 Technology Drive
Fremont, California 94538
Telephone: (510) 252-4245
Telecopy: (510) -
Attn: .
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
Telephone: (650) 328-6561
Telecopy: (650) -
Attn: James M. Koshland, Esq.
SECTION 10.
Parties.
This Agreement shall each inure to the benefit of and be binding upon
the Investors and the Company and their respective successors. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than Oaktree, the Investors and the Company
and their respective successors and the controlling persons and officers and
directors and their heirs and legal representatives, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Investors and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation.
SECTION 11.
Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed in said state.
SECTION 12.
Miscellaneous.
(a) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and each of the Investors, or in the case of a waiver,
by the party against whom the waiver is to be effective. No failure or delay by
any party in exercising any right, power or
17
<PAGE> 19
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. In the event that any one or
more of the provisions contained in this Agreement or in any other instrument
referred to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement or any other such
instrument.
(b) No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
parties hereto except that the Investors may without such consent assign their
rights hereunder to one or more of their respective affiliates.
(c) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same agreement.
(d) The heading references herein are for convenience purposes only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
(e) Neither Oaktree nor any officer, director, member, employee,
shareholder, investment manager, director, representative, fiduciary or
controlling person of Oaktree or of any Investor shall have any personal
obligations or liability to the Company under or in connection with this
Agreement. With respect to obligations of any Investor arising hereunder, the
Company shall look for payment or satisfaction solely to the assets and property
of such Investor and not to Oaktree, any other affiliate of such Investor or
Oaktree, or any officer, director, member, employee, shareholder, investment
manager, director, representative, fiduciary or controlling person of or
investor in Oaktree or such Investor.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
AUREAL SEMICONDUCTOR, INC.
By:
---------------------------------
Title:
OAKTREE CAPITAL MANAGEMENT, LLC,
solely on behalf of the entities on
Annex A hereto and not in its
individual capacity
By:
---------------------------------
Authorized Signatory
18
<PAGE> 20
Annex A
INVESTORS
TCW Special Credits Fund IIIb
TCW Special Credits Trust
TCW Special Credits Trust IIIb
Weyerhauser Company Master Retirement Trust
OCM Opportunities Fund II, L.P.
Columbia/HCA Master Retirement Trust
<PAGE> 21
Annex B
RIGHTS INVESTORS
<TABLE>
<CAPTION>
Percentage
of
Rights Shares
<S> <C>
OCM Opportunities Fund II, LP %
Columbia/HCA Master Retirement Trust %
</TABLE>
<PAGE> 22
Annex C
[Credit Agreement Amendment Term Sheet]
[TO COME]
<PAGE> 23
Annex D
REGISTRATION RIGHTS AGREEMENT
[TO COME]
<PAGE> 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 15, 1999
