<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [X]
Check the appropriate box: [X]
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
AUREAL SEMICONDUCTOR INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
AUREAL SEMICONDUCTOR INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MAY 19, 1999
Notice is hereby given that the annual meeting of stockholders of Aureal
Semiconductor Inc. will be held on Wednesday, May 19, 1999 at 12:30 p.m., at our
headquarters at 4245 Technology Drive, Fremont, California, for the following
purposes:
1. To elect one class I director to hold office for a three-year term and
until his respective successor is elected and qualified or until his
earlier resignation or removal.
2. To consider and vote upon a proposal to amend the Restated Certificate
of Incorporation to change our name from Aureal Semiconductor Inc. to
Aureal Inc.
3. To consider and vote upon a proposal to amend the Restated Certificate
of Incorporation to effect a one-for-fifteen reverse stock split.
4. To consider and vote upon a proposal to amend the 1995 Stock Option Plan
to increase (a) the maximum number of shares that may be issued under
the plan by 3,333,333 shares and (b) the employee grant limit from
80,000 shares to 500,000 shares, assuming Proposal 3 is approved.
5. To ratify the appointment of Arthur Andersen LLP as our independent
accountants for the 1999 fiscal year.
6. To consider and transact such other business, if any, as may properly
come before the meeting or any adjournments or postponements thereof.
Only stockholders of record at the close of business on March , 1999 will
be entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof. All stockholders are cordially invited to attend the
meeting in person. Whether or not you plan to attend the meeting in person,
please complete, date, sign and return the enclosed proxy card as soon as
possible in the enclosed envelope. Your vote is important.
By order of the board of directors
Brendan O'Flaherty
Secretary
Fremont, California
April , 1999
<PAGE> 3
AUREAL SEMICONDUCTOR INC.
4245 TECHNOLOGY DRIVE
FREMONT, CALIFORNIA 94538
(510) 252-4245
------------------------
PROXY STATEMENT
------------------------
This proxy statement is furnished in connection with the solicitation by
the board of directors of Aureal Semiconductor Inc., a Delaware corporation, of
proxies in the accompanying form, relating to the annual meeting of stockholders
to be held on Wednesday, May 19, 1999 at 12:30 p.m., at 4245 Technology Drive,
Fremont, California, or any adjournments or postponements thereof. The proxy
statement and the enclosed proxy are being mailed to stockholders on or about
April , 1999.
GENERAL INFORMATION
ANNUAL REPORT
An annual report on Form 10-K for the 1998 fiscal year ended January 3,
1999 is enclosed with this proxy statement.
RECORD DATE AND SHARES OUTSTANDING
Only stockholders of record at the close of business on March , 1999 are
entitled to vote at the annual meeting. On that date, there were outstanding and
entitled to vote shares of common stock. In addition, shares
of series B preferred stock were outstanding. Each share of our series B
preferred stock is convertible into 4,000 shares of common stock at the option
of the holder and is entitled to vote on an "as converted" basis. Holders of
shares of series A preferred stock and shares of series C
preferred stock are not entitled to vote. As of March , 1999, the
shares of series B preferred stock were entitled to votes on an "as
converted" basis. Thus, a total of shares of common stock and "as
converted" common stock are eligible to vote at the annual meeting.
VOTING AND SOLICITATION
Stockholders may vote in person or by proxy. Each share of common stock,
including the "as converted" common share calculation of series B preferred
stock, is entitled to one vote on each proposal that comes before the
stockholders at the annual meeting. Our bylaws provide that a majority of all of
the shares of stock entitled to vote, whether present in person or represented
by proxy, shall constitute a quorum for the transaction of business at the
meeting. Abstentions and broker non-votes will be counted in determining whether
a quorum is present at the annual meeting.
If the enclosed proxy is properly executed and returned, the shares of
common stock represented by it will be voted at the meeting in accordance with
the stockholder's instructions. If no instructions are given with respect to any
matter, the proxy will be voted in favor of such matter.
Our directors, officers and other authorized employees may make
solicitation of proxies by personal interview, telephone or other means of
communication. No additional compensation will be paid for any such services.
Costs of solicitation, including preparation, assembly, printing and mailing of
this proxy statement, the proxy and any other information furnished to the
stockholders, will be borne by Aureal. We will, upon request, reimburse the
reasonable charges and expenses of brokerage houses or other nominees or
fiduciaries for forwarding proxy materials to, and obtaining authority to
execute proxies from, beneficial owners for whose account they hold shares of
common stock.
<PAGE> 4
REVOCABILITY OF PROXIES
Any stockholder giving a proxy for the meeting in the accompanying form may
revoke it at any time prior to it being voted by either:
- filing with the Secretary of Aureal at our principal executive office,
4245 Technology Drive, Fremont, California 94538, an instrument of
revocation or a duly executed proxy bearing a later date, or
- attending the annual meeting and voting in person.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 by 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.
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 by 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.
Unless otherwise noted, the share amounts set forth in this table and
elsewhere in this proxy statement have not been adjusted to reflect the
one-for-fifteen reverse stock split proposed in proposal 3.
<TABLE>
<CAPTION>
VOTING SHARES
(INCLUDING "AS
SHARES BENEFICIALLY CONVERTED" SERIES B
OWNED PREFERRED STOCK)
-------------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT NUMBER PERCENT
------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Oaktree Capital Management, LLC(1)..................... 42,626,980 61.4% 59,404,148 68.9%
333 South Grand Street, 28th Floor
Los Angeles, CA 90071
D. Richard Masson(2)................................... 42,626,980 61.4% 59,404,148 68.9%
The TWC Group, Inc. and its affiliates(3).............. 19,608,363 28.7% 33,988,793 39.9%
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Thomas K. Smith(4)..................................... 19,608,363 28.7% 33,988,793 39.9%
Appaloosa Management L.P............................... 5,560,074 8.5% 5,560,074 6.8%
26 Main Street
Chatham, New Jersey 07928
Kenneth A. Kokinakis(5)................................ 1,625,000 2.4% 1,625,000 1.9%
Richard E. Christopher(6).............................. 40,625 * 40,625 *
L. William Krause(7)................................... 151,875 * 151,875 *
David J. Domeier(8).................................... 497,500 * 497,500 *
Scott H. Foster(9)..................................... 1,948,372 2.9% 1,948,372 2.3%
Michael L. Hunter(10).................................. 500,000 * 500,000 *
Sanjay Iyer(11)........................................ 602,500 * 602,500 *
Brendan R. O'Flaherty(12).............................. 510,000 * 510,000 *
All directors and executive officers as a group (10
persons)(13)......................................... 48,502,852 64.8% 65,280,020 71.2%
</TABLE>
- ---------------
* Less than 1%.
2
<PAGE> 5
(1) Oaktree acts as an investment manager for certain entities and in that
capacity, may be deemed to beneficially own securities held by those
entities. In addition, Oaktree provides sub-advisory services to certain
entities affiliated with The Trust Company of the West ("TCW"), and in that
capacity may be deemed to beneficially own securities held by those TCW
entities. As a result, Oaktree may be deemed to own 38,601,980 shares of
common stock. In addition, pursuant to warrants issued in August 1997,
Oaktree holds rights to acquire 4,025,000 shares of common stock. Oaktree
also beneficially owns 41,785 shares of series B preferred stock and 100
shares of series C preferred stock. Series B preferred stock have voting
rights on an "as converted" basis. As of March 22, 1999, the 41,785 shares
of series B preferred stock were convertible, at the option of the holder,
into 16,777,168 shares of common stock and the 100 shares of series C
preferred stock were convertible, at the option of the holder, into
2,553,202 shares of common stock. The series C preferred stock has no
voting rights.
(2) To the extent that Mr. Masson, as an authorized representative of Oaktree,
participates in the process to vote or dispose of any Oaktree controlled
shares, he may be deemed to be the beneficial owner of those shares. Mr.
Masson disclaims beneficial ownership of those shares.
(3) The TCW Group, Inc. may be deemed to beneficially own 16,658,363 shares of
common stock as well as warrants to purchase 2,950,000 additional shares of
common stock. Also under the same beneficial ownership are 35,816 shares of
series B preferred stock which as of March 22, 1999 were convertible into
14,380,430 shares of common stock. All of these securities are held by
limited partnerships, trusts and third party separate accounts for which
the TCW Group, Inc. acts as general partner, trustee and investment
advisor, respectively. The TCW Group, Inc. expressly disclaims beneficial
ownership of these securities.
(4) To the extent Mr. Smith, as either a Senior Vice President or authorized
representative of TCW or TCW Asset Management Company, participates in the
process to vote or dispose of the shares described in note (3) above, Mr.
