<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
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)
(510) 252-4245
(Telephone)
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 November 5, 1996, 39,133,010 shares of common stock, $0.001 par value, of the
registrant were outstanding.
This report on Form 10-Q, (including exhibits) contains 45 pages. The exhibit
index is located on page 16.
<PAGE> 2
AUREAL SEMICONDUCTOR INC.
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
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..................................................................... 14
Item 5. Other Information..................................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................................... 15
</TABLE>
2
<PAGE> 3
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 three quarters ended September 29, 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.
3
<PAGE> 4
AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 85 $ 22
Restricted cash -- 393
Accounts receivable 127 59
Inventories 107 178
Prepaid expenses and other current assets 280 1,115
--------- ---------
Total current assets 599 1,767
Property and equipment:
Machinery and equipment 2,281 1,961
Furniture, fixtures and improvements 915 913
--------- ---------
3,196 2,874
Accumulated depreciation and amortization (2,327) (1,813)
--------- ---------
Net property and equipment 869 1,061
Reorganization asset, less accumulated amortization
of $10,471 in 1996 and $8,596 in 1995 3,125 5,000
Other assets 176 120
--------- ---------
Total assets $ 4,769 $ 7,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 665 $ 836
Accrued compensation and benefits 578 448
Restructuring obligations 892 2,146
Other accrued liabilities 2,820 2,929
Current portion of pre-petition claims 818 946
--------- ---------
Total current liabilities 5,773 7,305
TCW Credit Facility 7,105 19,300
Long-term portion of pre-petition claims and deferred obligations 4,701 5,176
--------- ---------
Total liabilities 17,579 31,781
--------- ---------
Stockholders' equity (deficit):
Common stock, $0.001 par value
Authorized shares - 100,000,000; Issued and outstanding
shares - 39,129,796 in 1996, 20,000,000 in 1995 39 20
Additional paid-in capital 104,933 79,980
Accumulated deficit (117,782) (103,833)
--------- ---------
Total stockholders' (deficit) (12,810) (23,833)
--------- ---------
Total liabilities and stockholders' (deficit) $ 4,769 $ 7,948
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------- --------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------- ---------- ------------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 237 $ 7,292 $ 3,280 $ 47,260
Cost of sales 44 7,324 286 53,320
--------- --------- --------- ---------
Gross margin 193 (32) 2,994 (6,060)
Operating expenses:
Research and development 1,521 1,626 4,843 5,026
Sales and marketing 880 1,794 1,285 13,082
General and administrative 502 863 1,794 4,025
Amortization of reorganization asset 625 625 1,875 7,971
Restructuring charges -- 8,000 -- 61,626
Write-off of acquired research and development
in progress -- -- 6,013 --
--------- --------- --------- ---------
Total operating expenses 3,528 12,908 15,810 91,730
Operating loss (3,335) (12,940) (12,816) (97,790)
Interest expense (342) (721) (1,845) (2,371)
Interest income 16 41 154 134
Other income (expense) 362 (27) 558 (24)
--------- --------- --------- ---------
Loss from operations before income taxes (3,299) (13,647) (13,949) (100,051)
Provision for income taxes -- -- -- --
Net loss $ (3,299) $ (13,647) $ (13,949) $(100,051)
========= ========= ========= =========
Net loss per share $ (0.08) $ (0.68) $ (0.44) $ (5.00)
========= ========= ========= =========
Shares used in calculating per share amounts 38,930 20,000 31,412 20,000
</TABLE>
See accompanying notes.
5
<PAGE> 6
AUREAL SEMICONDUCTOR INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Quarters Ended
--------------------
September 29, October 1,
1996 1995
------------- ----------
OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net loss from continuing operations $ (13,949) $(100,051)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Restructuring charges -- 61,626
Depreciation and amortization 2,388 9,787
Write-off of acquired research and development in process 6,013 --
Changes in operating assets and liabilities - net of assets acquired and
liabilities assumed in 1996:
Restricted cash used for purchase of inventory -- 2,838
Accounts receivable 148 13,387
Inventories 145 8,980
Prepaid expenses and other current assets 1,019 3,011
Other assets 155 492
Accounts payable (288) (953)
Accrued compensation and benefits, and
other accrued liabilities (1,712) (7,685)
--------- ---------
Net cash used in operating activities (6,081) (8,568)
INVESTING ACTIVITIES
Payment for acquisition of business, net of cash acquired (2,970) --
Acquisition of property and equipment (273) (277)
Proceeds from disposition of property and equipment -- 290
--------- ---------
Net cash provided by (used in) investing activities (3,243) 13
FINANCING ACTIVITIES
Proceeds from TCW Credit Facility 2,733 9,805
Repayment of TCW Credit Facility (14,928) --
Principal payments on pre-petition claims (552) (1,542)
Proceeds from issuance of common stock, net of issuance costs 22,134 --
--------- ---------
Net cash provided by financing activities 9,387 8,263
Net increase (decrease) in cash and cash equivalents 63 (292)
Cash and cash equivalents at beginning of period 22 590
--------- ---------
Cash and cash equivalents at end of period $ 85 $ 298
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,163 $ 653
</TABLE>
See accompanying notes.
6
<PAGE> 7
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 PC's marketed through
electronics retailers and distributors.
In August 1995, the Company announced that it was divesting its multimedia
components business to implement a business plan based on the development and
sale of software and semiconductor solutions providing advanced audio for the PC
and consumer electronics markets. Given the Company's change in business plan,
revenues are not expected to be significant in 1996 as the Company completes
development of its newest audio technologies and begins to market such products.
The Company expects to incur operating losses at least through fiscal 1996, and
there is no assurance that the Company will achieve profitability thereafter.
During the first quarter of 1996, the Company sold the Media Vision brand
name, related trade names and other assets of its previous retail business to a
third party. The sales agreement transferred the retail customer service and
technical support obligations to the buyer. It also provides for a potential
royalty stream on future sales made under the Media Vision brand name, and a
commitment by the buyer to purchase products incorporating the Company's current
advanced audio solutions for the PC audio market.
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 stock symbol on the OTC Bulletin Board is AURL.
In three transactions from February through June 1996, the Company
completed the private sale of 18.9 million shares of common stock for $22
million. The proceeds from the sale of this common stock has been used for
working capital, to pay down the existing TCW Credit Facility and to partially
fund the acquisition of Crystal River Engineering, Inc. (see below). In
conjunction with this equity infusion, the total availability under the
Company's line of credit was reduced from $22 million to $20 million.
The Company, in May 1996, acquired 100% ownership of Crystal River
Engineering, Inc. ("CRE"), a privately held firm specializing in 3D audio
technology development. The total recorded cost of the acquisition was $6.4
million. Aureal recorded, in the second quarter, a write-off of $6.0 million due
to the 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 early September 1996, the Company introduced Aureal 3D, the first
interactive 3D audio solution for implementation in both the PC and consumer
home theater applications. The introduction included announcement of 3D
technology licensing agreements with Diamond Multimedia and Oak Technology. Also
in September, the Company announced the VSP901 Dolby(R) Pro Logic(R) Surround
Processor, an Aureal proprietary semiconductor designed to produce a complete
Dolby surround sound solution utilizing only two speakers.
