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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.
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1999
Commission File Number 0-20684
AUREAL 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)
45757 NORTHPORT LOOP WEST
FREMONT, CA 94538
(Address of principal executive offices)
Telephone: (510) 252-4245
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents required
to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
At November 1, 1999, 9,965,943 shares of common stock, $0.001 par value, of the
registrant were outstanding.
This report on Form 10-Q contains 21 pages. The exhibit index is on page 21.
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AUREAL INC
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
Item 3. Qualitative and Quantitative Disclosure of Market Risks.........18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................19
Item 5. Other Information...............................................19
Item 6. Exhibits and Reports on Form 8-K................................19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUREAL INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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<CAPTION>
October 3, 1999 Jan. 3, 1999
--------------- ------------
(Unaudited)
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ASSETS:
Current assets:
Cash and cash equivalents $ 263 $ 87
Restricted cash -- 6
Accounts receivable 8,890 4,781
Inventories 3,239 3,916
Deferred fair value of debt related warrants -- 924
Prepaid loan fees and other current assets 791 757
--------- ---------
Total current assets 13,183 10,471
Property and equipment:
Machinery and equipment 6,346 4,636
Furniture, fixtures and improvements 888 639
--------- ---------
7,234 5,275
Accumulated depreciation and amortization (3,978) (2,795)
--------- ---------
Net property and equipment 3,256 2,480
Other long-term assets 161 687
--------- ---------
Total assets $ 16,600 $ 13,638
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Line of credit $ 4,149 $ 4,329
Accounts payable 6,793 5,966
Accrued compensation and benefits 2,280 1,765
Other accrued liabilities 978 1,061
Current portion of pre-petition claims 982 936
--------- ---------
Total current liabilities 15,182 14,057
Long-term portion of pre-petition claims and deferred obligations 262 889
--------- ---------
Total liabilities 15,444 14,946
Stockholders' equity (deficit): Preferred stock, $0.001 par value,
authorized shares-5,000,000:
Series A: Authorized shares - 500; Issued and
outstanding
Shares - 35 and 249, respectively -- --
Series B: Authorized shares - 60,000; 40,966 shares
Issued and outstanding in 1998 -- --
Series C: Authorized shares - 1,500; 600 shares
Issued and outstanding in 1998 -- --
Additional paid-in capital 394 51,421
Common stock, $0.001 par value:
Authorized shares - 200,000,000; Issued and outstanding
Shares - 9,965,943 and 3,178,422, respectively 10 48
Additional paid-in capital 192,221 119,790
Accumulated deficit (191,469) (172,567)
--------- ---------
Total stockholders' equity (deficit) 1,156 (1,308)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 16,600 $ 13,638
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUREAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Quarter Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
(Unaudited) (Unaudited)
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Net sales $ 11,153 $ 7,535 $ 31,794 $ 14,553
Cost of sales 7,120 5,390 20,454 10,216
-------- -------- -------- --------
Gross margin 4,033 2,145 11,340 4,337
Operating expenses:
Research and development 5,312 3,014 12,311 8,548
Sales and marketing 2,723 1,511 7,725 4,495
General and administrative 2,214 1,192 6,001 2,868
-------- -------- -------- --------
Total operating expenses 10,249 5,717 26,037 15,911
-------- -------- -------- --------
Operating loss (6,216) (3,572) (14,697) (11,574)
Amortization of debt related warrants -- (231) (1,309) (1,558)
Interest expense (227) (300) (1,358) (2,294)
Other income (expense), net (6) 5 (47) 396
-------- -------- -------- --------
Loss from operations before income taxes (6,449) (4,098) (17,411) (15,030)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (6,449) $ (4,098) $(17,411) $(15,030)
======== ======== ======== ========
Accretion/dividends related to preferred stock $ (7) $ (1,891) $ (1,491) $(14,012)
======== ======== ======== ========
Net loss attributable to common stockholders $ (6,456) $ (5,989) $(18,902) $(29,042)
======== ======== ======== ========
Net loss per share: basic and diluted $ (0.65) $ (2.10) $ (2.71) $ (10.31)
-------- -------- -------- --------
Weighted average common shares outstanding 9,964 2,846 6,980 2,818
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUREAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
Nine Months Ended
---------------------------
October 3, September 27,
1999 1998
(Unaudited)
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OPERATING ACTIVITIES