Smith may be deemed to be the beneficial owner of those shares. Mr. Smith
disclaims beneficial ownership of those shares.
(5) Includes 1,600,000 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 654,167 are
not vested and subject to repurchase by Aureal.
(6) Includes 20,625 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999.
(7) Includes 151,875 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999.
(8) Includes 472,500 shares subject to exercise of outstanding stock options
exercisable within 60 days of March 22, 1999. Of those shares, 178,303 are
not vested and subject to repurchase by Aureal.
(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 Aural.
(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
42,626,980 shares that may be deemed beneficially owned by Mr. Masson, and
19,608,363 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.
3
<PAGE> 6
PROPOSAL 1
ELECTION OF DIRECTORS
We have a classified board of directors currently consisting of one class I
director, two class II directors and two class III directors, who will serve
until the annual meetings of stockholders to be held in 1999, 2000 and 2001
respectively, and until their respective successors are duly elected and
qualified. At each annual meeting of stockholders, directors are elected for a
term of three years to succeed those directors whose terms expire on the annual
meeting dates.
The nominee for election at the 1999 annual meeting to class I of the board
of directors is Kenneth A. Kokinakis. If elected, Mr. Kokinakis will serve as a
director until the annual meeting in 2002 and until his successor is elected and
qualified or until his earlier resignation or removal. If a nominee declines to
serve or becomes unavailable for any reason, or if a vacancy occurs before the
election, although management knows of no reason to anticipate that this will
occur, the proxies may be voted for such substitute nominee as management may
designate.
If a quorum is present and voting, the nominee for director receiving the
highest number of votes will be elected as a director.
INFORMATION CONCERNING THE BOARD OF DIRECTORS OF AUREAL
The name of and certain other information regarding the current directors
and nominee for director are set forth in the following table.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH AUREAL DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
CLASS I DIRECTOR WHOSE TERM EXPIRES AT THE 1999 ANNUAL MEETING OF STOCKHOLDERS:
Kenneth A. Kokinakis............ 45 President, Chief Executive February 1996
Officer and Director
CLASS II DIRECTORS WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING OF STOCKHOLDERS:
D. Richard Masson............... 40 Director December 1994
Richard E. Christopher.......... 51 Director November 1996
CLASS III DIRECTORS WHOSE TERMS EXPIRE AT THE 2001 ANNUAL MEETING OF STOCKHOLDERS:
L. William Krause............... 56 Director April 1995
Thomas K. Smith, Jr............. 34 Director December 1994
</TABLE>
Mr. Kokinakis was appointed President and Chief Executive Officer of Aureal
effective January 15, 1996 and a director effective February 7, 1996. Prior to
joining Aureal, Mr. Kokinakis served as the Managing Director and Chief
Executive Officer of Memec (Asia-Pacific), an electronic component distributor,
from January 1991 to January 1996. Prior to 1991, Mr. Kokinakis held various
executive sales and marketing positions at Xilinx, Inc. and Microchip Technology
Inc.
Mr. Masson has served as a director of Aureal since December 30, 1994. Mr.
Masson has been a principal of Oaktree since May 1995. Prior to the founding of
Oaktree, he was a partner of TCW Special Credits since 1991 and served as a
Managing Director and in various other capacities for Trust Company of the West
and TCW Asset Management Company ("TAMCO"), wholly-owned subsidiaries of The TCW
Group, Inc., since 1988. TCW Special Credits serves as a general partner,
trustee and investment advisor to certain limited partnerships, trusts, and
accounts invested in the securities and debt obligations of financially
distressed companies. Oaktree provides investment sub-advisory services to TAMCO
on certain funds and accounts managed by TAMCO. TAMCO is the managing general
partner of TCW Special Credits. Mr. Masson also serves as a director of Winship
Properties.
Mr. Christopher has served as a director of Aureal since November 1996. Mr.
Christopher is Executive Vice President, Chief Operating Officer, and a director
of Triscend Co., a manufacturer of configurable micro controllers. From July
1992 through October 1998, Mr. Christopher was the Vice President of Worldwide
Sales for Chips and Technologies Inc., a supplier of advanced graphic
controllers and accelerators for notebook computers. Intel Corporation acquired
Chips and Technologies Inc. in February 1998. Prior to
4
<PAGE> 7
joining Chips and Technologies Inc., Mr. Christopher spent twelve years at
Fujitsu Microelectronics where he became Senior Vice President and General
Manager.
Mr. Krause has served as a director of Aureal since April 1995. Since
November 1998, Mr. Krause has been President of LWK Ventures, a private
investment company. Mr. Krause was President, Chief Executive Officer and a
director of Storm Technology Inc., a provider of computer peripherals and
software for digital imaging, from October 1991 until November 1998 when it
filed for protection under federal bankruptcy laws. Prior to that, Mr. Krause
spent ten years at 3Com Corporation, a manufacturer of networking systems, where
he served as President and Chief Executive Officer until he retired in September
1990. Mr. Krause continued as Chairman of the Board for 3Com Corporation until
1993. Mr. Krause currently serves as a director of Sybase, Inc. and Infoseek
Corporation.
Mr. Smith has served as a director of Aureal since December 1994. Mr. Smith
is a Senior Vice President of Trust Company of the West, a wholly owned
subsidiary of The TCW Group, Inc., which he joined in 1991 as an investment
analyst for TCW Special Credits. TCW Special Credits serves as general partner,
trustee and investment advisor to certain limited partnerships, trusts, and
accounts invested in the securities and debt obligations of financially
distressed companies. TAMCO is the managing general partner of TCW Special
Credits.
BOARD COMPENSATION
Pursuant to our 1996 Outside Directors Stock Option Plan, Mr. Christopher
and Mr. Krause receive automatic annual stock option grants to purchase 5,000
shares of Aureal common stock. In addition, pursuant to this plan, when Mr.
Christopher was appointed as a director in November 1996, he received an initial
stock option grant to purchase 30,000 shares of Aureal common stock. Each of the
grants is priced at market price on the date of grant and vests 25% on the one
year anniversary of the grant, with additional vesting at the rate of 2.08% per
month thereafter for the remaining term so that the option is fully vested four
years from the date of grant. Prior to adoption of the 1996 Outside Directors
Stock Option Plan, as compensation for service on the board, Aureal granted to
Mr. Krause, in April 1995 upon his appointment to the board, an option to
purchase 100,000 shares of the Aureal common stock. In addition, Aureal granted
an additional option to purchase 50,000 shares of the Aureal common stock to Mr.
Krause in September 1995. Both options were granted at market price on the date
of grant and vested 25% upon grant and an additional 25% at the end of each
six-month period thereafter.
As cash compensation for services on the board, Messrs. Krause and
Christopher receive $500 for each board meeting attended. The other directors do
not receive any compensation for their services as members of the board. All
non-management directors are reimbursed for their reasonable expenses incurred
in attending meetings of the board and committees of the board.
Messrs. Masson and Smith have declined to participate in our stock option
plans or receive payment for their attendance at board meetings in connection
with their employment with Oaktree and TCW, respectively, both of which are
deemed beneficial owners of significant portions of our common stock.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The board held six meetings and acted five times by written consent during
1998. Except for Mr. Krause, each incumbent director attended at least 75% of
the aggregate meetings of the board of directors and of the committees, if any,
on which he served in 1998 that were held while he was a director or a member of
such committee.
Standing committees of the board include an audit committee and a
compensation committee.
The current members of the audit committee are Messrs. Krause and
Christopher. The audit committee recommends engagement of Aureal's independent
accountants, reviews the scope of the audit and any non-audit services provided
by our independent accountants, and reviews with management and the independent
auditors as deemed necessary, the financial statements, the results of the
annual audit and internal accounting and control matters. The audit committee
held two meetings during 1998.
5
<PAGE> 8
The compensation committee determines the compensation for our senior
management and administers our stock option plans for officers, directors,
employees and consultants. The current members of the compensation committee are
Messrs. Masson and Smith. The compensation committee held three meetings and
acted eight times by written consent, for the purpose of approving stock option
grants, during 1998. For more information regarding executive compensation, see
"Report of the compensation committee on executive compensation."
During 1997, the board of directors established a special committee of
disinterested directors with authority to review and approve all documents
prepared in connection with equity transactions involving any parties related to
members of the board of directors. This special committee, consisting of Messrs.
Christopher and Krause, met twice during 1998 to review and approve the June
1998 issuance of series B preferred stock as payment of the outstanding balance
of Aureal's line of credit with TCW.
