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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
\X\
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
\ \
For the transition period from: to: .
Commission File Number 0-20684
AUREAL SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3117385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4245 TECHNOLOGY DRIVE
FREMONT, CA 94538
(Address of principal executive offices)
Telephone: (510) 252-4245
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes X No
--- ---
At August 1, 1996 38,899,173 shares of common stock, $0.001 par value, of the
registrant were outstanding.
This report on Form 10-Q, contains 13 pages.
----------------------
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AUREAL SEMICONDUCTOR INC.
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 13
Item 5. Other Information............................................................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................................................. 13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUREAL SEMICONDUCTOR INC.
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Interim Condensed Consolidated Financial Statements of Aureal
Semiconductor Inc. (the "Company") have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
disclosures included in the Interim Condensed Consolidated Financial Statements
should be read in conjunction with the Company's audited financial statements at
December 31, 1995 and the notes thereto included in the Company's 1995 Annual
Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations and cash flows for such periods. The results of operations for the
fiscal quarter and two quarters ended June 30, 1996 are not necessarily
indicative of the results that may be expected for any subsequent quarter or the
entire fiscal year ending December 29, 1996.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,475 $ 22
Restricted cash 57 393
Accounts receivable 246 59
Inventories 38 178
Prepaid expenses and other current assets 1,004 1,115
--------- ---------
Total current assets 2,820 1,767
Property and equipment:
Machinery and equipment 2,222 1,961
Furniture, fixtures and improvements 913 913
--------- ---------
3,135 2,874
Accumulated depreciation and amortization (2,136) (1,813)
--------- ---------
Net property and equipment 999 1,061
Reorganization asset, less accumulated amortization
of $9,846 in 1996 and $8,596 in 1995 3,750 5,000
Other assets 267 120
--------- ---------
Total assets $ 7,836 $ 7,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 593 $ 836
Accrued compensation and benefits 527 448
Restructuring obligations 1,040 2,146
Other accrued liabilities 2,869 2,929
Current portion of pre-petition claims 878 946
--------- ---------
Total current liabilities 5,907 7,305
TCW Credit Facility 6,780 19,300
Long-term portion of pre-petition claims and deferred obligations 4,826 5,176
--------- ---------
Total liabilities 17,513 31,781
--------- ---------
Stockholders' equity (deficit):
Common stock, $.001 par value
Authorized shares - 100,000,000; Issued and outstanding
shares - 38,898,888 in 1996, 20,000,000 in 1995 39 20
Additional paid-in capital 104,767 79,980
Retained earnings (deficit) (114,483) (103,833)
--------- ---------
Total stockholders' equity (deficit) (9,677) (23,833)
--------- ---------
Total liabilities and stockholders' (deficit) $ 7,836 $ 7,948
========= =========
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
------------- ------------------
June 30, 1996 July 2, 1995 June 30, 1996 July 2, 1995
------------- ------------ ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 511 $ 16,106 $ 3,043 $ 39,968
Cost of sales 123 18,050 242 45,996
-------- -------- -------- --------
Gross profit 388 (1,944) 2,801 (6,028)
Operating expenses:
Research and development 1,705 1,718 3,322 3,400
Sales and marketing 255 4,757 405 11,288
General and administrative 738 1,400 1,292 3,162
Amortization of reorganization asset 625 3,673 1,250 7,346
Restructuring charges -- 53,626 -- 53,626
Write-off of acquired research and development
in progress 6,013 -- 6,013 --
-------- -------- -------- --------
Total operating expenses 9,336 65,174 12,282 78,822
-------- -------- -------- --------
Operating loss (8,948) (67,118) (9,481) (84,850)
Interest income 72 85 137 93
Interest expense (718) (917) (1,503) (1,650)
Other income, net 16 23 197 3
-------- -------- -------- --------
Loss from operations before income taxes (9,578) (67,927) (10,650) (86,404)
Provision for income taxes -- -- -- --
Net loss $ (9,578) $(67,927) $(10,650) $(86,404)
======== ======== ======== ========