Net loss $(17,411) $(15,030)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,858 2,709
Changes in operating assets and liabilities:
Restricted cash 6 102
Accounts receivable (4,340) (5,610)
Inventories 908 (3,741)
Prepaid expenses and other current assets (1,446) (613)
Other assets 242 (465)
Accounts payable 708 1,995
Accrued compensation and benefits, and
other accrued liabilities 432 (342)
-------- --------
Net cash used in operating activities (17,043) (20,995)
-------- --------
INVESTING ACTIVITIES
Acquisition of property and equipment (1,969) (1,676)
-------- --------
Net cash used in investing activities (1,969) (1,676)
-------- --------
FINANCING ACTIVITIES
Proceeds from Line of Credit 39,157 28,465
Repayment on Line of Credit (39,382) (15,546)
Principal payments on pre-petition claims (581) (911)
Proceeds from issuance of stock, net of issuance costs 19,994 10,818
-------- --------
Net cash provided by financing activities 19,188 22,826
-------- --------
Net increase/(decrease) in cash and cash equivalents 176 155
Cash and cash equivalents at beginning of period 87 135
-------- --------
Cash and cash equivalents at end of period $ 263 $ 290
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 801 $ 2,739
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Conversion of Line of Credit balance to preferred stock -- $ 28,685
Accretion/dividends on preferred stock $ 1,491 $ 14,012
Valuation of debt-related warrants issued -- $ 1,848
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AUREAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY
Aureal Inc., together with our subsidiaries Crystal River Engineering, Inc.
and Aureal Limited, is a producer of digital audio semiconductor and board-level
products and advanced digital audio technologies primarily for the personal
computer market. Crystal River Engineering, which was founded in 1987 and which
we acquired in the second quarter of 1996, has been a pioneer in the development
of 3D audio technologies. We established Aureal Limited, located in Hong Kong,
in March 1998 as a sales, technical support and field engineering office. Our
business involves the development and sale of audio processing semiconductor
chips and audio-based add-in cards for use in PCs, as well as the licensing of
technology that is designed to define and develop advanced audio standards in
the marketplace. Our stock symbol on the OTC Bulletin Board is AURL.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We, the management of Aureal Inc., have prepared the following Interim
Condensed Consolidated Financial Statements without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the 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
our audited financial statements at January 3, 1999 and the financial footnotes
included in our 1998 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 us 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 periods.
Actual results could differ from those estimates.
The Interim Condensed Consolidated Financial Statements reflect, in our
opinion, 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 ended October 3, 1999 are not necessarily indicative of the results that
may be expected for the subsequent quarter or the entire fiscal year ending
January 2, 2000.
Cash and Cash Equivalents and Short Term Investments
We consider cash invested in highly liquid financial instruments with an
original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but not longer than fifteen months are classified as
short-term investments.
Inventories
Inventories are stated at the lower-of-cost-or-market value on a first-in
first-out basis. We do not consider any inventory to be raw material, since our
initial point of purchase is for fabricated silicon wafers. Net inventories at
October 3, 1999 and January 3, 1999 consisted of the following, in thousands:
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October 3, 1999 January 3, 1999
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Work-In-Process ........ $1,275 $2,460
Finished Goods ......... 1,964 1,456
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Total Inventories... $3,239 $3,916
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Property and Equipment
Property and equipment are stated at cost and depreciated utilizing the
straight-line method over their estimated useful lives (one and one-half to five
years). Leasehold improvements are amortized utilizing the straight-line method
over their estimated useful lives or the term of the lease whichever is shorter.
Maintenance and repairs are expensed as incurred.
Revenue Recognition
Our major sources of revenue consist of sales of proprietary design, advanced
audio semiconductor chips and boards, and licensing of related audio
technologies. Revenue is recognized upon shipment for product sales. Licensing
revenues are recognized upon delivery of licensed product if a non-cancelable
contract has been signed, the fees are fixed and determinable, collection of the
recognized fees is probable, and there are no remaining significant obligations.