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
The following table sets forth the 1998, 1997 and 1996 total compensation
of Aureal's Chief Executive Officer and each of the other executive officers as
of January 3, 1999. Unless otherwise noted, bonuses were paid early in the
following year for services in the year indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Kenneth A. Kokinakis(2)............... 1998 $307,704 $ 50,000 250,000 $ 5,600
President and Chief 1997 $200,000 $100,000 350,000 $ 4,750
Executive Officer 1996 $184,615 $100,000 1,000,000 $ 47,240(3)
David J. Domeier...................... 1998 $190,192 $ 25,000 100,000 $ 5,000
Vice President, Finance and 1997 $175,000 110,000 $ 4,750
Chief Financial Officer 1996 $174,327 87,500 $ 4,750
Scott H. Foster(4).................... 1998 $191,154 $ 12,500 100,000 $ 5,000
Chief Technical Officer 1997 $180,000 70,000 $104,750(5)
1996 $ 97,789 200,000 $ 54,750(5)
Michael Hunter(6)..................... 1998 $175,000 $ 40,000 97,500 $ 5,000
Vice President, Sales 1997 $140,000 $ 30,000 140,000 $ 4,750
1996 $138,600 $ 22,500 137,500 $ 4,750
Sanjay Iyer........................... 1998 $188,269 $ 25,000 100,000 $ 5,300
Vice President, General Manager 1997 $165,000 180,000 $ 4,750
-- Technology Division 1996 $156,519 147,500 $ 4,750
Brendan R. O'Flaherty................. 1998 $188,269 $ 25,000 100,000 $ 5,000
Vice President, General Counsel 1997 $165,000 140,000 $ 4,750
and General Manager -- Systems 1996 $164,365 112,500 $ 4,750
Division
</TABLE>
- ---------------
(1) Represents primarily Aureal's contribution to the employee's 401(k) plan
account as a partial match to the employee's contributions for the year
noted. The maximum matching contribution was $5,000 for 1998 and $4,750 for
both 1997 and 1996.
(2) Mr. Kokinakis joined Aureal in January 1996; compensation indicated for 1996
was for the partial year.
(3) Includes moving and other associated expenses incurred by Mr. Kokinakis for
his transfer from Hong Kong to join Aureal.
6
<PAGE> 9
(4) Mr. Foster joined Aureal in May 1996 in connection with the merger with
Crystal River Engineering Inc., or CRE, of which he was the Chief Executive
Officer; compensation indicated for 1996 was for the partial year.
(5) Payments totaling $100,000 and $50,000 were made to Mr. Foster during 1997
and 1996 respectively, related to the merger with CRE and his continued
involvement with the merged companies. No further related payments will be
made.
(6) Mr. Hunter's bonus payment for 1998 included $15,000 of commissions earned
based on achievement of certain sales goals. Mr. Hunter's bonus payments for
1997 and 1996 reflected guaranteed commissions while Aureal was largely
engaged in product development and "pre-sales" customer contact efforts.
STOCK OPTIONS GRANTED IN 1998
The following table sets forth information with respect to the options to
purchase common stock granted to the Chief Executive Officer and the other
executive officers named in the summary compensation table during 1998. Aureal
did not grant any stock appreciation rights during 1998.
The options described below are immediately exercisable at the date of
grant, but shares purchased upon exercise of unvested options are subject to
repurchase at Aureal's option at their original issuance price. All options in
this table have exercise prices equal to the fair market value on the date of
grant. The options vest over a period of four years and expire ten years from
the original date of grant. We granted options to purchase 3,262,500 shares of
common stock to employees in 1998 under our 1995 Stock Option Plan.
STOCK OPTIONS GRANTED IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION -------------------------
NAME GRANTED IN YEAR PRICE DATE 5% 10%
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Kokinakis........... 250,000 7.7% $0.55 10/19/08 $85,923 $217,745
David J. Domeier............... 100,000 3.1% $0.55 10/19/08 $34,369 $ 87,098
Scott H. Foster................ 100,000 3.1% $0.55 10/19/08 $34,369 $ 87,098
Michael L. Hunter.............. 97,500 3.0% $0.55 10/19/08 $33,510 $ 84,921
Sanjay Iyer.................... 100,000 3.1% $0.55 10/19/08 $34,369 $ 87,098
Brendan O'Flaherty............. 100,000 3.1% $0.55 10/19/08 $34,369 $ 87,098
</TABLE>
- ---------------
(1) The potential gain is determined by comparing the grant price to the assumed
values as calculated utilizing the annual stock price appreciation rates
indicated. These amounts represent only assumed rates of appreciation as
established by the Securities and Exchange Commission for such disclosure,
and do not represent our estimates or projections of future stock prices.
The calculated amounts have not been discounted to reflect the present value
of these amounts. Actual gains, if any, on stock option exercises and common
stock holdings are dependent upon the future performance of Aureal and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table or the associated rates of appreciation will be
achieved.
7
<PAGE> 10
OPTION EXERCISES AND 1998 YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value
of unexercised options held on January 3, 1999 by the Chief Executive Officer
and the executive officers named in the summary compensation table. In addition,
it sets forth the number of shares acquired and value realized upon exercise of
stock options during 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------------------- ---------------------
NAME EXERCISE REALIZED EXERCISABLE VESTED UNEXERCISABLE VESTED UNVESTED
---- ----------- -------- ----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth A Kokinakis... 1,600,000 825,000
David J. Domeier...... 470,096 270,692 2,404
Scott H. Foster....... 250,000 $313,675 1,522,944 1,336,278 $141,704
Michael Hunter........ 499,324 275,634 676
Sanjay Iyer........... 601,625 330,864 875
Brendan O'Flaherty.... 501,875 275,685 625
</TABLE>
- ---------------
(1) Value per share is defined as the market price of our common stock at
year-end minus the per share exercise price of the option. The closing price
per share of our common stock on December 31, 1998, was $0.45 as reported on
the Over-the-Counter Electronic Bulletin Board.
8
<PAGE> 11
REPRICED OPTIONS
The following table provides the specified information concerning all
repricings of options to purchase Aureal's common stock held by any executive
officer of Aureal since November 11, 1992, the date of our initial public
offering.
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER ORIGINAL
OF OPTION TERM
SECURITIES MARKET PRICE REMAINING
UNDERLYING OF STOCK AT EXERCISE PRICE AT DATE OF
OPTIONS TIME OF AT TIME OF REPRICING OR
REPRICING REPRICED OR REPRICING OR REPRICING OR NEW EXERCISE AMENDMENT
NAME AND POSITION DATE AMENDED AMENDMENT AMENDMENT PRICE (IN MONTHS)
----------------- --------- ----------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Kokinakis..... 9/1/98 200,000 $1.03 $1.34 $1.03 92
9/1/98 150,000 $1.03 $2.19 $1.03 104
9/1/98 200,000 $1.03 $1.75 $1.03 111
David J. Domeier......... 9/1/98 87,500 $1.03 $1.34 $1.03 92
9/1/98 40,000 $1.03 $2.19 $1.03 104
9/1/98 70,000 $1.03 $1.75 $1.03 111
9/1/98 125,000 $1.03 $1.88 $1.03 79
Scott H. Foster.......... 9/1/98 200,000 $1.03 $1.81 $1.03 93
9/1/98 40,000 $1.03 $2.19 $1.03 104
9/1/98 30,000 $1.03 $1.75 $1.03 111
Michael L. Hunter........ 9/1/98 137,500 $1.03 $1.34 $1.03 92
9/1/98 40,000 $1.03 $2.19 $1.03 104
9/1/98 100,000 $1.03 $1.75 $1.03 111
9/1/98 100,000 $1.03 $1.88 $1.03 79
Sanjay Iyer.............. 4/4/95 40,000 $1.88 $4.00 $1.88 117
9/1/98 35,000 $1.03 $1.88 $1.03 79
9/1/98 40,000 $1.03 $1.88 $1.03 76
9/1/98 147,500 $1.03 $1.34 $1.03 92
9/1/98 40,000 $1.03 $2.19 $1.03 104
9/1/98 140,000 $1.03 $1.75 $1.03 111
Brendan O'Flaherty....... 4/4/95 75,000 $1.88 $4.00 $1.88 117
9/1/98 75,000 $1.03 $1.88 $1.03 76
9/1/98 25,000 $1.03 $1.88 $1.03 79
9/1/98 112,500 $1.03 $1.34 $1.03 92
9/1/98 100,000 $1.03 $1.75 $1.03 111
9/1/98 40,000 $1.03 $2.19 $1.03 104
Former Executive Officers
Gary M. Catlin(1)........ 4/4/95 30,000 $1.88 $4.00 $1.88 117
9/1/98 30,000 $1.03 $1.88 $1.03 76
9/1/98 10,000 $1.03 $1.88 $1.03 79
9/1/98 146,250 $1.03 $1.34 $1.03 92
9/1/98 40,000 $1.03 $2.19 $1.03 104
9/1/98 140,000 $1.03 $1.75 $1.03 111
Leonard L. Backus(2)..... 4/4/95 75,000 $1.88 $4.00 $1.88 117
Robert G. Brownell(3).... 4/4/95 300,000 $1.88 $4.00 $1.88 117
Bharat Sastri(4)......... 4/4/95 200,000 $1.88 $4.00 $1.88 117
</TABLE>
- ---------------
(1) Mr. Catlin resigned as Vice President, Engineering in July 1998. He
continues as an Aureal employee.