Also in September 1996, CRE was awarded a Small Business Innovative
Research (SBIR) Program Phase II contract by the Office of Naval Research. The
initial award of $250,000 is subject to increase in two further segments
expected to be received in the near future, pending appropriation of funding.
Anticipating the exercise of the further options by the Navy, the contract can
total $613,000. Receipt of actual payments will follow specific milestone
achievements, as set forth in the contract.
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.
7
<PAGE> 8
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
quarter and three quarters ended September 29, 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, which consist predominantly of finished goods at both balance
sheet dates presented, are stated at the lower of cost or market value.
Revenue Recognition
The Company's major sources of revenue consist of sales of proprietary
design, advanced audio semiconductor chips, licensing of related audio
technology and sales of PC hardware and software for utilization of the audio
technology. Revenue is recognized upon shipment for product sales. With respect
to licensing transactions, revenue is recognized upon delivery of certain
technologies for development fees, and upon reported sales of licensed units for
royalties.
Loss Per Share
Loss per share is based upon the weighted average common shares outstanding
for the period. No stock option information is incorporated into the calculation
as, due to the net loss, any affect would be anti-dilutive.
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. ("CRE")
During the second quarter of 1996, the Company acquired 100% ownership of
CRE, a privately held firm specializing in the development of 3D audio
technologies. The acquisition consideration included purchase of stock totaling
approximately $2.9 million, 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 the 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 second quarter due to recognition that in-process research
and development efforts associated with CRE's 3D audio technology had not
reached technological feasibility with
8
<PAGE> 9
respect to the Company's product line at the date of acquisition. The Company
plans 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>
<CAPTION>
Year to Date
September 29, October 1,
1996 1995
---- ----
<S> <C> <C>
Revenues $ 3,704 $ 48,662
Costs and expenses 18,313 149,446
--------- ---------
Net loss $ (14,609) $(100,784)
========= =========
Net loss per share $ (0.47) $ (5.04)
========= =========
</TABLE>
4. INCOME TAXES
The Company was not required to provide for income taxes in the first
three 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 November 5, 1996, $8.3 million was outstanding under the line.
Additionally, as of November 5, 1996, TCW and affiliated entities controlled
approximately 44% of the Company's outstanding common stock.
9
<PAGE> 10
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 PRODUCT LINE BASED ON A NEW TECHNOLOGY;
COMPETITION AND PRICING PRESSURES; AND OTHER RISKS DETAILED BELOW AND FROM TIME
TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
During 1995 and the first three quarters of 1996, a number of significant
changes took place in the Company's business (see Note 1 to the Interim
Condensed Consolidated Financial Statements in Item 1). 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 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 three 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 periods in
the years presented, as described above.
The audio semiconductor industry is extremely competitive, and is
characterized by rapid technological change, evolving industry standards,
changing market conditions and frequent new product introductions and
enhancements. The introduction of products embodying new technologies or
standards can render existing products or products under development obsolete or
unmarketable. Many of the Company's competitors have more extensive engineering,
manufacturing, marketing, financial and personnel resources than those of the
Company. Accordingly, the Company's success in implementing its strategy to
focus on the audio semiconductor business will depend in large part on its
ability to anticipate industry changes and to develop and introduce new products
on a timely basis. Development and customer acceptance of new products is
inherently uncertain, and there can be no assurance that the Company will
successfully complete the development of its advanced audio solutions on a
timely basis or that such products will be commercially successful.
RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter of 1996 totaled $237,000 comprised
primarily of sales of CRE's "Accoustetron II", a stand-alone sound system
offering Aureal 3D interactive three dimensional sound for real-time graphics
workstations. Year-to-date revenues of $3.3 million consist primarily of
technology licensing transactions along with sales of semiconductor products of
pre-existing technology in the first two fiscal quarters. In addition to
licenses for Aureal's pre-existing legacy audio technology, which account for
virtually all of the licensing revenues to date, the Company has entered into 3D
audio technology ("Aureal A3D") licenses with Diamond Multimedia and Oak
Technology, companies which are anticipated to utilize the technology in the PC
marketplace.
As indicated in earlier quarterly filings, the Company has not anticipated
significant revenues in 1996. The Company's primary goal for the second half of
1996 has been to generate significant visibility for Aureal's technology in both
the PC and home electronic entertainment markets. Important steps toward this
goal have been taken with the September announcements of Aureal 3D ("A3D")
technology and the VSP901 semiconductor chip. The Company anticipates making the
VSP901 available to customers in the first quarter of 1997.
10
<PAGE> 11
Revenues will not be recognized until finished products are shipped to
customers. There can be no assurance that the Company can complete development
and arrange for the successful manufacturing of these semiconductor products,
nor that such products will be successful in the marketplace.
Revenues in the third quarter and first three quarters of 1995 were $7.3
million and $47.3 million respectively, consisting primarily of PC multimedia
upgrade kit sales prior to the termination of that business in the second half
of 1995.
Gross Margin
Gross margin for the third quarter and first three quarters of 1996 were
$193,000 and $3.0 million respectively. A significant percentage of net sales
for the three quarters consisted of licensing revenues from the Company's
pre-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 was near 100% for those revenues. Gross margins
associated with sales of semiconductor products were approximately 50% for the
year to date.
Negative gross margin for the year to date in 1995 reflects the negative
market conditions for the Company as it struggled in the retail PC upgrade
marketplace, until the August 1995 announcement that it was exiting that
business. A virtually break-even gross margin for the third quarter resulted
from a second quarter write-down of all inventories to liquidation value as the
Company terminated its retail business.
Research and Development
Research and development expenditures remained relatively constant at $1.52
million in third quarter of 1996, as compared to $1.62 million and $1.70 million
in the first and second quarters of the year. The research and development
efforts are expected to continue at current levels, or increase as work on audio
technologies and enhancements continue.
Year to date expense comparisons ($4.8 million in 1996 versus $5.0 million
in 1995) reflect increased focus on only audio R&D efforts in 1996. With the
elimination of efforts in non-audio areas, the actual spending on audio
technology efforts has increased in 1996.
Selling and Marketing
Selling and marketing expenditures have increased each quarter in 1996 as
the Company moves closer to releasing products for sale. Increases included
additions to staffing as well as incremental travel costs due to increased
contact with potential domestic and international customers. Specific product
designs as well as reference designs to utilize Aureal semiconductor
technologies for customer products have been developed and are currently being
demonstrated to a number of major home entertainment and PC peripheral
manufacturers.
1995 sales and marketing expenses related to the domestic and international
efforts in the retail PC upgrade kit marketplace. Those efforts were reduced in
the third quarter of 1995 and eliminated by year-end 1995.
General and Administrative
General and administrative expenditures of $502,000 and $1.8 million for
the third quarter and three quarters respectively, of 1996, reflect continued
cost containment efforts in the administrative functions. Legal costs, noted as
increased in the second quarter of 1996 for prosecution of pending patent
applications, were lower in the third quarter. General and administrative costs
are anticipated to increase in support of the Company's activities as product
shipments commence.
As with other cost categories above, general and administrative costs in
1995 supported the retail products organization. With the change in business in
late 1995, these costs were reduced in line with the overall size of the
Company.