Net loss per share $ (.30) $ (3.40) $ (.39) $ (4.32)
======== ======== ======== ========
Shares used in calculating per share amounts 31,954 20,000 27,653 20,000
======== ======== ======== ========
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Two Quarters Ended
------------------
June 30, 1996 July 2, 1995
------------- ------------
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net loss from operations $(10,650) $(86,404)
Adjustments to reconcile net loss from operations to net cash
used in operating activities:
Restructuring charges -- 53,626
Depreciation and amortization 1,573 8,810
Write-off of acquired research and development in process 6013 --
Changes in operating assets and liabilities - net of assets acquired and
liabilities assumed in 1996:
Restricted cash used for purchase of inventory -- 1,610
Accounts receivable 29 7,665
Inventories 214 5,357
Prepaid expenses and other current assets 238 2,587
Other assets 64 358
Accounts payable (360) 660
Accrued compensation and benefits, and
other accrued liabilities (1,566) (4,517)
-------- --------
Net cash used in operating activities (4,445) (10,248)
-------- --------
INVESTING ACTIVITIES
Payment for acquisition of business, net of cash acquired (2,970) --
Acquisition of property and equipment (213) (266)
Proceeds from disposition of property and equipment -- 106
-------- --------
Net cash used in investing activities (3,183) (160)
-------- --------
FINANCING ACTIVITIES
Proceeds from TCW Credit Facility 1,883 10,900
Repayment on TCW Credit Facility (14,403) --
Principal payments on pre-petition claims (367) (855)
Proceeds from issuance of common stock, net of issuance costs 21,968 --
-------- --------
Net cash provided by financing activities 9,081 10,045
-------- --------
Net increase (decrease) in cash and cash equivalents 1,453 (363)
Cash and cash equivalents at beginning of period 22 590
-------- --------
Cash and cash equivalents at end of period $ 1,475 $ 227
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,144 $ 1,085
</TABLE>
See accompanying notes.
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AUREAL SEMICONDUCTOR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. RECENT EVENTS
The Company emerged from Chapter 11 bankruptcy protection in December 1994.
At that time, it derived substantially all of its revenues from the design,
development, and sale of multimedia add-in systems for personal computers
marketed through electronics retailers and distributors.
In August 1995, the Company announced that it was divesting its retail
operations in order to concentrate solely on the development of advanced audio
technologies and implement a business plan based on the sale of audio
semiconductor solutions for the PC and other consumer electronics markets, as
well as licensing related audio technologies. Given the Company's change in
business plan, net revenues are not expected to be significant in 1996 as the
Company completes development of its newest technologies and begins to market
such products. The Company expects to incur operating losses through fiscal
1996, and there is no assurance that the Company will achieve profitability
thereafter.
In conjunction with the Company's change in business, it formally changed
its name to Aureal Semiconductor Inc. at its Annual Stockholders Meeting in May
1996. Its new stock symbol on the OTC Bulletin Board is AURL.
In February 1996, the Company reached a definitive agreement to sell the
Media Vision brand name, related trade names and other assets of its previous
retail business to a third party. The agreement transfers the retail customer
service and technical support obligations to the buyer. It also provides a
potential royalty stream on future retail products sold under the Media Vision
trade name, and a commitment by the buyer to purchase products incorporating the
Company's current advanced audio synthesis solutions for the PC audio market.
In February and March 1996, the Company completed two separate $5 million
private placement transactions with three existing shareholders. The $10 million
infusion of capital represented the sale of 10 million shares of Common Stock.
The Company, in May 1996, acquired 100% ownership of Crystal River
Engineering, Inc., a privately held firm specializing in 3D audio technologies.
The total recorded cost of the acquisition was $6.4 million. Aureal recorded a
write-off in the current fiscal quarter of $6.0 million due to recognition that
in-process research and development efforts associated with CRE's 3D audio
technology had not reached technological feasibility with respect to the
Company's product line at the date of acquisition.