Comprehensive income
Statement of Financial Accounting Standards No. 130 requires that we
disclose all non-owner changes in equity, such as cumulative foreign currency
translation adjustments, certain minimum pension liabilities and gains and
losses on available-for-sale securities. During the first nine months of both
1999 and 1998, we had no significant elements of comprehensive income.
Concentration of Financial Instrument Risks and Credit Risks
Financial instruments which potentially subject us to concentration of
market risk consist primarily of our line of credit. Concentration of market
risk on the line of credit is related to changes in the prime lending rate, as
the majority of our debt bears interest at rates that fluctuate with changes in
the prime lending rate. Our credit risk consists primarily of trade receivables.
Some of these trade receivables are the result of sales to foreign companies. We
have established an allowance for doubtful accounts based on the credit risks of
the business in general.
Valuation of Warrants
In connection with the establishment of a credit facility in June 1998, we
issued warrants to purchase 1.35 million shares of our common stock. The fair
value of these warrants was estimated utilizing the Black-Scholes valuation
method as approximately $1.8 million. This value was being amortized over the
two-year term of the credit facility. These warrants were issued in
consideration of the Tranche B portion of this credit facility. When the Tranche
B portion of this credit facility was terminated in May 1999, the remaining
unamortized value of $0.9 million was expensed.
Loss Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, which requires that the calculation for basic
earnings per share exclude the dilutive effect of common stock equivalents in
the calculation for basic net income (loss) per share. Diluted earnings per
share under Statement of Financial Accounting Standards No. 128, is calculated
using the weighted average number of common shares and common stock equivalent
shares outstanding during the period. Common equivalent shares are computed
using the treasury stock method for outstanding warrants and stock options.
Common equivalent shares are excluded from the diluted earnings per share
computation only if their effect is anti-dilutive. No common stock equivalents
were included in the calculations for any fiscal period presented, as due to our
net loss position, any affect would be anti-dilutive.
Accretion related to the beneficial conversion features of the series A
preferred stock and the series C preferred stock, and the dividend / accretion
rate of 8% on the series A, series B and series C preferred stock totaled $1.5
million during the first three quarters of 1999. These charges were recorded
directly to accumulated deficit and are included as a component of net loss per
share attributable to common stockholders.
Loss per share figures for prior periods have been restated to reflect the
effect of the one-for-fifteen reverse stock split effected June 10, 1999.
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3. CREDIT FACILITY
Effective September 30, 1999, our existing line of credit was amended to
(1) increase the total availability to $25.0 million, (2) add PNC Bank, National
Association as an additional lender with Transamerica Business Credit
Corporation, and (3) reduce the interest rate on borrowings to prime plus 2%. In
addition, the amended line of credit provides for the issuance of standby
letters of credit up to a limit of $1.5 million. As part of this line expansion,
an affiliate of Oaktree Capital Management, LLC provided to the lenders a
guarantee, on behalf of Aureal, for up to $5.0 million of availability, which is
not subject to specific asset-based requirements. The lenders under the credit
facility hold a lien against substantially all of Aureal's assets. We are
subject to certain covenant restrictions under this facility. This agreement is
scheduled to terminate on July 2, 2001.
4. EQUITY FUNDING
During the second quarter of this year, we effected a capital restructuring
plan which included a subscription rights offering, the conversion of our
outstanding series B preferred stock to common stock and a one-for-fifteen
reverse stock split. Under the subscription rights offering, we offered for sale
$20 million of our common stock, at a price of $0.60 per share (pre-reverse
split). Stockholders of our common stock on April 22, 1999 were offered, on a
pro-rata basis, the opportunity to purchase new shares of our common stock. Our
two largest stockholders, Oaktree Capital Management LLC and TCW Special
Credits, agreed to purchase any unsubscribed shares of this rights offering up
to a maximum amount of $20 million. Oaktree and TCW, holders of all of our
series B preferred stock, converted their shares of series B preferred stock
into 20.5 million shares of common stock upon the closing of the rights
offering. In consideration of this conversion, we issued an additional 26.2
million shares of common stock to these holders. We did not register these
additional 26.2 million shares, but we granted standard demand and piggyback
registration rights to Oaktree and TCW. As a result of these actions, most of
our preferred stock converted to common stock. We also effected the
one-for-fifteen reverse stock split on June 10, 1999, at which point, we had
9,960,577 shares outstanding.