11
<PAGE> 12
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
During 1995, the Company announced a plan to divest its worldwide retail
operations and provided a $61.6 million restructuring provision to reflect a
writedown of assets and record incremental costs. This provision was included as
a component of operating expenses for the second and third quarters of 1995
totaling $53.6 million and $8.0 million respectively.
Interest Expense
Interest expense for the three quarters 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. 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 debt balance outstanding reduced interest expense in the second
and third quarters of 1996. The balance on the TCW Credit Facility is expected
to increase over future fiscal quarters as it is utilized as a source of working
capital.
Interest and Other Income
Interest income of $16,000 declined in the third quarter of 1996 from the
prior two quarters ($65,000 in the first quarter and $72,000 in the second
quarter). Virtually all the interest income was generated on funds received from
the private placement of common stock in February and March of 1996. Terms of
these transactions placed certain restrictions on the Company's ability to use
the proceeds to reduce the outstanding balance on the TCW Credit Facility. The
invested cash declined during the second and third quarters as it was utilized
for ongoing operations costs as well as in the acquisition of CRE. With cash
balances at a minimum at the end of the third quarter, future interest income is
not expected to be significant.
The Company has recognized $558,000 of other income in 1996 from a number
of sources, including receipt of prior year VAT refunds and other old business
sources (together totaling approximately $298,000 in the third quarter in excess
of previously recorded amounts), recovery of property loss insurance proceeds,
and miscellaneous other receipts.
Interest income for 1995 was earned primarily on certificates of deposit
utilized to collateralize the purchase of certain inventory items, a program
terminated in the third quarter of that year.
Income Taxes
The Company was not required to provide for income taxes in the first three
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.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents have remained essentially flat (net increase of
$63,000) over the first three fiscal quarters of 1996. In addition to ongoing
operations during this period, a number of significant transactions occurred
affecting capital resources. The Company raised approximately $22 million from
the sale of its common stock, reduced outstanding debt by $12.7 million and
invested cash of $3.0 million in the acquisition 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 $11.7 million was available for borrowings
as of November 5, 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.
RISK FACTORS
In evaluating the Company's business, the following factors should be
considered in addition to the other information in this Form 10-Q.
Pre-revenue Stage Company
The Company is a pre-revenue stage operation relative to its primary
product line and has generated only minimal revenues since its transition to an
audio technology firm. As discussed above, the Company has made progress toward
development and marketing of its technologies and specific products, but there
is no assurance that the Company will be successful in its efforts to complete
development of its products or to commercialize its products or generate
positive cash flow from anticipated product sales.
Emerging Technology - Product Concentration
The primary technology for the Company's anticipated products is new and
emerging in the marketplace. The Company is working to set standards for Audio
3D in both the PC and home entertainment markets. There is no assurance that the
markets will develop and recognize the value of the Company's products, or that
such events will occur over a time period to allow the Company to successfully
participate in the markets' anticipated growth.
In addition, the Company is seeking to compete in an area of rapid
technological change and potentially short product life cycles. The Company must
develop, market and sell products in timeframes appropriate to the marketplace.
The Company expects that potential competition may come from companies who have
financial and other resources significantly greater than those of the Company.
Need for Foundry Access
The Company is a "fabless semiconductor firm" which depends on outside
manufacturing resources for production of its semiconductor products. As such,
the Company places a high value on maintaining strong relationships with
potential manufacturing sources. Such foundry relationships can take many forms,
and the company is constantly exploring the expansion of existing relationships.
The Company believes it currently has access to sufficient foundry capacity to
provide manufacturing resources for its currently anticipated products. This
capacity is subject to overall industry demand as well as individual factors
which can impact any specific manufacturer's ability or intention to provide
product manufacturing resources to the Company. There is no assurance that the
Company can continue to obtain sufficient foundry capacity, or maintain such
capacity at acceptable costs.
13
<PAGE> 14
New Management Team; Dependence on Personnel
Only one of the Company's current officers served as an officer of the
Company prior to March 1995. All of the Company's four current directors were
elected to the Board of Directors at or subsequent to December 1994. The
Company's management team and Board of Directors face significant challenges in
delivering emerging technology products in a cost effective, and profitable
manner.
The Company is highly dependent upon continued services of key engineering,
marketing, sales and management personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time. The
competition for such employees is intense and the loss of their services could
have a material adverse effect on the Company's business.
Proprietary Rights and Related Litigation
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues to
implement protective measures and intends to defend its proprietary rights,
there can be no assurance that measures to deter or prevent unauthorized use of
the Company's technology will be successful. The Company relies on a combination
of copyright and trade secret protection, nondisclosure agreements and licensing
arrangements to establish and protect its proprietary rights. In addition, the
Company has certain issued patents and patent applications pending in the United
States and in foreign countries and intends to file additional applications as
appropriate for patents covering its technologies and products. There can be no
assurance that patents will issue from any of these pending applications, or, if
patents do issue, that any claims allowed will be sufficiently broad to protect
the Company's technology. There can also be no assurance that any patents that
may be issued to the Company will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide proprietary
protection to the Company. In addition, the laws of certain foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe the proprietary rights
of any third parties, there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) will
not be asserted against the Company or that any such assertions will not
materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company could incur significant cost and diversion of
management efforts with respect to the defense thereof which could have a
material adverse effect on the Company's business, financial condition or
results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms or at
all.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 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.
In October 1996, the Company became aware of, but has not been served
with, a counterclaim filed by the Company's prior auditors, Ernst and Young LLP
("E&Y") naming the Company as a third-party defendant in a lawsuit involving the
Company's prior creditors and E&Y. The third-party complaint seeks
indemnification and contribution from the Company for lawsuits filed against
E&Y resulting from pre-bankruptcy activities. The Company believes that any
such alleged obligations were discharged by bankruptcy court confirmation of
the Company's Plan of Reorganization in 1994. The Company plans to
aggressively pursue its rights to dismiss the suit and vigorously argue that
any alleged obligations have been discharged in the bankruptcy proceedings.
See Item 3 of Company's 1995 Annual Report on Form 10-K.
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
On August 2, 1996, the Company filed a registration statement on Form S-8
to register a total of 2,644,845 shares of Aureal Common Stock in conjunction
with stock options granted by Crystal River Engineering, Inc., and assumed by
Aureal in connection with the acquisition of CRE by Aureal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit index at page 16.
(b) Reports on Form 8-K:
On July 17, 1996 the Company filed an amendment to its Form 8-K
originally filed May 22, 1996 to include the audited and pro forma financial
statements of Crystal River Engineering, Inc., pursuant to Article 11 of
Regulation S-X.