In June 1996, the Company completed another private placement of equity
capital. This latest transaction, which included additional investments from the
Company's three largest shareholders, provided proceeds of $12 million from the
sale of 8.9 million shares of Common Stock. Proceeds of the offering were used
to reduce the Company's outstanding borrowings under its line of credit with
TCW, the largest shareholder of the Company. In conjunction with this latest
equity funding, the total availability under the Company's line of credit was
reduced from $22 million to $20 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Interim Condensed Consolidated Financial Statements have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations.
The preparation of financial statements in conformity with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at
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the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Interim Condensed Consolidated Financial Statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of financial position, results of
operations and cash flows for such periods. The results of operations for the
fiscal quarter and two quarters ended June 30, 1996 are not necessarily
indicative of the results that may be expected for any subsequent quarter or the
entire fiscal year ending December 29, 1996.
Certain reclassifications have been made to the prior year's interim
financial statements to conform to the 1996 presentation.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity
of three months or less to be cash equivalents. Substantially all cash and cash
equivalents are on deposit with one financial institution.
Inventories
Inventories are stated at the lower of cost or market value. Inventories at
the balance sheet dates presented consisted entirely of finished goods.
Revenue Recognition
The Company's major sources of revenue consist of sales of proprietary
design, advanced audio semiconductor chips and licensing of related audio
technology. Revenue is recognized upon shipment for product sales. Revenue is
recognized upon delivery of technology and upon contractual earnings points in
licensing contracts. Allowances for sales returns and warranty costs on product
sales are recorded at the time sales are recognized in accordance with SFAS 48.
Loss Per Share
Loss per share is based upon the weighted average common shares outstanding
for the period.
Amortization of Reorganization Asset
At December 31, 1994, the Company was reorganized under Chapter 11 of the
federal bankruptcy code. The reorganization value of the Company exceeded its
net assets by $44.1 million, thus giving rise to an intangible asset recorded on
the consolidated balance sheet of the Company ("Reorganization Asset"). The
value of the Reorganization Asset was reduced in the second quarter of 1995 as
the Company exited the retail products business. The net remaining
Reorganization Asset of $5.0 million as of December 31, 1995 is being amortized
over two years ($625,000 per quarter).
3. ACQUISITION OF CRYSTAL RIVER ENGINEERING, INC.
During May 1996, the Company acquired 100% ownership of Crystal River
Engineering, Inc. ("CRE"), a privately held firm specializing in the development
of 3D audio technologies. The acquisition was accomplished through a merger of
CRE with a wholly owned subsidiary of the Company. As a result, CRE became a
100% owned subsidiary of the Company. The acquisition/merger consideration
included approximately $2.9 million of cash purchase of stock, the exchange of
stock options valued at $2.8 million and other cash considerations (both current
and deferred) totaling approximately $0.6 million. The acquisition was recorded
using purchase accounting. The fair value of CRE assets and liabilities at date
of acquisition were recorded in the Company's consolidated financial statements.
As part of the allocation of fair values, the Company recorded a non-recurring
write-off of approximately $6.0 million in the current fiscal quarter due to
recognition that in-process research and development efforts associated with
CRE's 3D audio technology had not reached technological feasibility with respect
to the
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Company's product line at the date of acquisition. The Company does plan to
incorporate the CRE 3D audio technology into a number of its future products.
Comparable pro-forma statements of operations for the year-to-date periods in
both 1996 and 1995 assuming the acquisition had taken place at the beginning of
each fiscal year are shown below.
<TABLE>
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Year to Date
June 30, 1996 July 2, 1995
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Revenues $ 3,467 $ 40,800
Costs and expenses 14,641 127,600
--------- ---------
Net loss $ (11,174) $ (86,800)
========= =========
Net loss per share $ (.40) $ (4.34)
========= =========
</TABLE>
4. INCOME TAXES
The Company was not required to provide for income taxes in the first two
fiscal quarters of 1996 or the entire fiscal year of 1995 due to its net
operating losses. No tax benefit has been recorded for the losses due to the
uncertainty as to the realizability.