5. INCOME TAXES
We were not required to provide for income taxes in the first three
quarters of 1999 or 1998 due to our net operating losses. No tax benefit has
been recorded for the losses due to the uncertainty as to the realizability. At
January 3, 1999, we had available net operating loss carryforwards of
approximately $308 million to reduce future taxable income.
6. INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
We operate in a single segment, which includes three product revenue
groups. During the third quarter of 1999, we generated $3.2 million in revenues
from the sale of semiconductor chips, $7.7 million from the sale of board-level
products and $0.3 million in revenues from licensing agreements. During the same
period in 1998, revenues from semiconductor chips were $5.7 million, with $1.7
million from board-level products and $0.1 million from licensing agreements and
miscellaneous audio revenues.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ANY FORWARD-LOOKING STATEMENTS MADE HEREIN ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT
OF 1995. INVESTORS ARE CAUTIONED THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE PROJECTED IN ANY FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS
INCLUDING, BUT NOT LIMITED TO, OUR DEPENDENCE ON THE PERSONAL COMPUTER INDUSTRY
AND ON PRODUCT LINES BASED ON NEW TECHNOLOGIES; FOUNDRY AND FACTORY CAPACITY,
AVAILABILITY AND RELIABILITY; COMPETITION AND PRICING PRESSURES; OUR ABILITY TO
SECURE ADDITIONAL FINANCING; AND OTHER RISKS DETAILED BELOW AND FROM TIME TO
TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. FOR A FURTHER
DISCUSSION OF THE RISKS RELATING TO OUR BUSINESS, SEE THE RISK FACTORS SECTION
OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS.
OVERVIEW
Aureal Inc., together with our subsidiaries Crystal River Engineering, Inc.
and Aureal Limited, is a producer of digital audio semiconductor and board-level
products and advanced digital audio technologies for the personal computer
market. We contract with independent silicon manufacturers, which in the
semiconductor industry are called foundries, for production of our semiconductor
products, and thus we do not fabricate our own semiconductor products. The
foundry that manufactures the majority of our semiconductor products is one of
the three largest foundries in the world that manufactures products exclusively
for outside customers. Our objective is to be a leading provider of advanced
digital audio solutions for the personal computer market.
To date in 1999, a number of significant events occurred for us:
- - During September 1999, we announced and began shipping two new audio
boards, the Vortex SQ1500 and the Vortex2 SQ2500, for the retail market. We
are distributing these boards initially through a number of national
electronics retailers as well as our e-commerce website.
- - In August 1999, we moved our Fremont operations into a larger building,
which we have leased for a minimum of two and one-half years. We have
options to extend the lease, if the sub-lessor agrees, at the time of the
extension.
- - In June 1999, we completed a capital restructuring which included a $20
million subscription rights offering of common stock, the conversion of all
of our series B and C preferred stock and a one-for-fifteen reverse stock
split.
- - In May 1999, our stockholders voted to change our name from Aureal
Semiconductor Inc. to Aureal Inc. We believe our new name more accurately
reflects our focus as a digital audio imaging hardware and software
company.
- - Also in May 1999, we announced the introduction of the Vortex Advantage
soundcard - a new, low-cost audio sub-system for systems integrators.
- - In April 1999, we announced that Sony Electronics had begun shipping two
new VAIO brand PCs incorporating our Vortex2 audio processors. With the
introduction of these machines, Sony became the first manufacturer to
design Vortex2 audio processors directly onto a PC motherboard.
- - Also in April 1999, we announced the availability of a new digital audio
accelerator for desktop and notebook PCs, the Vortex AU8810. This new chip
is a low-cost, motherboard solution resulting from the integration of audio
and modem capabilities.
- - In March 1999, we released our A3D 2.0 software development kit, which
enables the creation of interactive 3D audio content, to the general
development community. This kit had previously only been available to
selected game developers.
- - Also in March 1999, we announced the formation of a partnership with
Flatland Online, Inc. As part of this partnership, we have integrated our
A3D 2.0 standard into Flatland's tools and web browser extension software
providing easy-to-use positional audio for the 3D web enhanced by our
Aureal Wavetracing technology.