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: November 5, 1996 By: /S/ Kenneth A. Kokinakis
------------------------
Kenneth A. Kokinakis
President and Chief Executive Officer
Date: November 5, 1996 By: /s/David J. Domeier
-------------------
David J. Domeier
Vice President, Finance and
Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGES
- ----------- ----------------------- ------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization among the
Company, Aureal Acquisition Corporation, a
wholly-owned subsidiary of the Company and Crystal
River Engineering, Inc., dated as of May 7, 1996 (1)
3.1 Second Amended and Restated Certificate of Incorporation of the
Company dated May 8, 1996 (2)
3.2 Restated Bylaws of Aureal Semiconductor Inc. 18-33
4.1 Common Stock Purchase Agreement by and among the
Company and certain beneficial owners of 5% or more of
the Company's Common Stock, as amended (3)
4.2 Common Stock Purchase Agreement by and among the Company and
certain entities and individuals dated June 10, 1996 (5)
10.1 Amended and Restated Loan Agreement dated as of
December 30, 1994 with TCW Special Credits, and the
First Amendment thereto dated March 22, 1995 (4)
10.2 Second Amendment to Amended and Restated Loan Agreement dated as
of July 24, 1995 (3)
10.3 Third Amendment to Amended and Restated Loan Agreement dated as of
February 16, 1996 (3)
10.4 Letter Agreement between TCW Special Credits and the Company dated 34-37
June 5, 1996 reducing loan commitment from $22 million to $20 million
10.5 1995 Stock Option Plan (3)
10.6 Form of incentive option agreement and non-statutory stock option
agreement used
under 1995 Stock Option Plan (3)
10.7 1994 Stock Option Plan (4)
10.8 Form of incentive option agreement and non-statutory stock option
agreement used under 1994 Stock Option Plan (4)
10.10 Industrial Space Sublease with Chemical Waste Management, Inc.
dated September 13, 1995 (3)
10.11 Offer Letter Agreement with Kenneth A Kokinakis dated December 8,
1995 (3)
10.12 Form of Indemnity Agreement for Directors and Officers 38-45
11.1 Statement regarding computation of per share earnings
- see Note 2 to Condensed Consolidated Financial
Statements in Item 1 of this report
</TABLE>
16
<PAGE> 17
27.1 Financial Data Schedule (Edgar only)
- ----------------
(1) Incorporated by reference to the exhibits filed with Form 8-K dated May 22,
1996
(2) Incorporated by reference to the exhibits filed with Form S-8 (Registration
number 333-09531) filed August 2, 1996
(3) Incorporated by reference to the exhibits filed with Form 10-K for year
ended December 31, 1995
(4) Incorporated by reference to the exhibits filed with Form 10-K for year
ended December 31, 1994
(5) Incorporated by reference to the exhibits filed with Form S-3 (Registration
number 333-3870) filed June 26, 1996
<PAGE> 1
RESTATED BYLAWS
OF
AUREAL SEMICONDUCTOR INC.
<PAGE> 2
TABLE OF CONTENTS
Page
----
I STOCKHOLDERS........................................................ 1
1.1 Annual Meeting............................................. 1
1.2 Special Meeting............................................ 1
1.3 Notice of Meetings......................................... 1
1.4 Quorum..................................................... 2
1.5 Conduct of the Stockholders' Meeting....................... 2
1.6 Conduct of Business........................................ 2
1.7 Notice of Stockholder Business............................. 3
1.8 Proxies and Voting......................................... 3
1.9 Stock List................................................. 4
1.10 Action Without Meeting..................................... 4
II BOARD OF DIRECTORS.................................................. 4
2.1 Number and Term of Office.................................. 4
2.2 Vacancies and Newly Created Directorships.................. 5
2.3 Removal.................................................... 5
2.4 Regular Meetings........................................... 6
2.5 Special Meetings........................................... 6
2.6 Quorum..................................................... 6
2.7 Participation in Meetings by Conference Telephone.......... 6
2.8 Conduct of Business........................................ 6
2.9 Powers..................................................... 6
2.10 Compensation of Directors.................................. 7
2.11 Nomination of Director Candidates.......................... 7
III COMMITTEES.......................................................... 8
3.1 Committees of the Board of Directors....................... 8
3.2 Conduct of Business........................................ 8
IV OFFICERS............................................................ 9
4.1 Generally.................................................. 9
4.2 Chairman of the Board...................................... 9
4.3 President.................................................. 9
4.4 Vice President............................................. 9
4.5 Treasurer.................................................. 9
4.6 Secretary.................................................. 10
4.7 Delegation of Authority.................................... 10
4.8 Removal.................................................... 10
4.9 Action With Respect to Securities of Other Corporations.... 10
i
<PAGE> 3
V STOCK............................................................... 10
5.1 Certificates of Stock...................................... 10
5.2 Transfers of Stock......................................... 10
5.3 Record Date................................................ 10
5.4 Lost, Stolen or Destroyed Certificates..................... 11
5.5 Regulations................................................ 11
VI NOTICES............................................................. 11
6.1 Notices.................................................... 11
6.2 Waivers.................................................... 11
VII MISCELLANEOUS....................................................... 11
7.1 Facsimile Signatures....................................... 11
7.2 Corporate Seal............................................. 12
7.3 Reliance Upon Books, Reports and Records................... 12
7.4 Fiscal Year................................................ 12
7.5 Time Periods............................................... 12
VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS........................... 12
8.1 Right to Indemnification................................... 12
8.2 Right of Claimant to Bring Suit............................ 13
8.3 Non-Exclusivity of Rights.................................. 13
8.4 Indemnification Contracts.................................. 13
8.5 Insurance.................................................. 13
8.6 Effect of Amendment........................................ 13
IX AMENDMENTS.......................................................... 13
ii
<PAGE> 4
AUREAL SEMICONDUCTOR INC.,
A DELAWARE CORPORATION
RESTATED BYLAWS
ARTICLE I
STOCKHOLDERS
I.1 Annual Meeting. An annual meeting of the stockholders, for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place (within or without the State of Delaware), on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
I.2 Special Meeting. Except as otherwise required by law (meaning, here
and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the Corporation), special
meetings of the stockholders, for any purpose or purposes prescribed in the
notice of the meeting, may be called only (i) by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (ii) by the holders of not less than ten percent
(10%) of all shares entitled to cast votes at the meeting, voting together as a
single class and shall be held at such time, date and place (within or without
the State of Delaware) as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.
I.3 Notice of Meetings. Written notice of the place, date, and time of
all meetings of the stockholders shall be given, not less than ten (10) nor more
than sixty (60) days before the date on which the meeting is to be held, to each
stockholder entitled to vote at such meeting, except as otherwise provided
herein or required by law.
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
I.4 Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall
1
<PAGE> 5
constitute a quorum for all purposes, unless or except to the extent that the
presence of a larger number may be required by law.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, starting that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
I.5 Conduct of the Stockholders' Meeting. At every meeting of the
stockholders, the Chairman, if there is such an Officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 8 of these Bylaws to
act by proxy, and officers of the Corporation.
I.6 Conduct of Business. The Chairman shall call the meeting to order,
establish the agenda, and conduct the business of the meeting in accordance
therewith or, at the Chairman's discretion, it may be conducted otherwise in
accordance with the wishes of the stockholders in attendance. The date and time
of the opening and closing of the polls for each matter upon which the
stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 6 and in
Section 7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 6 and
of Section 7, and if he should so determine, he shall so declare to the meeting,
and any such business not properly brought before the meeting shall not be
transacted.