(2) Mr. Backus resigned as Vice President, International Sales and Marketing in
October 1995.
(3) Mr. Brownell resigned as President and Chief Executive Officer on December
31, 1995.
(4) Mr. Sastri resigned as Vice President, Technology in August 1995.
9
<PAGE> 12
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Aureal's 1994 Stock Option Plan contains provisions pursuant to which all
outstanding options granted under that plan will become fully vested and
immediately exercisable upon certain changes of control and related events.
Options granted under Aureal's 1995 Stock Option Plan and the 1996 Outside
Director Stock Option Plan generally are immediately exercisable, subject to the
right of Aureal to repurchase, at the optionee's original purchase price, any
shares acquired upon exercise of unvested options that are held by the optionee
upon termination of service with Aureal. Aureal's right of repurchase lapses
over time while the optionee remains in continuous service with Aural in
accordance with a vesting schedule established for each option granted. In
addition, option agreements entered into with each optionee under the plans
generally provide that in the event of certain changes in control, Aureal's
right of repurchase will automatically terminate unless the option is assumed by
the acquiring party or such party substitutes equivalent options for the
acquiring party's stock. In the event an option is assumed or substituted for by
the acquiring party, option agreements under the 1995 Stock Option Plan
generally further provide for automatic termination of Aureal's right of
repurchase if the optionee is terminated without cause or resigns for good cause
within twelve months following specified changes in control of Aureal.
CHANGES TO BENEFIT PLANS
At a special meeting of the stockholders held on December 16, 1998,
stockholders approved a proposal to increase the number of shares of common
stock that may be issued under the 1995 Stock Option Plan. The proposal
increased the maximum number of shares eligible for issuance under the plan from
12,000,000 to 25,000,000. This increase was ratified at the same time that the
number of authorized shares of Aureal's common stock was increased from
100,000,000 to 200,000,000 shares.
The board of directors has amended the 1995 Stock Option Plan, subject to
stockholder approval, to increase by 3,333,333, the number of shares reserved
for issuance under the plan, assuming adoption of the reverse stock split
proposal 3, from 1,666,667 to 5,000,000. See "Proposal 4 -- Amendment of the
1995 Stock Option Plan" for more information. As of the date of this proxy
statement, none of the additional options under the plan had been granted.
During 1998, options granted to the Chief Executive Officer and the other
executive officers under the 1995 Stock Option Plan are disclosed in "Stock
options granted in 1998" above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of March 22, 1999, Oaktree maintained beneficial ownership of
approximately 59% of our outstanding shares of common stock, 67% of the voting
shares when the series B preferred stock is included on an "as converted" basis,
including holdings of various TCW entities. Mr. Masson, a director of Aureal, is
a principal of Oaktree, which provides investment sub-advisory services to a TCW
affiliate. Mr. Smith, also a director of Aureal, is a Senior Vice President of
TCW, a wholly owned subsidiary of the TCW Group, Inc.
In addition to its beneficial ownership position in our common stock,
Oaktree, on behalf of TCW entities and a separate Oaktree account, have entered
into put agreements, dated November 6, 1998, with Aureal's current credit
facility lenders. Under these agreements, the lenders may "put" certain
outstanding balances under the credit facility to the Oaktree and TCW entities
and force these entities to buy out the lenders' positions in the loans.
TCW acted as the managing agent and primary lender under a line of credit
to Aureal until we paid off and terminated the line of credit on June 26, 1998.
The amount of available credit and the terms of the line of credit, including
its maturity date, had been amended over time since the line was first
established in 1994. The available line ranged from $10 million to $36.5 million
over time. As the availability had been increased and the maturity date extended
over time, we paid the lenders various fees. These fees included $200,000 in
1995 to increase the line from $15 million to $22 million, and to extend the
maturity date through March 1996, and $220,000 in 1996 to extend the maturity
date through March 1998.
10
<PAGE> 13
In August 1997, in conjunction with a private placement of $3.8 million of
our common stock, including sales to both TCW and DDJ Capital Management, LLC
("DDJ"), our line of credit was expanded from $22 million to $31.5 million. DDJ
became a participating lender under the line of credit for up to $4.5 million of
the total of $31.5 million. At that time, the maturity date of the line of
credit was also extended to March 1999. For the expansion of the line of credit
and the extension of the maturity date, we paid the lenders $630,000 and also
issued to the lenders warrants to purchase 3.15 million shares of our common
stock at an exercise price of $2.00 per share. Borrowings under the line of
credit bore interest at the prime rate to borrowers of Bank of America plus 5%
and the lenders had the benefit of specific covenants. This line of credit was
paid in full and terminated in June 1998, in conjunction with Aureal's sale of
$5 million of series C preferred stock to DDJ and the exchange of $31.5 million
face value of series B preferred stock to the holders of the line of credit, DDJ
and TCW.
In August 1997, we sold 1.910 million units, each unit consisting of one
share of common stock and one-half of one warrant to buy an additional share of
common stock, in a private placement to a limited number of pre-existing
stockholders of Aureal. The individual units were priced at $2.00, and the
exercise price for the warrants was $2.00 per share. Oaktree, TCW and DDJ
purchased 500,000, 500,000 and 750,000 units, respectively, in the transaction.
On March 5, 1999, DDJ sold the majority of its position in the common stock
and the series C preferred stock of Aureal to Oaktree. In addition, at that
time, DDJ sold its entire position in the series B preferred stock and the
warrants to purchase the common stock to Oaktree.
Our bylaws provide that Aureal shall indemnify our officers, directors and
employees to the fullest extent permitted by law. The bylaws expressly authorize
the use of indemnity agreements and Aureal has entered into these agreements
with each of its directors and officers. We also maintain insurance policies,
which cover the officers and directors for any liability arising out of their
actions in such capacities.
A special committee of disinterested directors approved all transactions
described above and we believe the terms of these transactions were no less
favorable than we could have been obtained from unaffiliated third parties.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers, and persons who own more than 10% of the outstanding
shares of our common stock, to file with the Securities and Exchange Commission
initial reports of ownership on form 3, and changes in ownership of our stock
and other equity securities on forms 4 and 5. These persons are also required by
SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely upon review of the copies of such reports
and certain representations furnished to it, all Section 16(a) filing
requirements applicable to our executive officers, directors and greater than
10% beneficial holders were complied with on a timely basis during 1998.
11
<PAGE> 14
COMPARISON OF STOCKHOLDER RETURN
SEC regulations require presentation of information relative to the return
to stockholders based on the share price of our common stock over the last five
years. For Aureal, that five year period encompasses two distinct and separate
periods of stock ownership. The first period ran from our initial pubic offering
in November 1992 through December 1994 when we emerged from Chapter 11
bankruptcy proceedings and all of the previously outstanding common stock, noted
in the first chart below as "Old Common Stock" was declared worthless. During
that time, operating under the name Media Vision Technology, Inc., we competed
to sell PC upgrade products in the retail marketplace, and thus our stock price
was compared against an index for computer manufacturers. These results are
shown in the first chart below. The second period of our stock price comparisons
began in January 1995 when new common stock was issued and began to trade post-
Chapter 11 exit. During this time, we have focused our primary efforts on the
development and marketing of audio technologies and related semiconductor
devices for sale to manufacturers of PC and consumer electronics products;
therefore the second chart below includes the semiconductor industry index for
purposes of comparison.
The chart below compares the cumulative total return on our old common
stock with the cumulative return of the CRSP Total Return Index for the NASDAQ
National Market and the CRSP Total Return Index for Computer Manufacturers for
the period commencing on November 11, 1992, the date trading of the old common
stock began, and ending on December 30, 1994, the date at which the old common
stock was canceled pursuant to the Plan of Reorganization. The chart assumes
that $100.00 was invested in the old common stock and each of the indexes on
November 11, 1992 and that dividends, if any, were reinvested. As the old common
stock was canceled and no longer trades on any market system, this stock is not
tracked on the performance chart after December 30, 1994.