- - In February 1999, we received Computer Gaming World's prestigious Gaming
Hardware of the Year award for our Vortex2 audio processor. This was the
first time that the award was presented to an audio hardware company. Also
in February, we began web-based distribution of our A3D Pro sound design
software
- - In January 1999, we began direct sales to systems integrators. We also
announced an extension of our relationship with Compaq Computer
Corporation, in which Compaq agreed to ship our Vortex sound card products
in their new Presario 5600 desktop computer products.
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We are headquartered in Fremont, California and have offices in Austin,
Texas and Hong Kong. As of November 1, 1999, we employed 128 people. Of this
total, 78 were engaged in engineering functions, 34 were in sales and marketing
activities, and 16 were engaged in administrative support. In addition, we
utilize the services of contractor consultants to supplement our employee
workforce.
Aureal, A3D, Vortex SQ1500, and Vortex2 2500 are trademarks, and Vortex
is a registered trademark of Aureal Inc. Other names referred to in this
document may be trademarks of their respective owners.
RESULTS OF OPERATIONS
Third quarter and nine months of 1999 compared to the third quarter and nine
months of 1998
Net sales
Net sales for the third quarter of 1999 of $11.2 million increased 48%
over the $7.5 million generated in the same quarter of 1998. The sales increase
reflected increased volumes of products shipped to many of our OEM and system
integrator customers, as well as initial shipments of our Vortex SQ1500 and
Vortex2 SQ2500 audio boards to the retail market. Year-to-date revenues for 1999
of $31.8 million more than doubled the $14.6 million 1998 amount. The most
significant area of growth from 1998 to 1999 has been the emergence of Aureal's
board-level products. Board-level products accounted for 69% of our revenues in
the third quarter and 61% year-to-date, as compared to 22% for the same quarter
and 11% year-to-date in 1998. Audio boards, including an Aureal audio
semiconductor chip, generally have a higher average selling price than a direct
chip sale. All of our system integrator and retail revenues consist of
board-level sales, and our OEM revenues consist of both chip and board-level
sales. In addition, sales of audio chips to manufacturers of PC "motherboards"
are an increasing portion of our quarterly sales. Licensing revenue in all
periods discussed was not significant.
Gross margin
Gross margin for both the third quarter and year-to-date in 1999 was
36%. The gross margin on the sale of our products for any period is affected by
both the margins on the individual products and the mix of products sold during
the period. In addition, the market into which a product is sold, OEM, system
integrator or retail, can have an impact on the gross margin recognized on any
specific product. Gross margins for the third quarter and year-to-date in 1998
were 28% and 30%, respectively. Gross margins were adversely affected in 1998
due to costs incurred in the "start-up" phase of the AU8830 chip. We have
experienced some reductions in the cost of the chips and surrounding processing
as a result of the manufacturing maturity and increasing volumes of parts being
manufactured during 1999.
Research and development
Expenditures for research and development continue to be significant as
resources are allocated to create future audio products and technologies.
Spending in this area yields both short-term and long-term product developments
as we continue to bring new and improved products to the market. Research and
development expenses increased from $3.0 million in the third quarter of 1998 to
$5.3 million in the third quarter of 1999. During the third quarter of 1999, we
incurred significant expenditures for chip and audio technology development. In
addition, we invested in the development of new audio loudspeaker and internet
audio technologies. The Aureal Vortex Player, a software package designed to
provide full internet audio capabilities over time, began shipping with our
Aureal Vortex boards late in the third quarter of 1999. Year-to-date research
and development expenditures increased 44% from $8.5 million for the first nine
months of 1998 to $12.3 million for the first nine months of 1999. Certain
development efforts ended late in the third quarter and early fourth quarter of
1999. As a result, some reductions in force, both employees and outside
contractors and consultants, are being made during the fourth quarter to reduce
costs on certain programs going forward. We expect research and development to
continue to be a significant area of investment for us as we develop new audio
technologies and products.