I.7 Notice of Stockholder Business. At an annual or special meeting of
the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before a meeting,
business must be (a) specified in the notice
2
<PAGE> 6
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) properly brought before the meeting by or at the direction of
the Board of Directors, (c) properly brought before an annual meeting by a
stockholder, or (d) properly brought before a special meeting by a stockholder,
but if, and only if, the notice of a special meeting provides for business to be
brought before the meeting by stockholders. For business to be properly brought
before a meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder proposal to be presented at an annual meeting shall be received at
the Corporation's principal executive offices not less than 120 calendar days in
advance of the date that the Corporation's (or the Corporation's predecessor's)
proxy statement was released to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the previous
year's proxy statement, or in the event of a special meeting, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth day following the day on which notice of the date of the proposed
meeting was mailed or public disclosure of such date was made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual or special meeting (a) a brief description
of the business desired to be brought before the annual or special meeting and
the reasons for conducting such business at the special meeting, (b) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (c) the class and number of shares of the Corporation
which are beneficially owned by the stockholder, and (d) any material interest
of the stockholder in such business.
I.8 Proxies and Voting. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting. No stockholder may authorize
more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the Chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
I.9 Stock List. A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order for each class of stock
and showing the address of
3
<PAGE> 7
each such stockholder and the number of shares registered in his or her name,
shall be open to the examination of any such stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the identity
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
I.10 Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any annual or special meeting of the stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE II
BOARD OF DIRECTORS
II.1 Number and Term of Office. The authorized number of directors
initially shall be five (5), and thereafter may be increased or decreased from
time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors; provided that
the authorized number of directors which shall constitute the whole Board of
Directors shall not be less than five (5) nor more than seven (7). The directors
shall be divided into three (3) classes, as nearly equal in number as reasonably
possible. Each director shall serve for a term ending on the third annual
meeting of stockholders following the annual meeting of stockholders at which
such director was elected; provided, however, that the directors first elected
to Class I shall serve for a term ending at the annual meeting to be held in
1996, the directors first elected to Class II shall serve for a term ending at
the annual meeting to be held in 1997, and the directors first elected to Class
III shall serve for a term ending at the annual meeting to be held in 1998. At
each annual election, the directors chosen to succeed those whose terms then
expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall designate one or more directorships whose terms then
expire as directorships of another class in order to more nearly achieve
equality of the number of directors among the classes. Notwithstanding the rule
that the three (3) classes shall be as nearly equal in number of directors as
possible, in the event of any changes in the authorized number of directors,
each director then continuing to serve as such shall nevertheless continue as a
director of the class of which he or she is a member until the expiration of his
or her current term, or his or her prior death, resignation or removal. The
directors shall be elected at each annual meeting of stockholders, but if any
annual meeting is not
4
<PAGE> 8
held, or the directors are not elected thereat, the directors may be elected at
any special meeting of the stockholders held for that purpose. All directors
shall hold office until the expiration of the term for which elected, and until
their respective successors are elected, except in the case of the death,
resignation, or removal of any director. Elections of directors need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
II.2 Vacancies and Newly Created Directorships. Newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification or other cause (other than removal from office by a
vote of the stockholders) may be filled only by a majority vote of the directors
than in office, through less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of stockholders at which
the term of office of the class to which they have been elected expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
II.3 Removal. Any director, or the entire Board of Directors, may be
removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class. Vacancies on the Board of Directors resulting from such removal may be
filled only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present or by unanimous
written consent of the stockholders. Directors so chosen shall hold office for a
term expiring at the next annual meeting of stockholders at which the term of
office of the class to which they have been elected expires.
II.4 Regular Meetings. Regular meetings of the Board of Directors shall
be held at such place or places, on such date or dates, and at such time or
times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required.
II.5 Special Meetings. Special meetings of the Board of Directors may
be called by one-third of the directors then in office (rounded up to the
nearest whole number) or by the chief executive officer and shall be held at
such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
II.6 Quorum. At any meeting of the Board of Directors, a majority of
the total number of authorized directors shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
II.7 Participation in Meetings by Conference Telephone. Members of the
Board of
5
<PAGE> 9
Directors, or of any committee thereof, may participate in a meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other and such participation shall constitute presence in person at such
meeting.
II.8 Conduct of Business. At any meeting of the Board of Directors,
business shall be transacted in such order and manner as the Board may from time
to time determine, and all matters shall be determined by the vote of a majority
of the directors present, except as otherwise provided herein or required by
law. Action may be taken by the Board of Directors without a meeting if all
members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors.
II.9 Powers. The Board of Directors may, except as otherwise required
by law, exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, including, without limiting the generality
of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with
law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(c) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(d) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(g) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's business and affairs.
II.10 Compensation of Directors. Directors, as such, may
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as
6
<PAGE> 10
directors, including, without limitation, their services as members of
committees of the Board of Directors.
II.11 Nomination of Director Candidates. Nominations for the election
of Directors may be made by the Board of Directors or a proxy committee
appointed by the Board of Directors or by any stockholder entitled to vote in
the election of directors generally. However, any stockholder entitled to vote
in the election of directors generally may nominate one or more persons for
election as directors at a meeting only if timely notice of such stockholder's
intent to make such nomination or nominations has been given in writing to the
Secretary of the Corporation. To be timely, a stockholder nomination for a
director shall be received at the Corporation's principal executive offices not
less than 21 days nor more than 60 days prior to any meeting of stockholders
called for the election of directors; provided, however, that if less than 21
days notice of the meeting is given to shareholders, such notice of intention to
nominate shall be received at the Corporation's principal executive offices not
later than the close of business on the 7th day following the day on which the
notice of meeting was mailed. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote for the election
of directors on the date of such notice and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (e) the consent of each nominee to serve as a director of the Corporation if
so elected.
In the event that a person is validly designated as a nominee in
accordance with this Section 11 and shall thereafter become unable or unwilling
to stand for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five (5) days prior to the date
of the meeting for the election of such nominee, of a written notice to the
secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the Chairman of the meeting for the election of directors determines
that a nomination of any candidate for election as a director at such meeting
was not made in accordance with the applicable provisions of this Section 11,
such nomination shall be void.
ARTICLE III
COMMITTEES
7
<PAGE> 11
III.1 Committees of the Board of Directors. The Board of Directors, by
a vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall, for those
committees and any others provided for herein, elect a director or directors to
serve as the member or members, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power and
authority of the Board of Directors to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law if the resolution which
designates the committee or a supplemental resolution of the Board of Directors
shall so provide. In the absence or disqualification of any member of any
committee and any alternate member in his place, the member or members of the
committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member.
III.2 Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third of the authorized members shall constitute a quorum unless the
committee shall consist of one or two members, in which event one member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
IV.1 Generally. The officers of the Corporation shall consist of a
President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board and such other officers as may from time to time be
appointed by the Board of Directors. Officers shall be elected by the Board of
Directors, which shall consider that subject at its first meeting after every
annual meeting of stockholders. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The Chairman of the Board, if there shall be such an officer, and the
President shall each be members of the Board of Directors. Any number of offices
may be held by the same person.
IV.2 Chairman of the Board. The Chairman of the Board, if there shall
be such an officer, shall, if present, preside at all meetings of the Board of
Directors, and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by these
Bylaws.
8
<PAGE> 12
IV.3 President. The President shall be the chief executive officer of
the Corporation. Subject to the provisions of these Bylaws and to the direction
of the Board of Directors, he or she shall have the responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of chief executive or which are delegated to him or her by the Board
of Directors. He or she shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision and direction of all of the other officers,
employees and agents of the Corporation.