<TABLE>
<CAPTION>
OLD COMMON STOCK (MEDIA COMPUTER MANUFACTURERIS
VISION) NASDAQ MARKET INDEX INDEX
----------------------- ------------------- -----------------------
<S> <C> <C> <C>
11/11/92 100.00 100.00 100.00
12/31/92 109.10 103.68 106.00
12/31/93 198.90 119.01 100.46
12/30/94 0.00 116.34 110.34
</TABLE>
12
<PAGE> 15
Aureal's new common stock was initially issued on December 30, 1994 and
initially traded on the OTC Bulletin Board on January 6, 1995. The closing price
of the common stock on that date was $2.75. The closing price of our common
stock on the last trading day of 1998 was $0.45. The chart below compares the
cumulative total return on our common stock with the cumulative return of the
NASDAQ Market Index and a Semiconductor Index, 120 companies with the 3674 SIC
Code -- Semiconductors and Related Devices. The chart assumes that $100 was
invested in our common stock and each of the indexes on January 6, 1995 and that
dividends, if any, were reinvested.
<TABLE>
<CAPTION>
AUREAL COMMON STOCK NASDAQ MARKET INDEX SEMICONDUCTOR INDEX
------------------- ------------------- -------------------
<S> <C> <C> <C>
1/6/95 100.00 100.00 100.00
12/29/95 50.00 129.71 162.40
12/29/96 71.59 161.18 261.45
12/28/97 86.36 197.16 272.45
1/3/99 16.48 278.08 410.21
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION
The compensation committee is comprised of two outside directors of the
board of directors, Messrs. Masson and Smith. The committee reviews and
determines our executive compensation objectives and policies and administers
our stock option plans. The committee reviews and sets the compensation of
Aureal's Chief Executive Officer, and taking into account recommendations of the
Chief Executive Officer, sets the compensation for all other executive officers.
We apply a consistent philosophy to employee compensation based on the
premise that the achievements of Aureal result from the coordinated efforts of
all its employees working toward common goals. The objectives of the
compensation committee are to align executive compensation with business
objectives and successful performance, and to enable Aureal to attract, retain
and reward executive officers and all employees who contribute to our long term
success.
SALARIES
The committee annually reviews the salaries of our executives including the
Chief Executive Officer. When setting salary levels, the committee considers
competitive market conditions, our performance and individual performance.
Market competitive salary levels are reviewed relative to external data provided
for comparable positions in companies in the same industry of similar size and
geographic location.
13
<PAGE> 16
In both 1997 and 1996, Mr. Kokinakis' base salary was paid at the annual
rate of $200,000. In addition, in both years, he was paid a bonus of $100,000
pursuant to his original employment agreement. In 1998, his annual salary was
increased to $300,000 without a specific arrangement as to any predetermined
bonus.
BONUSES
Aureal did not have a formal bonus plan during 1998. The committee believes
that Aureal achieved significant progress in 1998, as we moved through our first
year of volume product sales. For 1998, Mr. Kokinakis received a bonus of
$50,000. The other executive officers received bonuses as indicated in the
summary compensation table above.
STOCK OPTIONS
The compensation committee and Aureal's management strongly believe that
employee equity ownership provides significant motivation to executive officers
and all employees to maximize value for Aureal's stockholders. In addition, such
equity ownership helps retain key employees in a competitive marketplace.
Therefore, the committee periodically grants stock options under Aureal's stock
option plans. To date, all employees have been granted stock options upon
initial employment with Aureal. The committee has also made incremental stock
option grants, upon the recommendation of management, to most employees. All
stock options are granted by the committee at the then current market price of
Aureal's common stock and have value only as the price of our common stock
increases over the granted exercise price.
The compensation committee believes that it is standard industry practice,
and in the best interests of Aureal and its stockholders, for approximately 20%
to 30% of Aureal's common stock, on a fully diluted basis, to be available for
employees as a group. Consequently, Aureal has instituted stock option plans
that provide for this availability. Aureal and the compensation committee are
strongly committed to providing competitive compensation packages to its
employees to ensure a continuation of attracting and retaining top quality
technical, management and support personnel.
During 1998 stock option grants were made to the Chief Executive Officer
and the other executive officers as indicated in the stock options granted table
above, as well as to all employees. These grants were made after a review of the
exercise prices and numbers of options granted to each of the employees in the
past. Aureal maintains general guidelines relating to the number of stock
options to be granted to employees at different levels within Aureal. While
there are no precise targets with respect to the number of options for executive
officers or other employees, the compensation committee believes that the higher
the level of an employee's responsibilities, the larger the stock-based
component of their compensation should be.
STOCK OPTION REPRICINGS
In September 1998, certain outstanding stock options were repriced by
action of the compensation committee. At that time, as a result of a broad
decline in the price of Aureal's common stock, the vast majority of outstanding
stock options held by executive officers and other employees had exercise prices
well above the recent historical trading prices of Aureal's common stock. The
committee believed that this situation had a significant impact on the
perception by Aureal's employees regarding the stock option component of the
overall compensation packages offered by Aureal. It also believed that:
- Aureal's success in the future would depend in large part on its ability
to retain its personnel,
- competition for the required personnel would be intense, and
- it was important and cost-effective to provide further equity incentives
to employees and executive officers.
Accordingly, in September 1998, the compensation committee approved an
offer to all employees, including executive officers, to amend their options
that had exercise prices above the then current trading price of Aureal's common
stock to receive an exercise price equal to the current trading price of the
common stock. In exchange for this repricing, the repriced options were subject
to a six-month "black-out" period
14
<PAGE> 17
during which time none of the options could be exercised, regardless of vesting
or other pre-existing exercisability conditions. Vesting status of the repriced
options was not interrupted. In total, options for 6.3 million shares with
exercise prices ranging from $1.26 to $3.22 were repriced at $1.03. For detailed
information on the repricings of options held by executive officers, see the ten
year option repricings table above.
THE COMPENSATION COMMITTEE
D. Richard Masson
Thomas K. Smith, Jr.
PROPOSAL 2
AMENDMENT TO
AUREAL'S RESTATED CERTIFICATE OF INCORPORATION
TO CHANGE OUR NAME
At the annual meeting, stockholders will be asked to consider and vote upon
a proposal to amend our Restated Certificate of Incorporation to change our name
from Aureal Semiconductor Inc. to Aureal Inc. The change reflects our continued
transition from a business based almost solely on semiconductor products to a
more diverse product offering. As we expand our product families in the future,
the "semiconductor" portion of the name will not reflect the diversity of our
products or the diversity of market segments, which we will be seeking to
address.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
Approval of this proposal requires the affirmative vote of a majority of
the votes present or represented by proxy and entitled to vote at the annual
meeting of stockholders, at which a quorum representing a majority of all
outstanding shares of Aureal's common stock is present and voting, either in
person or by proxy. Abstentions and broker non-votes will each be counted as
present for purposes of determining the presence of a quorum but will not be
counted as having been voted on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO AMEND OUR RESTATED CERTIFICATE OF INCORPORATION TO CHANGE OUR NAME.
PROPOSAL 3
ONE-FOR-FIFTEEN REVERSE STOCK SPLIT
Aureal has recently reached an agreement with Oaktree pursuant to which
Aureal plans to offer for sale up to $20 million of our common stock, on a
pro-rata basis, to existing holders of our common stock on the record date for
the offering. We expect to use this infusion of capital to reduce our existing
debt and provide for future working capital for our anticipated growth. Under
the terms of our agreement with Oaktree, Oaktree has agreed to purchase any
amount of common stock that current holders of our common stock elect not to
purchase to ensure that the entire amount of the offering is sold. In addition,
Oaktree has agreed to convert all of its holdings of Aureal's series B preferred
stock simultaneously with the consummation of the rights offering. As
consideration for Oaktree's commitments, Aureal has agreed to adjust the
conversion price at which Oaktree will convert its series B preferred stock from
$2.50 per share of common stock to $0.90 per share of common stock. As a result
of the additional shares of common stock to be issued in the rights offering and
upon to the conversion of the series B preferred stock, the number of shares of
common stock outstanding and available upon the exercise of outstanding
convertible securities may exceed 160 million. The board of directors believes
that action to reduce the number of shares of Aureal's common stock would be in
the best interests of Aureal and its stockholders.