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Sales and marketing
During the third quarter of 1999, we continued our direct sales efforts
to expand our presence in the system integrator channel. In addition, toward the
end of the quarter we incurred expenses related to the introduction of our new
Vortex SQ1500 and Vortex2 SQ2500 audio boards in the retail market. This effort
included development of Aureal's own retail e-commerce website as well as
advertising and promotional expenditures that focused on Aureal's entry into the
retail audio board market. While year-to-date sales and marketing expenses
increased in absolute dollar terms from $4.5 million in 1998 to $7.7 million in
1999, these costs decreased as a percentage of net sales from 31% in 1998 to 24%
in 1999. As we expand our distribution model and revenues increase, we expect
sales and marketing expenses will continue to increase in absolute dollars in
the future.
General and administrative
General and administrative expenses for the third quarter of 1999
increased to $2.2 million from $1.2 million in 1998. The most significant
individual component of this increase was legal fees, as we prepared for the
scheduled November trial against Creative Technology Ltd. relative to alleged
patent infringement. For the first nine months of 1999, general and
administrative expenses increased to $6.0 million compared to $2.9 million for
the same period of 1998, again primarily as a result of increased legal costs.
Interest expense
Interest expense for the third quarter of 1999 decreased to $0.2
million from $0.3 million in the same period in 1998. Relatively low interest
costs in the third quarters of both years resulted from infusions of equity
capital in the second quarters of both years, and our subsequent paydowns of
debt in June of each year. On a year-to-date basis, interest expense declined
from $2.3 million in 1998 to $1.4 million in 1999, primarily due to the reduced
debt balances as a result of the equity capital infusions in both 1998 and 1999.
Amortization of debt-related warrants
In connection with the establishment of a credit facility in June 1998,
we issued warrants to purchase 1.35 million (pre-reverse split) shares of our
common stock. The fair value of these warrants was estimated utilizing the
Black-Scholes valuation method as approximately $1.8 million. This value was
being amortized over the original two-year term of the credit facility. These
warrants were issued in consideration for the Tranche B portion of this credit
facility. When the Tranche B portion of this credit facility was terminated in
May 1999; the remaining unamortized value of $0.9 million was expensed.
In August 1997, in conjunction with the expansion and extension of our
prior line of credit, we issued warrants to purchase 3.15 million (pre-reverse
split) shares of our common stock to our lenders. Using the Black-Scholes
valuation method, the estimated fair value of the warrants was determined to be
$5.0 million. This value was amortized over the estimated life of the line of
credit at the rate of $0.75 million per quarter. When the line of credit was
converted to preferred stock in June 1998, the remaining unamortized deferred
costs related to the warrants were netted against the outstanding loan balance
and eliminated as a reduction of the conversion value of the series B preferred
shares.
Income taxes
We were not required to provide for income taxes in either the first
nine months of 1999 or 1998, respectively, due to our net operating losses. No
tax benefit has been recorded for the net operating loss carryforwards due to
the uncertainty as to their realizability.
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LIQUIDITY AND CAPITAL RESOURCES
As of October 3, 1999, we had a working capital deficit of $2.0
million, classifying all outstanding balances under our line of credit as
current liabilities, and stockholders' equity of $1.2 million. We used $17.0
million of cash to support operations during the first nine months of 1999 as
compared to $21.0 million for the same period in 1998. While operating losses
were greater in 1999, investments in inventories, accounts receivable and other
current assets were reduced from the requirements for 1998.
Financing for our 1999 year-to-date cash outlays was provided by a
combination of our line of credit and cash received from our June 1999 rights
offering. We expect that in the next twelve months we will need additional cash
to fund and expand our business and to finance additional inventory and accounts
receivable. It is extremely difficult to estimate the cash flows, and the timing
of these cash flows, due to our lack of significant sales and customer payment
history. We are working to increase revenues and control costs to provide for
positive cash flow operations in the future, however, we can make no assurances
that we will achieve such positive cash flow from operations within the near
future. We anticipate that our available line of credit will continue to provide
sufficient funding for the foreseeable future.
On June 10, 1999, we completed a capital restructuring plan which
included a subscription rights offering, the conversion of our outstanding
series B preferred stock to common stock and a one-for-fifteen reverse stock
split. Under the subscription rights offering, we offered for sale $20 million
of our common stock, at a price of $0.60 per share (pre-reverse split).