IV.4 Vice President. Each Vice President shall have such powers and
duties as may be delegated to him or her by the Board of Directors. One Vice
President shall be designated by the Board to perform the duties and exercise
the powers of the President in the event of the President's absence or
disability.
IV.5 Treasurer. Unless otherwise designated by the Board of Directors,
the Chief Financial Officer of the Corporation shall be the Treasurer. The
Treasurer shall have the responsibility for maintaining the financial records of
the Corporation and shall have custody of all monies and securities of the
Corporation. He or she shall make such disbursements of the funds of the
Corporation as are authorized and shall render from time to time an account of
all such transactions and of the financial condition of the Corporation. The
Treasurer shall also perform such other duties as the Board of Directors may
from time to time prescribe.
IV.6 Secretary. The Secretary shall issue all authorized notices for,
and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
IV.7 Delegation of Authority. The Board of Directors may from time to
time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
IV.8 Removal. Any officer of the Corporation may be removed at any
time, with or without cause, by the Board of Directors.
IV.9 Action With Respect to Securities of Other Corporations. Unless
otherwise directed by the Board of Directors, the President or any officer of
the Corporation authorized by the President shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
9
<PAGE> 13
V.1 Certificates of Stock. Each stockholder shall be entitled to a
certificate signed by, or in the name of the Corporation by, the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer, certifying the number of shares owned by him or her.
Any of or all the signatures on the certificate may be facsimile.
V.2 Transfers of Stock. Transfers of stock shall be made only upon the
transfer books of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of the Corporation.
Except where a certificate is issued in accordance with Section 4 of Article V
of these Bylaws, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
V.3 Record Date. The Board of Directors may fix a record date, which
shall not be more than sixty (60) nor fewer than ten (10) days before the date
of any meeting of stockholders, nor more than sixty (60) days prior to the time
for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
V.4 Lost, Stolen or Destroyed Certificates. In the event of the loss,
theft or destruction of any certificate of stock, another may be issued in its
place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
V.5 Regulations. The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other regulations as the Board
of Directors may establish.
ARTICLE VI
NOTICES
VI.1 Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or by telegram or mailgram.
VI.2 Waivers. A written waive of any notice, signed by a stockholder,
director, officer, employee or agent, whether before or after the time of the
event for which notice is to be given,
10
<PAGE> 14
shall be deemed equivalent to the notice required to be given to such
stockholder, director, officer, employee or agent. Neither the business nor the
purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
VII.1 Facsimile Signatures. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
VII.2 Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
VII.3 Reliance Upon Books, Reports and Records. Each director, each
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation, including reports made to the Corporation by any of its officers,
by an independent certified public accountant, or by an appraiser selected with
reasonable care.
VII.4 Fiscal Year. The fiscal year of the Corporation shall be as fixed
by the Board of Directors.
VII.5 Time Periods. In applying any provision of these Bylaws which
require that an act be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
VIII.1 Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she is or was a director,
officer or employee of the Corporation or is or was serving at the request of
the Corporation as a director, officer or employee of another corporation, or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by Delaware
11
<PAGE> 15
law, as the same exists or may hereafter be amended (but in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights that said law permitted the Corporation
to provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith, and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit or his or her heirs, executors and administrators; provided, however,
that, except as otherwise provided in Section 2 of this Article VIII, the
Corporation shall indemnify any such person seeking indemnity in connection with
an action, suit or proceeding (or part thereof) initiated by such person only if
(a) such indemnification is expressly required to be made by law, (b) the
action, suit or proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation, (c) such indemnification is provided by the
Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Delaware General Corporation Law, or (d) the action, suit
or proceeding (or part thereof) is brought to establish or enforce a right to
indemnification under an indemnity agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation Law.
Such right shall be a contract right and shall include the right to be paid by
the Corporation expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the Delaware General
Corporation Law then so requires, the payment of such expenses incurred by a
director or officer of the Corporation in his or her capacity as a director or
officer (and not in any other capacity in which service was or is tendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this Section or otherwise.
VIII.2 Right of Claimant to Bring Suit. If a claim under Section 1 of
this Article VIII is not paid in full by the Corporation within ninety (90) days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if such suit is not frivolous or brought in bad faith,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to this Corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such
12
<PAGE> 16
applicable standard of conduct, shall be a defense to the action or create a
presumption that claimant has not met the applicable standard of conduct.
VIII.3 Non-Exclusivity of Rights. The rights conferred on any person in
Sections 1 and 2 shall be in addition to any other right which such persons may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested directors
or otherwise.
VIII.4 Indemnification Contracts. The Board of Directors is authorized
to enter into a contract with any director, officer, employee or agent of the
Corporation, or any person serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in this Article VIII.
VIII.5 Insurance. The Corporation shall maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
VIII.6 Effect of Amendment. Any amendment, repeal or modification of
any provision of this Article VIII shall not adversely affect any right or
protection of a director or officer of the Corporation existing at the time of
such amendment, repeal or modification.
ARTICLE IX
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend or repeal
Bylaws of the Corporation. Any adoption, amendment or repeal by Bylaws of the
Corporation by the Board of Directors shall require the approval of a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal the Bylaws of the
Corporation. In addition to any vote of the holders of any class or series of
stock of this Corporation required by law or by these Bylaws, the affirmative
vote of the holders of at least a majority of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation. Notwithstanding anything to the contrary contained in this Article
IX, the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all of the then outstanding shares of
the capital stock of the Corporation entitled to vote generally in the election
of directors, voting together as a single class, shall be required to amend or
repeal Bylaws of the Corporation that relate to the matters described in Article
I, Section 2, Article II, Sections 1, 2 and 3, and Article VIII of these Bylaws.
13
<PAGE> 1
June 5, 1996
Aureal Semiconductor Inc.
(formerly known as Media Vision Technology Inc.)
4245 Technology Drive
Fremont, California 94538
Attention: Brendan O'Flaherty, Esq.
Gentlemen:
We refer to that certain Amended and Restated Loan Agreement dated as
of December 30, 1994, as amended to the date hereof (as so amended, the "Loan
Agreement", the terms defined therein being used herein as therein defined),
among Aureal Semiconductor Inc. (formerly known as Media Vision Technology
Inc.), as Borrower ("Borrower" or "Company"), and TCW Special Credits, as Agent
for the entities set forth on Schedule A hereto, as Lender ("Lender").
Company has informed Lender that Company's Board of Directors has
authorized issuance of two warrants for purchase of 50,000 shares each of
Company's common stock to Financing for Science International and to Hambrecht &
Quist. Company has also informed Lender that it intends to issue $12 million in
Securities and reduce the Commitment from $22 million to $20 million. Company
has requested that upon such issuance described in the second sentence of this
paragraph, the Commitment be reduced from $22 million to $20 million. At the
request of Company, Lender hereby waives compliance with the provisions of
subsection 7.8 of the Loan Agreement to the extent, and only to the extent,
necessary to permit such issuance; provided that upon such issuance described in
the second sentence of this paragraph, the Commitment shall be reduced from $22
million to 20 million.
