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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-75631
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 2.0485 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 April 23, 1999
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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 2.0485 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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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> 14
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> 15
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> 16
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> 17
- -------------------------
* 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> 18
(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 2.0485 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 2.0485 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> 19
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 26, 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> 20
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> 21
- 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> 22
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
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<PAGE> 23
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.
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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.
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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.
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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.
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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
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PROSPECTUS
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APRIL 23, 1999
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