At December 31, 1995, the Company had available net operating loss
carryforwards ("NOL's") of approximately $253 million to reduce future taxable
income. The Company's ability to use NOL's originating in years prior to 1995 to
offset future taxable income is subject to restrictions under the Internal
Revenue Code of 1986 ("the Code"), as amended. The restrictions imposed under
Section 382 (l)(5) of the Code severely limit the Company's future use of its
NOL's should the Company undergo a significant ownership change (as defined in
the Code) prior to December 31, 1996. The Company does not believe that any
recent or historical changes in stock ownership have resulted in an ownership
change through the date of these financial statements.
5. LINE OF CREDIT
The Company maintains a line of credit, with a maturity date of March 31,
1998, with certain entities managed by TCW Special Credits, an affiliate of the
TCW Group, Inc., ("TCW"). In conjunction with the private placement of equity
finalized in June 1996, the line of credit was reduced from $22 million to $20
million. Borrowings under the facility are secured by all the assets of the
Company. At August 1, 1996, $6.78 million was outstanding under the line.
Additionally, as of August 1, 1996, TCW and affiliated entities controlled
approximately 44% of the Company's outstanding common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN AND THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1995, CONTAINED IN FORM 10-K FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
INVESTORS ARE CAUTIONED THAT SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, DEPENDENCE ON NEW TECHNOLOGY,
FOUNDRY CAPACITY AVAILABILITY AND RELIABILITY; DEPENDENCE ON THE PC AND CONSUMER
ELECTRONICS INDUSTRIES AND ON A SINGLE PRODUCT LINE; COMPETITION AND PRICING
PRESSURES; AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
During 1995 and the first two quarters of 1996, a number of significant
changes took place in the Company's business. Some of these events are detailed
in Footnote 1 to the Interim Condensed Consolidated Financial Statements in Item
1 of this report. The company has exited its prior business of designing,
developing, and selling PC multimedia upgrade kits in the retail marketplace,
and is focusing all of its efforts on the development of advanced audio
solutions (combination of semiconductor products and related software) for use
in the PC and consumer electronics markets. This change in business was
announced in early August 1995, with the transition taking place over the second
half of 1995. Due to this change in business, the financial results of
operations for the first two fiscal quarters of 1996 and 1995 are not considered
comparable. While some comparative comments are included herein, the composition
of the business varied greatly between the first halves of the years presented,
as described above. Results of operations from past periods should not be
considered indicative of future results.
RESULTS OF OPERATIONS
Net Sales
Net sales for the second quarter of 1996 totaled $511,000 compared to $2.5
million in the previous quarter. Revenues for both quarters consist primarily of
technology licensing transactions. The Company has licensed some of its
pre-existing legacy audio technology to third parties with the expectation that
such technology will be incorporated into the third parties' semiconductor
products. Such revenues, including up-front non-refundable engineering fees and
per-unit royalties, are recognized as the technology is delivered and as the
third parties report product sales, respectively. During the first quarter of
1996, in one case, an unlimited license was granted in exchange for a one-time,
non-refundable payment of $2 million. In addition, the Company recognized sales
of semiconductor products of pre-existing technology during both quarters.
The Company does not anticipate significant revenues from either technology
licensing or sales of semiconductor products in the third quarter of 1996.
However, the Company is in discussions with a number of outside parties with
respect to potential licensing of its audio technologies and sale of Aureal
semiconductor products. Samples of some of the Company's new semiconductor
products are anticipated to be available in the next quarter, with limited
production available in the fourth quarter of 1996. There can be no assurance
that the Company can complete development and arrange for successful
manufacturing of these semiconductor products, nor that such products will be
successful in the marketplace.