Without limiting the generality of the provisions of subsection 10.1 of
the Loan Agreement, the waiver set forth herein shall be limited precisely as
written and relates solely to the noncompliance by Company with the provisions
of subsection 7.8 of the Loan Agreement in the manner and to the extent
described above, and nothing in this Limited Waiver shall be deemed to (a)
constitute a waiver of compliance by Company with respect to (i) subsection 7.8
of the Loan Agreement in any other instance or (ii) any other term, provision or
condition of the Loan Agreement or any other instrument or agreement referred to
therein or (b) prejudice any right or remedy that Lender may now have or may
have in the future under or in connection with the Credit Agreement or any other
instrument or agreement referred to therein. Except as expressly set forth
herein, the terms, provisions and conditions of the Loan Agreement and the other
Loan Documents shall remain in full force and effect and in all other respects
are hereby ratified and confirmed.
<PAGE> 2
This Limited Waiver may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. The limited waiver
set forth herein shall become effective as of the date hereof upon the execution
of counterparts hereof by Company and each of its Subsidiaries and by Lender.
THIS LIMITED WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES.
TCW SPECIAL CREDITS,
as agent and nominee for the entities listed
on Schedule A annexed hereto
By: TWC ASSET MANAGEMENT
COMPANY, its managing general partner
By: /s/ Bruce A. Karsh
____________________________
Title: Authorized Signatory
By: /s/ Kenneth Liang
____________________________
Title: Authorized Signatory
ACCEPTED AND AGREED:
AUREAL SEMICONDUCTOR INC.
(FORMERLY KNOWN AS MEDIA VISION TECHNOLOGY INC.)
By: /s/ David J. Domeier
____________________________
Title: Vice President, Finance and Chief
Financial Officer
<PAGE> 3
By its execution of a counterpart of this Limited Waiver, the
undersigned as Guarantor under that certain Guaranty dated as of December 30.
1994 (the "Guaranty") in favor of Lender, hereby acknowledges that it has read
this Limited Waiver and consents to the terms thereof and further hereby
confirms and agrees that, notwithstanding the effectiveness of this Limited
Waiver, the obligations of the undersigned under the Guaranty shall not be
impaired or affected and the Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all aspects.
MEDIA VISION TECHNOLOGY, LTD.
BY: /s/ Brendan O'Flaherty
____________________________
TITLE: Director
MEDIA VISION TECHNOLOGY GmbH
By: /s/Brendan O'Flaherty
____________________________
Title: Managing Director
<PAGE> 1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of ___________________________, by
and between Aureal Semiconductor Inc., a Delaware corporation (the "Company"),
and ____________________, an officer, director, or key employee of the Company
or its subsidiaries (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations unless
they are protected by comprehensive liability insurance or indemnification, due
to increased exposure to litigation costs and risks resulting from their service
to such corporations, and due to the fact that the exposure frequently bears no
reasonable relationship to the compensation of such directors and officers;
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors and officers with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take;
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of officers and directors;
D. The Company believes that it is unfair for its directors and
officers and the directors and officers of its subsidiaries to assume the risk
of huge judgments and other expenses which may occur in cases in which the
director or officer received no personal profit and in cases where the director
or officer was not culpable;
E. Based upon their experience, the Board of Directors of the Company
(the "Board") has concluded that, to retain and attract talented and experienced
individuals to serve as officers and directors of the Company and its
subsidiaries and to encourage such individuals to take the business risks
necessary for the success of the Company and its subsidiaries, it is necessary
for the Company to contractually indemnify its officers and directors and the
officers and directors of its subsidiaries, and to assume for itself maximum
liability for expenses and damages in connection with claims against such
officers and directors in connection with their service to the Company and its
subsidiaries, and has further concluded that the failure to provide such
contractual indemnification could result in great harm to the Company and its
subsidiaries and the Company's shareholders;
F. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
officers, directors, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive;
G. The Company, after reasonable investigation prior to the date
hereof, has determined that the liability insurance coverage available to the
Company and its subsidiaries as of the date hereof may be inadequate. The
Company believes, therefore, that the interests of the Company's shareholders
would best be served by a combination of such insurance and the indemnification
by the Company of the directors and officers of the Company and its
subsidiaries;
1
<PAGE> 2
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company and/or one or more
subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company; and
I. The Indemnitee is willing to serve, or to continue to serve, the
Company and/or one or more subsidiaries of the Company, provided that he is
furnished the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses"
includes all direct and indirect costs of any type or nature whatsoever
(including, without limitation, all attorneys' fees and related disbursements,
other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in
connection with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement,
Section 145 or otherwise; provided, however, that unless otherwise expressly
provided below, expenses shall not include any judgments, fines, ERISA excise
taxes or penalties or amounts paid in settlement of a proceeding.
(c) Proceeding. For the purposes of this Agreement,
"proceeding" means any threatened, pending, or completed action, suit or other
proceeding, whether civil, criminal, administrative, investigative or any other
type whatsoever.
(d) Subsidiary. For purposes of this Agreement, "subsidiary"
means any corporation of which more than 50% of the outstanding voting
securities is owned directly or indirectly by the Company, by the Company and
one or more other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue
to serve as an agent of the Company, at the will of the Company (or under
separate agreement, if such agreement exists), in the capacity Indemnitee
currently serves as an agent of the Company, so long as he is duly appointed or
elected and qualified in accordance with the applicable provisions of the
by-laws of the Company or any subsidiary of the Company or until such time as he
tenders his resignation in writing, provided, however, that nothing contained in
this Agreement is intended to create any right to continued employment by
Indemnitee.
2
<PAGE> 3
3. Maintenance of Liability Insurance.
(a) The Company hereby covenants and agrees that, so long as
the Indemnitee shall continue to serve as an agent of the Company and thereafter
so long as the Indemnitee shall be subject to any possible proceeding by reason
of the fact that the Indemnitee was an agent of the Company, the Company,
subject to Section 3(c), shall promptly obtain and maintain in full force and
effect directors' and officers' liability insurance ("D&O Insurance") in
reasonable amounts from established and reputable insurers.
(b) In all policies of D&O Insurance, the Indemnitee shall be
named as an insured in such a manner as to provide the Indemnitee the same
rights and benefits as are accorded to the most favorably insured of the
Company's directors, if the Indemnitee is a director; or of the Company's
officers, if the Indemnitee is not a director of the Company but is an officer;
or of the Company's key employees, if the Indemnitee is not an officer or
director but is a key employee.
(c) Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain D&O Insurance if the Company determines in good
faith that such insurance is not reasonably available, the premium costs for
such insurance are disproportionate to the amount of coverage provided, the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or the Indemnitee is covered by similar insurance
maintained by a subsidiary of the Company.