15
<PAGE> 18
The board of directors has authorized, subject to stockholder approval, an
amendment to our Restated Certificate of Incorporation to effect a
one-for-fifteen reverse stock split of our common stock. This reverse stock
split would affect our currently issued and outstanding common stock. In
addition, this reverse stock split would provide that all currently outstanding
stock options and warrants to purchase common stock and outstanding shares of
convertible preferred stock would be subject to the one-for-fifteen adjustment
and reduction in the number of shares of common stock subject to acquisition
through exercise or conversion thereof. Such adjustments, under the terms of
each convertible security, would also include adjustments to the exercise and
conversion prices thereof to maintain economic parity with the position held
prior to this reverse stock split. The proposed reverse stock split would not
alter the number of shares of common stock authorized for issuance, which will
remain at 200,000,000. Information concerning the capitalization of the Aureal,
provided elsewhere in this proxy statement, does not give effect to the proposed
reverse stock split unless specifically noted.
If the stockholders approve the proposed one-for-fifteen reverse stock
split, the board of directors will determine the timing of the reverse stock
split in its sole discretion, based on market conditions, corporate developments
and other business factors. The board of directors may abandon the reverse stock
split and not file the amendment to our Restated Certificate of Incorporation at
any time if the board determines, in its sole discretion, that the proposed
reverse stock split would not be in the best interests of Aureal and its
stockholders.
REASONS FOR THE ONE-FOR-FIFTEEN REVERSE STOCK SPLIT
The primary reasons for the one-for-fifteen reverse stock split are:
- to decrease to total number of outstanding shares of common stock either
outstanding or subject to exercise of convertible securities, and
- so that the common stock outstanding after giving effect to the reverse
stock split trades at a higher price per share than the common stock
outstanding before giving effect to the reverse stock split.
Over the last three years, while Aureal was developing its initial audio
technologies and first products, it financed its operations primarily through
the sale of common stock and convertible preferred stock. As of March 22, 1999,
65.5 million shares of common stock were outstanding, and another 39.5 million
shares of common stock were issuable upon exercise of outstanding convertible
securities. This is generally perceived as an extremely large number of
outstanding shares of common stock for a company that is just completing its
first year of product sales. In addition, as noted above, we plan to sell an
additional $20 million of common stock in the rights offering.
From January 1996 through March 22, 1999, our stock has traded in the range
of $0.41 to $3.50. We believe that our low market price per share may discourage
potential investors, increase market volatility and decrease the liquidity of
our common stock. In addition, with the common stock trading at these low
levels, we cannot qualify to list our common stock on a national market system
such as the Nasdaq National Market. This lack of national market "listing"
impedes our ability to generate wider investor interest in our common stock as
well as limits liquidity. We believe, but we cannot assure you, that the
one-for-fifteen reverse stock split will enable the common stock to trade above
the minimum price levels established by various national market systems and
allow Aureal to meet the listing requirements thereof. Upon meeting the
requirements of these systems it is our intention to apply for listing on one of
the market systems.
EFFECTS OF THE ONE-FOR-FIFTEEN REVERSE STOCK SPLIT
Except for the negligible effect that may result from the payment of cash
for fractional shares as described below, each stockholder will hold the same
percentage of common stock outstanding immediately following the one-for-fifteen
reverse stock split as each stockholder did immediately prior to the reverse
stock split. The board believes that the reverse stock split, by decreasing the
number of shares outstanding, without altering the aggregate economic interest
in Aureal represented by these shares, may increase the market price per share
of our common stock. There can be no assurance, however, that the market price
for a share of our
16
<PAGE> 19
common stock after the one-for-fifteen reverse stock split will be approximately
fifteen times the market price for a share of our common stock immediately prior
to the reverse stock split. The reverse stock split would not affect the voting
rights or other rights of the holders of common stock or the rights of holders
of any convertible securities. The reverse stock split would have no material
federal tax consequences to our stockholders.
By decreasing by fifteen times the number of outstanding shares of our
common stock, the reverse stock split may adversely affect the liquidity of the
market for our common stock by making it more difficult for holders of common
stock to sell their shares. The board of directors believes that, if it occurs,
this effect would be offset by the positive effect on liquidity which would
likely result if we were able to list our shares of common stock on a national
market system.
The one-for-fifteen reverse stock split will also result in some
stockholders owning "odd lots" of less than 100 shares of common stock.
Brokerage commissions and other costs of transactions in odd lots may be higher,
particularly on a per-share basis, than the cost of transactions in even
multiples of 100 shares.
Aureal is authorized to issue 200,000,000 shares of common stock and
5,000,000 shares of preferred stock. As of March 22, 1999, 65,453,386 shares of
common stock and 41,974 shares of preferred stock were issued and outstanding.
If all shares of the preferred stock were eligible for conversion and were
converted to common stock on March 22, 1999, 21,639,032 shares of common stock
would be issuable on conversion of these preferred stock shares. In addition, on
March 22, 1999, 17,892,109 shares of common stock were issuable upon exercise of
all outstanding stock options and warrants to purchase common stock.
As a result of the proposed one-for-fifteen reverse stock split, Aureal
will have a greater number of authorized but unissued shares of common stock
than prior to the reverse stock split. The increase in authorized but unissued
shares of common stock could make a change in control of Aureal more difficult
to achieve. Under certain circumstances, shares of common stock could be used to
create voting impediments to frustrate persons seeking to effect a takeover or
otherwise gain control of Aureal. Shares could be sold privately to purchasers
who might side with the board of directors in opposing a takeover bid that the
board determines is not in the best interests of Aureal and it stockholders.
The increase in the authorized but unissued shares of common stock also may
have the effect of discouraging an attempt by another person or entity, through
acquisition of a substantial number of shares of common stock, to acquire
control of Aureal with a view to effecting a merger, sale of assets or a similar
transaction, since the issuance of new shares could be used to dilute the stock
ownership of such person or entity. Shares of authorized but unissued common
stock could be issued to a holder who would thereby have sufficient voting power
to assure that any such business combination or any amendment to our Restated
Certificate of Incorporation would not receive the stockholder vote required for
approval thereof.
EXCHANGE OF STOCK CERTIFICATES AND LIQUIDATION OF FRACTIONAL SHARES
If the proposed one-for-fifteen reverse stock split is approved by our
stockholders, and the board of directors does not elect to abandon this
amendment, the reverse stock split will become effective on the date the
amendment to our Restated Certificate of Incorporation is filled with the
Secretary of State of the State of Delaware. We anticipate that the effective
date will be soon after we complete the rights offering for the sale of $20
million of our common stock and the conversion of all outstanding shares of our
series B preferred stock. We will establish a record date prior to the effective
date with regard to the reverse stock split. We anticipate that our transfer
agent will act as the exchange agent for holders of common stock in implementing
the exchange of their certificates following the reverse stock split. As soon as
practicable after the effective date, each holder of record of certificates
formerly representing shares of our common stock will be notified of the reverse
stock split and requested to surrender these certificates to the exchange agent
in exchange for certificates representing the number of shares of common stock
each stockholder is entitled to receive as a consequence of the one-for-fifteen
reverse stock split.
Fractional shares of common stock will not be issued as a result of the
reverse stock split. Stockholders entitled to receive a fractional share of
common stock as a consequence of the reverse stock split will, instead,
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<PAGE> 20
receive from Aureal a cash payment in U.S. dollars equal to such fraction
multiplied by fifteen times the average closing bid and asked prices per share
of the common stock on the OTC Bulletin Board over the five trading days
immediately preceding the effective date of the reverse stock split.
Each stockholder that owns fewer than fifteen shares of common stock will
have their fractional share of common stock converted into the right to receive
cash as set forth above. The interest of such stockholder in Aureal will thereby
be terminated. Each stockholder that owns fifteen or more shares of common stock
will have their interest represented by one-fifteenth as many shares as the
stockholder owned before the reverse stock split, subject to the adjustment for
fractional shares in which case the stockholder will receive cash in lieu of any
fractional share. The number of shares of common stock that may be acquired upon
the exercise or conversion of all outstanding convertible securities and the per
share exercise or conversion prices thereof, will be adjusted appropriately as
of the effective date of the reverse stock split, so that the aggregate number
of shares of common stock issuable upon exercise or conversion of all
convertible securities immediately following the effective date will be
one-fifteenth of the number issuable immediately prior to the effective date,
and the per share exercise or conversion price immediately following the
effective date will be 1500% of the per share exercise or conversion price
immediately prior to the effective date. The aggregate exercise or conversion
prices thereunder will remain unchanged.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
Approval of this proposal requires the affirmative vote of a majority of
the votes present or represented by proxy and entitled to vote at the annual
meeting of stockholders, at which a quorum representing a majority of all
outstanding shares of common stock of Aureal is present and voting, either in
person or by proxy. Abstentions and broker non-votes will each be counted as
present for purposes of determining the presence of a quorum but will not be
counted as having been voted on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO AMEND OUR RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A
ONE-FOR-FIFTEEN REVERSE STOCK SPLIT OF THE SHARES OF OUR COMMON STOCK.