Stockholders of our common stock on April 22, 1999 were offered, on a pro-rata
basis, the opportunity to purchase new shares of our common stock. Our two
largest stockholders, Oaktree Capital Management LLC and TCW Special Credits,
agreed to purchase any unsubscribed shares of this rights offering up to a
maximum amount of $20 million. Oaktree and TCW, holders of all of our series B
preferred stock, converted their shares of series B preferred stock into 20.5
million shares of common stock upon the closing of the rights offering. In
consideration of this conversion, we issued an additional 26.2 million shares of
common stock to these holders. We did not register these additional 26.2 million
shares, but we granted standard demand and piggyback registration rights to
Oaktree and TCW. As a result of these actions, most of our preferred stock was
converted to common stock.
In connection with our second quarter 1999 capital restructuring, the
outstanding balance under our line of credit was re-paid and new terms were
agreed upon with Transamerica Business Credit Corporation. Effective September
30, 1999 our line of credit was amended to (1) increase the total availability
to $25.0 million, (2) add PNC Bank, National Association as an additional lender
with Transamerica Business Credit Corporation, and (3) reduce the interest rate
on borrowings to prime plus 2%. In addition, the amended line of credit provides
for the issuance of standby letters of credit up to a limit of $1.5 million. As
part of this line expansion, an affiliate of Oaktree Capital Management, LLC
provided to the lenders a guarantee, on behalf of Aureal, for up to $5.0 million
of availability, which is not subject to specific asset-based requirements. We
are subject to certain covenant restrictions under this facility. This agreement
is scheduled to terminate on July 2, 2001.
At October 3, 1999, we had a $4.1 million outstanding balance under our
line of credit. Our unused borrowing availability under the line was $4.9
million.
DISCLOSURE REGARDING THE YEAR 2000
Year 2000 Readiness Disclosure: Some computer, software, and other
equipment include computer code in which calendar year data is abbreviated to
only two digits. As a result of this design protocol, some of these systems
could fail to operate or fail to produce correct results if the year "00" is
interpreted to mean 1900 instead of 2000. These problems are widely expected to
increase in frequency and severity as the year 2000 approaches and are commonly
referred to as the "year 2000 problem."
Assessment:
The year 2000 problem affects some of the computers, software and other
equipment that we use, operate or maintain for our operations. We have developed
a year 2000 readiness plan to assess our exposure to the year 2000 problem,
implement solutions and develop necessary contingency plans. This plan has been
reported to our board of directors and progress is reported to them on a regular
basis. To date we have obtained verification and validation from the majority of
our independent third party software and hardware suppliers of the year 2000
compliance of their products.
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Internal infrastructure:
Of the systems we are currently using, the components of our mission
critical software are year 2000 compliant as are the majority of the software
packages we employ as engineering tools.
In addition to computers and software packages, some office equipment
such as fax machines, telephone switches, security systems and other common
devices may be affected by the year 2000 problem. Of these pieces of equipment,
we identified our voice mail system as having year 2000 issues, and upgraded it
in October 1999.
Products and software programs:
We have tested our products for year 2000 problems. This testing was
completed during the first quarter of 1999. Our engineering staff performed
compliance testing on all A3D drivers, utilities and supporting software using
testing methods and measurements that specifically addressed potential risks to
seamless integration into the year 2000 environment. Our A3D product passed both
functional and usage tests without errors due to year 2000 non-compliance.
We estimate the cost of completing any required modifications, upgrades
or replacements of our internal systems to not be significant. All systems that
we have tested to date are year 2000 compliant. We believe that the systems that
we have not tested can be replaced or modified in the normal course of business.
Suppliers:
We are contacting our suppliers and checking the web sites of
third-party suppliers of components used in the manufacture of our products to
determine if these suppliers are certifying that the components they provide us
are year 2000 compliant. To date, we believe all critical components that we
obtain from third party suppliers are year 2000 compliant. We expect that we
will be able to resolve any significant year 2000 problems with any third-party
suppliers of components; however, there can be no assurance that these suppliers
will resolve any or all year 2000 problems before the occurrence of a material
disruption to the operation of our business. Any failure of these third parties
to timely resolve year 2000 problems with their systems could have a material
adverse effect on our business, operating results and financial condition.