4. Mandatory Indemnification. The Company shall indemnify the
Indemnitee:
(a) Third Party Actions. If the Indemnitee is a person who was
or is a party or is threatened to be made a party to any proceeding (other than
an action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) actually and reasonably incurred
by him in connection with the investigation, defense, settlement or appeal of
such proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful; and
(b) Derivative Actions. If the Indemnitee is a person who was
or is a party or is threatened to be made a party to any proceeding by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that he is or was an agent of the Company, or by reason of anything done or not
done by him in any such capacity, against any and all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company; except that no indemnification under this subsection shall be made
in respect of any claim, issue or matter as to which such person shall have been
finally adjudged to be liable to the Company by a court of competent
jurisdiction due to willful misconduct of a culpable nature in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the Court of Chancery or such other court shall
deem proper; and
(c) Actions where Indemnitee is Deceased. If the Indemnitee is
a person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, against any
and all expenses and liabilities of any type whatsoever (including, but not
limited to, judgments, fines,
3
<PAGE> 4
ERISA excise taxes and penalties, and amounts paid in settlement) actually and
reasonably incurred by or for him in connection with the investigation, defense,
settlement or appeal of such proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, prior to, during the pendency of, or after completion of such
proceeding Indemnitee is deceased, except that in a proceeding by or in the
right of the Company no indemnification shall be due under the provisions of
this subsection in respect of any claim, issue or matter as to which such person
shall have been finally adjudged to be liable to the Company, by a court of
competent jurisdiction, due to willful misconduct of a culpable nature in the
performance of his duty to the Company, unless and only to the extent that the
Court of Chancery or the court in which such proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such amounts which the Court of Chancery or such other
court shall deem proper; and
(d) Notwithstanding the foregoing, the Company shall not be
obligated to indemnify the Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) which have been paid directly to
Indemnitee by D&O Insurance.
5. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding but not entitled, however, to indemnification for all of
the total amount thereof, the Company shall nevertheless indemnify the
Indemnitee for such total amount except as to the portion thereof to which the
Indemnitee is not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined pursuant to Section 8 hereof that the Indemnitee
is not entitled to be indemnified by the Company as authorized hereby. The
advances to be made hereunder shall be paid by the Company to the Indemnitee
within twenty (20) days following delivery of a written request therefor by the
Indemnitee to the Company.
7. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the
commencement of a proceeding pursuant to Section 7(a) hereof, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(c) In the event the Company shall be obligated to pay the
expenses of any proceeding against the Indemnitee, the Company, if appropriate,
shall be entitled to assume the defense of such
4
<PAGE> 5
proceeding, with counsel approved by the Indemnitee, upon the delivery to the
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by the Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to the Indemnitee under
this Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to the same proceeding, provided that (i) the Indemnitee shall have
the right to employ his counsel in any such proceeding at the Indemnitee's
expense; and (ii) if (A) the employment of counsel by the Indemnitee has been
previously authorized by the Company, (B) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and the
Indemnitee in the conduct of any such defense or (C) the Company shall not, in
fact, have employed counsel to assume the defense of such proceeding, the fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
8. Determination of Right to Indemnification.
(a) To the extent the Indemnitee has been successful on the
merits or otherwise in defense of any proceeding referred to in subsections
4(a), 4(b), or 4(c) of this Agreement or in the defense of any claim, issue or
matter described therein, the Company shall indemnify the Indemnitee against
expenses actually and reasonably incurred by him in connection with the
investigation, defense, or appeal of such proceeding.
(b) The Indemnitee shall be entitled to select the forum in
which the validity of the Company's claim that the Indemnitee is not entitled to
indemnification will be heard from among the following, which forums shall
determine that the Indemnitee is entitled to such indemnification unless the
Company shall prove by clear and convincing evidence that: (i) the Indemnitee
has not met the applicable standard of conduct required to entitle the
Indemnitee to such indemnification or that indemnification is otherwise not
required pursuant to Section 9 hereof, and (ii) the requirements of Section 8(a)
have not been met:
(1) A quorum of the Board consisting of directors who
are not parties to the proceeding for which indemnification is being sought;
(2) The shareholders of the Company;
(3) Legal counsel selected by the Indemnitee, and
reasonably approved by the Board, which counsel shall make such determination in
a written opinion; or
(4) A panel of three arbitrators, one of whom is
selected by the Company, another of whom is selected by the Indemnitee and the
last of whom is selected by the first two arbitrators so selected.
(c) As soon as practicable, and in no event later than 30 days
after written notice of the Indemnitee's choice of forum pursuant to Section
8(b) above, the Company shall, at its own expense, submit to the selected forum
in such manner as the Indemnitee or the Indemnitee's counsel may reasonably
request, its claim that the Indemnitee is not entitled to indemnification, and
the Company shall act in the utmost good faith to assure the Indemnitee a
complete opportunity to defend against such claim.
(d) Notwithstanding a determination by any forum listed in
Section 8(b) hereof that Indemnitee is not entitled to indemnification with
respect to a specific proceeding, the Indemnitee shall have the right to apply
to the Court of Chancery of Delaware, the court in which that proceeding is or
was pending, or any other court of competent jurisdiction, for the purpose of
enforcing the Indemnitee's right to indemnification pursuant to this Agreement.
Such court shall find that the Indemnitee is entitled to indemnification if the
Indemnitee proves by a preponderance of the evidence that he or she has met the
applicable standard of conduct required to entitle the Indemnitee to such
indemnification unless
5
<PAGE> 6
indemnification is otherwise not required pursuant to Section 9 hereof, and if
the requirements of Section 8(a) have been met.
(e) Notwithstanding any other provision in this Agreement to
the contrary, the Company shall indemnify the Indemnitee against all expenses
incurred by the Indemnitee in connection with any hearing or proceeding under
this Section 8 involving the Indemnitee and against all expenses incurred by the
Indemnitee in connection with any other proceeding between the Company and the
Indemnitee involving the interpretation or enforcement of the rights of the
Indemnitee under this Agreement unless a court of competent jurisdiction finds
that each of the claims and/or defenses of the Indemnitee in any such proceeding
was frivolous or made in bad faith.
9. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise as
required under Section 145, but such indemnification or advancement of expenses
may be provided by the Company in specific cases if the Board of Directors finds
it to be appropriate; or
(b) Lack of Good Faith. To indemnify the Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
the Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of a proceeding unless
the Company consents to such settlement, which consent shall not be unreasonably
withheld.
10. Non-exclusivity. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's certificate of incorporation or bylaws, the vote of the Company's
shareholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
11. Interpretation of Agreement. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent now or hereafter
permitted by law.
12. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable,
6
<PAGE> 7
that are not themselves invalid, illegal or unenforceable) shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable and to give effect to Section 12 hereof.
13. Modification and Waiver. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
14. Successors and Assigns. The terms of this agreement shall bind, and
shall inure to the benefit of, the successors and assigns of the parties hereto.
15. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
16. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
17. Consent to Jurisdiction. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
AUREAL SEMICONDUCTOR INC.
Address: 4245 Technology Drive
Fremont, California 94538
By: _______________________________
Brendan R. O'Flaherty
INDEMNITEE: _______________________________
Address: _______________________________
_______________________________
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED
SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<EXCHANGE-RATE> 1
<CASH> 85
<SECURITIES> 0
<RECEIVABLES> 127
<ALLOWANCES> 0
<INVENTORY> 107
<CURRENT-ASSETS> 599
<PP&E> 3,196
<DEPRECIATION> 2,327
<TOTAL-ASSETS> 4,769
<CURRENT-LIABILITIES> 5,773
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> (12,849)
<TOTAL-LIABILITY-AND-EQUITY> 4,769
<SALES> 3,280
<TOTAL-REVENUES> 3,280
<CGS> 286
<TOTAL-COSTS> 16,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,845
<INCOME-PRETAX> (13,949)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,949)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