PROPOSAL 4
AMENDMENT OF THE 1995 STOCK OPTION PLAN
The board adopted the 1995 Stock Option Plan in August 1995. Since that
time the stockholders have approved amendments to this plan to provide for
25,000,000 shares of our common stock to be issuable thereunder. Pursuant to
Proposal 3 above, the board of directors has adopted and recommends the
stockholders approve an amendment to our Amended Certificate of Incorporation
which will provide for a one-for-fifteen reverse stock split. Under the terms of
the 1995 stock option plan, the reverse stock split would automatically reduce
the number of shares of common stock issuable under the plan to 1,666,667, or
approximately one percent our authorized number of shares of common stock. In
addition, as a result of the rights offering, by which we anticipate offering
every stockholder on , 1999 the right to purchase
shares of common stock for every share then owed by each stockholder, the number
of shares of common stock subject to outstanding stock options would be less
than 10% of the shares of common stock on a fully diluted basis.
The Board believes that it is in the best interests of Aureal to have
employees holding substantial equity positions in Aureal, thereby ensuring that
the employees' interests are directly aligned with the interests of the
stockholders. To provide for this substantial equity position on the part of the
employees, the board believes that it is advantageous to have 20% to 30% of the
fully diluted shares of common stock held or available for granting of options
to the employees. To properly allow for such grants, the number of shares
available under the 1995 stock option plan is proposed to be increased from
1,666,667 shares, assuming adoption of proposal 3, to 5,000,000 shares. Subject
to stockholder approval, the board of directors, on March 31, 1999 amended the
plan to provide that, assuming adoption of Proposal 3, the maximum number of
shares of common stock issuable under the plan will be 5,000,000.
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<PAGE> 21
DESCRIPTION OF THE PLAN
The following summary of the 1995 stock option plan, as amended, is
qualified in its entirety by the specific language of the plan, a copy of which
is available to any stockholder upon request. Unless otherwise indicated, the
share numbers set forth below have been adjusted to assume that the
one-for-fifteen reverse stock split described in proposal 3 is approved by our
stockholders.
General. The plan provides for the grant of incentive stock options within
the meaning of section 422 of the Internal Revenue Code of 1986, and
nonstatutory stock options. As of March 22, 1999, options to purchase 497,861
shares of common stock granted pursuant to the option plan had been exercised,
options to purchase an aggregate of 9,770,981 shares were outstanding, and
options for 14,731,158 shares of common stock remained available for future
grants under the option plan. Assuming the adoption of the reverse stock split
as described above in proposal 3, the maximum number of shares of common sock
issuable under the option plan would automatically be adjusted from 25,000,000
to 1,666,667.
The option plan currently imposes a grant limit under which no employee may
receive in any fiscal year options to purchase in excess of 1,200,000 shares.
This grant limit would be automatically adjusted to 80,000 shares if the
one-for-fifteen reverse stock split is approved, and the board has amended the
plan, subject to stockholder approval, to increase the grant limit to 500,000
shares. Appropriate adjustments will be made to the shares subject to the option
plan, to the employee grant limit, and to outstanding options upon any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of Aureal. To the
extent that any outstanding option under the option plan expires or terminates
prior to exercise in full or if shares issued upon exercise of an option are
repurchased by Aureal, the shares of common stock for each option not exercised
and the repurchased shares are returned to the option plan and become available
for future grant.
Administration. The board or a duly appointed committee of the board
administers the option plan. With respect to the participation of individuals
whose transactions in Aureal's equity securities are subject to section 16 of
the Exchange Act, the option plan must be administered in compliance with the
requirements of Rule 16b-3 under the Exchange Act. Subject to the provision of
the option plan, the board determines:
- the persons to whom options are granted,
- the number of shares covered by each option,
- whether an option is to be an incentive stock option or a nonstatutory
stock option,
- the timing and terms of exercisability of each option,
- the vesting of shares acquired upon the exercise of an option, including
the effect thereon of an optionee's termination of service,
- the exercise price of and the type of consideration to be paid to Aureal
upon the exercise of each option,
- the duration of each option, and
- all other terms and conditions of the options.
The option plan authorizes the board to amend, modify, extend, renew, or
grant a new option in substitution for, any option, to waive any restrictions or
conditions applicable to any option or any shares acquired upon the exercise
thereof, and to amend the exercisability of any option or the vesting of any
shares acquired upon the exercise of an option, including with respect to the
period following an optionee's termination of service with Aureal. Subject to
certain limitations, the option plan provides for indemnification by Aureal of
any director, officer or employee against all reasonable expenses, including
attorneys' fees, incurred in connection with any legal action arising from such
person's action or failure to act in administering the option plan. The board
will interpret the option plan and options granted thereunder, and all
determinations of the board will be final and binding on all persons having an
interest in the option plan or any option.
Eligibility. Options may be granted under the option plan to directors and
current and prospective employees and consultants of Aureal or of any present or
future parent or subsidiary of Aureal. As of
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<PAGE> 22
March 22, 1999, we had approximately 120 employees, including six executive
officers eligible to receive options under the option plan. While any person
eligible under the option plan may be granted a nonstatutory option, only
employees may be granted incentive stock options.
Terms and conditions. Each option granted under the option plan is
evidenced by a written agreement between Aureal and the optionee specifying the
number of shares subject to the option and the other terms and conditions of the
option, consistent with the requirements of the option plan. The exercise price
of each option granted under the option plan must equal at least the fair market
value of a share of Aureal's common stock on the date of grant. However, any
option granted to a person who at the time of grant owns stock possessing more
than 10% of the total combined voting power of all classes of stock of Aureal or
any parent or subsidiary corporation of Aureal must have an exercise price equal
to at least 110% of the fair market value of a share of common stock on the date
of grant.
The option plan authorizes payment of the option exercise price:
- in cash, by check, or in cash equivalent,
- by tender of shares of Aureal's common stock owned by the optionee having
a fair market value not less than the exercise price,
- by the assignment of the proceeds of a sale or loan with respect to some
or all of the shares of common stock being acquired upon the exercise of
the option,
- by means of the optionee's promissory note,
- by any other lawful consideration approved by the board, and
- by any combination of the foregoing.
Nevertheless, the board may restrict the forms of payment permitted in
connection with any option grant. The option plan authorizes Aureal to withhold
from shares otherwise issuable upon the exercise of an option or to accept the
tender of shares of Aureal's common stock in full or partial payment of any
optionee's tax withholding obligations.
Options granted under the option plan become exercisable and vested at such
times and subject to such conditions as specified by the board. Generally,
options granted under the option plan are exercisable on and after the date of
grant, subject to the right of Aureal to reacquire at the optionee's exercise
price any unvested shares held by the optionee upon termination of the
optionee's service or if the optionee attempts to transfer any unvested shares.
Option shares generally vest and Aureal's right to repurchase unvested shares
lapses in installments over a period of time specified by the board at the time
of grant, subject to the optionee's continued service with Aureal. The maximum
term of an option granted under the option plan is ten years, provided that in
the case of an incentive stock option granted to a holder of 10% of the voting
power of Aureal, the maximum term is five years. Options are nontransferable by
the optionee other than by will or by the laws of descent and distribution, and
are exercisable during the optionee's lifetime only by the optionee.
Transfer of control. The option plan provides that, in the event of a
transfer of control, which is defined in the option plan to mean any of the
following:
- a sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of Aureal's voting stock,
- a merger or consolidation in which Aureal is a party,
- the sale, exchange or transfer of all or substantially all of Aureal's
assets,
- a liquidation or dissolution of Aureal wherein, upon any such event, the
stockholders of Aureal immediately before such event do not retain direct
or indirect beneficial ownership of more than 50% of the total combined
voting power of the voting stock of Aureal, its successor, or the
corporation to which the assets of Aureal were transferred,
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<PAGE> 23
all options will terminate and cease to be exercisable unless the acquiring or
successor corporation assumes Aureal's rights and obligations under the
outstanding options or substitutes substantially equivalent options for such
corporation's stock. However, option agreements entered into with each optionee
under the option plan generally provide that in the event of a transfer of
control, Aureal's right to repurchase unvested shares will automatically
terminate unless the option is assumed by the acquiring corporation or such
corporation substitutes a substantially equivalent option for the acquiring
corporation's stock. Furthermore, the option agreements generally provide for
automatic termination of Aureal's right to repurchase unvested shares if an
optionee who is an employee or a director is terminated without cause or resigns
for specified good reasons within twelve months following a transfer of control.