Revenues in the first and second fiscal quarters of 1995 totaled $23.9
million and $16.1 million respectively, consisting primarily of PC multimedia
upgrade kit sales.
Gross Profit
In the first and second quarters of 1996, gross margin totaled $2.4 million
and $388,000, respectively. A significant percentage of the net sales for both
quarters consisted of licensing revenues from the Company's pre-
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existing audio technologies. Virtually no current costs were directly associated
with the licensing of the Company's pre-existing audio technology. Consequently,
the gross profit for both quarters was near 100% for those revenues. Gross
margins associated with sales of semiconductor products were approximately 50%
in both quarters.
A negative gross profit for the first two quarters of 1995 reflected the
inability of the Company to obtain sufficient quantities of quad-speed CD-ROM
drive products at acceptable cost and quality points to provide for a
consistently marketable and profitable line of PC upgrade kits. The Company
consumed a portion of its inventory of relatively high priced components for use
in its retail kits. While conserving cash and reducing inventory, this practice
reduced margins on kits sold.
Research and Development
Research and development expenditures in 1996 remained relatively constant
at $1.62 million and $1.67 million in the first and second quarters,
respectively ($3.29 million year-to -date). This compares with $3.4 million for
the first half of 1995. With the elimination of the retail products business in
mid-1995, and the focusing of resources on only the development of audio
technologies, this level of expenditure has increased the spending on
development of new audio technologies.
Selling and Marketing
Selling and marketing expenses increased from $150,000 in the first quarter
of 1996 to $255,000 in the second quarter. Over the first half of the year, the
Company has commenced its marketing and sales efforts, including increasing
staffing of these functions within the Company, spending significant amounts of
time with potential customers to identify specific applications for the
Company's technologies, and finalizing product specifications for its initial
products. Selling and marketing expenses are expected to increase as product
introductions occur in future quarters.
1995 sales and marketing expenses related to the domestic and international
sales efforts in the retail PC products marketplace, which has been discontinued
by the Company as discussed above.
General and Administrative
General and administrative expenses increased from $554,000 in the first
quarter of 1996 to $738,000 in the second quarter. This reflects some staff
increases related to the Company's new business. In addition, the Company is
aggressively pursuing prosecution of pending patent applications related to its
advanced audio technologies.
General and administrative expenditures in the first half of 1995 related
to the retail products business. With the announced restructuring of the Company
at the close of the second quarter of 1995, these administrative costs were
reduced over the second half of 1995 in line with the reduction in the overall
size of the Company.
Amortization of Reorganization Asset
The Reorganization Asset originated pursuant to the Company's valuation
upon its exit from bankruptcy on December 30, 1994 whereby the fair value of the
Company exceeded its net assets by $44.1 million. The Reorganization Asset
initially was being amortized over three years at the rate of $3.7 million per
fiscal quarter. During the second quarter of 1995 it was determined that the
Reorganization Asset could no longer be assured of recovery and a $30.5 million
write-off was necessary (see Restructuring Charges below). The remaining asset
value after the write-off is being amortized through 1997 at the rate of
$625,000 per fiscal quarter.
Restructuring Charges
In the second quarter of 1995, the Company initiated a plan to divest
itself of worldwide retail operations. In connection with this plan, the Company
recorded a $53.6 million ($2.68 per share) restructuring charge to operations.
The restructuring consisted of: (i) $30.5 million impairment to the
Reorganization Asset; (ii) $15.0 million attributable to the write down to
liquidation value of inventories and related purchase commitments for retail
products and component parts; (iii) $6.0 million in write-offs primarily related
to equipment; and (iv) $2.1 million in severance and other costs attributable to
employees and facilities involved with the retail operation.
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Interest Income and Expense
Interest income held steady for the first two quarters of 1996 with $72,000
in the second quarter and $65,000 in the first quarter. This consisted primarily
of interest on funds received from the private placements of Common Stock in
February and March of 1996. Terms of these private placement transactions placed
certain restrictions on the Company's ability to use the proceeds to reduce the
balance of the TCW Credit Facility. The invested cash balances declined during
the second quarter as a result of cash used for operations as well as the cash
utilized in the acquisition of CRE. Net proceeds of approximately $12 million
from the June 1996 private placement transaction were utilized to reduce the
outstanding balance under the TCW Credit Facility.