Termination or amendment. The option plan will continue in effect until the
earlier of its termination by the board or the date on which all shares
available for issuance under the option plan have been issued and all
restrictions on such shares under the terms of the option plan and the option
agreements have lapsed, provided that all options must be granted within ten
years of the date on which the board adopted the option plan. The option plan
further provides that the period for granting options will be extended to a
period of ten years following any subsequent approval of an increase in the
maximum number of shares issuable under the option plan. The board may terminate
or amend the option plan at any time. However, subject to changes in the law
that would permit otherwise, without stockholder approval, the board may not
amend the Plan to increase the total number of shares of common stock issuable
thereunder, change the class of persons eligible to receive incentive stock
options, or expand the class of persons eligible to receive nonstatutory stock
options. No amendment may adversely affect an outstanding option without the
consent of the optionee, unless the amendment is required to preserve the
option's status as an incentive stock option or is necessary to comply with any
applicable law.
SUMMARY OF THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide as to the U.S.
federal income tax consequences under current law of participation in the option
plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Incentive stock options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of in
incentive stock option qualifying under section 422 of the Code. Optionees who
do not dispose of their shares for two years following the date the option was
granted nor within one year following the exercise of the option will normally
recognize a long-term capital gain or loss equal to the difference, if any,
between the sale price and the purchase price of the shares. If an optionee
satisfies such holding periods upon a sale of shares, Aureal will not be
entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares within two years after the date of grant or within one year
from the date of exercise, a "disqualifying disposition", the difference between
the fair market value of the shares on the determination date and the option
exercise price, not to exceed the gain realized on the sale if the disposition
is a transaction with respect to which a loss, if sustained, would be
recognized, will be taxed as ordinary income at the time of disposition. Any
gain in excess of that amount will be a capital gain. If a loss is recognized,
there will be no ordinary income, and such loss will be a capital loss. A
capital gain or loss will be long-term if the optionee's holding period is more
than 12 months. Any ordinary income recognized by the optionee upon the
disqualifying disposition of the shares generally should be deductible by Aureal
for federal income tax purposes, except to the extent such deduction is limited
by applicable provisions of the Code or regulations thereunder.
The difference between the option exercise price and the fair market value
of the shares on the determination date of an incentive stock option is an
adjustment in computing the optionee's alternative minimum taxable income and
may be subject to an alternative minimum tax which is paid if such tax exceeds
the regular tax for the year. Special rules may apply with respect to certain
subsequent sales of the shares in a disqualifying disposition, certain basis
adjustment for purpose of computing the alternative minimum taxable income on a
subsequent sale of the shares and certain tax credits which may arise with
respect to optionees subject to the alternative minimum tax.
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Nonstatutory stock options. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options. Nonstatutory stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the determination date. If the optionee is an
employee, such ordinary income generally is subject to withholding of income and
employment taxes. The "determination date" is the date on which the option is
exercised unless the shares are subject to a substantial risk of forfeiture and
are not transferable, in which case the determination date is the earlier of the
date on which the shares are transferable or the date on which the shares are
not subject to a substantial risk of forfeiture. If the determination date is
after the exercise date, the optionee may elect, pursuant to section 83 (b) of
the Code, to have the exercise date be the determination date by filing an
election with the Internal Revenue Service not later than 30 days after the date
the option is exercised. Upon the sale of stock acquired by the exercise of a
nonstatutory stock option, any gain or loss, based on the difference between the
sale price and the fair market value on the determination date, will be taxed as
capital gain or loss. A capital gain or loss will be long-term if the optionee's
holding period is more than 12 months. No tax deduction is available to Aureal
with respect to the grant of a nonstatutory stock option or the sale of the
stock acquired pursuant to such grant. Aureal generally should be entitled to a
deduction equal to the amount of ordinary income recognized by the optionee as a
result of the exercise of a nonstatutory stock option, except to the extent such
deduction is limited by applicable provision of the Code or the regulations
thereunder.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
Approval of this proposal requires the affirmative vote of a majority of
the votes present or represented by proxy and entitled to vote at the annual
meeting of stockholders, at which a quorum representing a majority of all
outstanding shares of common stock of Aureal is present and voting, either in
person or by proxy. Abstentions and broker non-votes will each be counted as
present for purposes of determining the presence of a quorum but will not be
counted as having been voted on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO AMEND AUREAL'S 1995 STOCK OPTION PLAN TO INCREASE (A) THE MAXIMUM
AGGREGATE NUMBER OF SHARES ISSUABLE THEREUNDER TO 5,000,000 SHARES AND (B) THE
ANNUAL EMPLOYEE GRANT LIMIT TO 500,000 SHARES.
PROPOSAL 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The board of directors, upon the recommendation of management, has selected
Arthur Andersen LLP as independent accountants to audit the financial statements
of Aureal for the 1999 fiscal year. Arthur Andersen LLP has acted in such
capacity since its appointment effective January 30, 1995 to audit our financial
statements for the 1994 fiscal year. Representatives of Arthur Andersen LLP are
expected to be present at the annual meeting and will have an opportunity to
make a statement, if they desire to do so, and be available to respond to
questions raised during the meeting.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
Approval of this proposal requires the affirmative vote of a majority of
the votes present or represented by proxy and entitled to vote at the annual
meeting of stockholders, at which a quorum representing a majority of all
outstanding shares of common stock of Aureal is present and voting, either in
person or by proxy. Abstentions and broker non-votes will each be counted as
present for purposes of determining the presence of a quorum but will not be
counted as having been voted on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THIS
PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS AUREAL'S
INDEPENDENT ACCOUNTANTS FOR FISCAL YEAR 1999.
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STOCKHOLDER PROPOSALS
Under the rules of the Securities and Exchange Commission, stockholders who
wish to submit proposals for inclusion in the proxy statement for the annual
meeting of stockholders to be held in 2000 must submit such proposals so as to
be received by Aureal at 4245 Technology Drive, Fremont, California 94538,
Attention: Shareholder Relations, not later than December 22, 1999.
TRANSACTION OF OTHER BUSINESS
At the date of this proxy statement, the only business, which the board of
directors intends to present or knows that others will present at the meeting,
is as set forth above. If any other matter or matters are properly brought
before the meeting or any adjournment thereof, it is the intention of the
persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their best judgment.
By order of the board of directors
Brendan O'Flaherty
Secretary
April , 1999
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<PAGE> 26
AUREAL SEMICONDUCTOR INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1999
The undersigned hereby appoints David J. Domeier and Brendan R. O'Flaherty, or
either of them, each with full power of substitution, as the proxyholder(s) of
the undersigned to represent the undersigned and vote all shares of the common
stock and the series B preferred stock of Aureal Semiconductor Inc. which the
undersigned would be entitled to vote if personally present at the annual
meeting of stockholders of Aureal Semiconductor Inc. on May 19, 1999, and at any
adjournments or postponements of such meeting, as follows:
FOLD AND DETACH HERE
Please mark [X]
your votes as
indicated in
this example
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1.To elect FOR AGAINST ABSTAIN 2.To approve an FOR AGAINST ABSTAIN
Kenneth A. Kokinakis amendment to the
to hold office for a [ ] [ ] [ ] Restated Certificate of [ ] [ ] [ ]
three-year term and Incorporation to change
until his respective our name from Aureal
successor is elected Semiconductor Inc. to
and qualified or Aureal Inc.
until his earlier
resignation or
removal.
3.To approve an FOR AGAINST ABSTAIN 4.(a) To approve an FOR AGAINST ABSTAIN
amendment to the amendment to the 1995
Restated Certificate [ ] [ ] [ ] Stock Option Plan to [ ] [ ] [ ]
of Incorporation to (a) increase the maximum
effect a number of shares that
one-for-fifteen may be issued under the
reverse stock split. plan by 3,333,333 shares
and (b) the employee
grant limit from 80,000
shares to 500,000 shares
(assuming Proposal 3 is
approved).
5.To ratify the FOR AGAINST ABSTAIN
appointment of Arthur
Andersen LLP as our [ ] [ ] [ ]
independent
accountants for the
1999 fiscal year.
</TABLE>
The board of directors recommends that you vote FOR the above proposals. This
proxy, when properly executed, will be voted in the manner directed above. WHEN
NO CHOICE IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ABOVE PROPOSALS. This
proxy may be revoked by the undersigned at any time, prior to the time it is
voted by any of the means described in the accompanying proxy statement.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE.
Signature(s)
_______________________________________________________________Date:
__________________, 1999. Date and sign exactly as name(s) appear(s) on this
proxy. If signing for estates, trusts, corporations or other entities, title or
capacity should be stated. If shares are held jointly, each holder should sign.
FOLD AND DETACH HERE