Interest income of $93,000 for the first half of 1995 was primarily earned
on certificates of deposit that collateralized the purchase of certain CD-ROM
drives, a program since eliminated.
Interest expense for the first half of both years consisted primarily of
interest on the TCW Credit Facility at the rate of prime plus 5%. The TCW Credit
Facility was a primary source of working capital during 1995. The equity funding
totaling $22 million in the first half of 1996 was utilized to both fund current
working capital needs and pay down the TCW Credit Facility. The reduction in the
balance outstanding reduced interest expense in the second quarter of 1996 and
is expected to reduce interest expense in the near future.
Other Income, net
During the first half of 1996, the Company recognized $197,000 of other
income from a number of sources, including sales of fixed assets, recovery of
property loss insurance proceeds, and miscellaneous other receipts. In 1995,
similar sources yielded $3,000 net for the first half of the year.
Income Taxes
The Company was not required to provide for income taxes in the first two
fiscal quarters of 1996 or the entire fiscal year of 1995 due to its net
operating losses. No tax benefit has been recorded for the losses due to the
uncertainty as to the realizability.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1.45 million during the first two
quarters of 1996. In addition to ongoing operations in the first half of the
year, a number of significant transactions occurred affecting capital resources.
The Company raised approximately $22 million from the sale of Common Stock;
reduced outstanding debt by $12.9 million, and invested cash of $3.0 million in
the purchase of CRE. In addition, the Company continues to reduce its
liabilities associated with the 1995 restructuring.
The Company believes that current cash on hand together with the $20
million TCW Credit Facility, of which $13.2 million was available for borrowings
as of August 1, 1996, will provide adequate financial resources to sustain its
business for the next twelve months. The Company may be required to seek
additional financing to expand its business unless revenues increase to a level
sufficient to generate positive cash flow. There can be no assurance that the
Company will be able to attain such revenue levels or generate positive cash
flows in the future or to obtain such financing on favorable terms, if at all.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the end of the second quarter of 1996, the Company received
correspondence from Yamaha Corporation asserting that the Company's FM synthesis
semiconductor device may infringe on a number of Yamaha's patents. The Company
has requested more specific information regarding Yamaha's assertions, however
it does not believe that its FM synthesis device infringes upon any of Yamaha's
patents. Yamaha has aggressively brought patent infringement actions against
other companies which have developed replacement FM synthesis devices. There can
be no assurance that Yamaha will not seek litigation against the Company.
See Item 3 of Company's 1995 Annual Report on Form 10-K.
ITEM 5. OTHER INFORMATION
The Company filed a registration statement on Form S-3, dated April 22,
1996 for a shelf registration of 27,682,716 shares of the Company's common
stock. On June 17, 1996, the Company filed an amendment to this registration
statement increasing the number of shares to be registered by 8,888,888 shares.
These shares were sold by the Company in its June 1996 private placement. This
registration statement was declared effective on June 27, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K:
(1) The Company filed a report on Form 8-K dated April 18,
1996 disclosing the completion of two private placements
of equity capital. The funding from the two transactions
totaled $10 million.
(2) The Company filed a report on Form 8-K dated May 22, 1996
disclosing that the company had entered into an agreement
to purchase 100% of the outstanding equity of Crystal
River Engineering, a firm specializing in 3D audio
technology.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUREAL SEMICONDUCTOR INC.
Date: August 1, 1996 By: /s/Kenneth A. Kokinakis
-------------------------
Kenneth A. Kokinakis
President and Chief
Executive Officer
Date: August 1, 1996 By: /s/David J. Domeier
-------------------------
David J. Domeier
Vice President of Finance
Chief Financial Officer
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