Most likely consequences of year 2000 problems:
We expect to identify and resolve all year 2000 problems before they
materially adversely affect our business operations; however, we believe that it
is not possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous. In
addition, no one can accurately predict how many year 2000 problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, we believe that we could
experience a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers, and our customers that will divert
management's time and attention and financial and human resources from ordinary
business activities. We also believe that it is possible that there may be
business disputes alleging that we failed to comply with the delivery terms of
contracts.
Contingency plans:
We will develop contingency plans to be implemented if our efforts to
correct identifiable year 2000 problems are not effective. Depending on the
systems identified as non-compliant, these plans could include: accelerated
replacement of affected equipment or software, short to medium-term use of
backup equipment and software; increased work hours for our personnel; and use
of contract personnel to correct on an accelerated schedule any year 2000
problems that arise or to provide manual workarounds for information systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
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Disclaimer:
The discussion of our efforts and expectations relating to year 2000
compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
RISK FACTORS
In addition to the other information in this report or incorporated in
this report by reference, you should consider carefully the following factors in
evaluating Aureal and our business:
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE
We emerged from bankruptcy protection in December 1994. Since that
time, we have recorded an accumulated deficit of $191 million as of October 3,
1999. This deficit is comprised of $174 million of incurred losses and $17
million of accretion and dividends on our preferred stock. We generated the
majority of our revenues in 1997 and 1996 through technology licensing
transactions. The majority of our revenues in 1998 and the first three quarters
of 1999 were derived from the sale of advanced audio products. We expect that
the majority of our future revenues will be derived from the sale of advanced
audio products. However, we will not be profitable unless we sell significant
volumes of our advanced audio products in the future.
A DIRECTOR OF AUREAL HAS VOTING CONTROL OVER A SUBSTANTIAL AMOUNT OF OUR STOCK
AND MAY, THEREFORE, INFLUENCE OUR AFFAIRS
As of October 3, 1999, Richard Masson, a director of Aureal, is deemed
to have voting control over approximately 77% of our common stock as a result of
his affiliations with Oaktree and TCW. Accordingly, Mr. Masson can be considered
to control all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combinations.
INVESTORS MAY FIND IT DIFFICULT TO TRADE OUR COMMON STOCK ON THE
OVER-THE-COUNTER ELECTRONIC BULLETIN BOARD
Our common stock trades only on the Over-the-Counter Electronic
Bulletin Board. Because our common stock trades on the Bulletin Board, an
investor may find it very difficult to sell or to obtain accurate quotations as
to the market value of our common stock. Furthermore, because our common stock
is not listed on the NASDAQ National Market, trading in our common stock is also
subject to certain rules promulgated by the SEC under the Securities Exchange
Act of 1934. These rules require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock.
Generally, a penny stock is any non-NASDAQ National Market listed equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. The additional burdens imposed upon broker-dealers by such
requirements may discourage broker-dealers from affecting transactions in our
common stock and may limit the ability of purchasers of our common stock to
resell our common stock in the secondary market.
WE EXPECT THE AVERAGE SELLING PRICE OF OUR ADVANCED AUDIO PRODUCTS TO DECREASE,
WHICH MAY REDUCE GROSS MARGINS AND REVENUES
Product prices in the audio technology industry generally decrease over
the life of a particular product. The willingness of prospective customers to
design our advanced audio products into their products depends to a significant
extent upon our ability to price our products at levels that are cost-effective
for these customers. As the markets for our products mature and competition
increases, we anticipate that prices for our advanced audio products will
decline over time. If we are unable to reduce our costs sufficiently to offset
declines in our product prices, or if we are unable to introduce new, higher
performance products with higher product prices, our gross margins and revenues
could decline.
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WE DEPEND ON A CREDIT FACILITY TO FUND OUR BUSINESS OPERATIONS
Because we have not been profitable to date, we have had to fund our
losses through a combination of equity and debt financings. Our current line of
credit provides for an aggregate maximum borrowing of $25.0 million. The
interest rate on the credit facility is generally the prime rate plus 2.0%.
Accordingly, while the credit facility provides us with needed working capital,
the high cost of servicing any borrowing under it could negatively affect our
liquidity. In addition, the credit facility may not be sufficient to meet our
working capital requirements. In the event we must secure capital in addition to
the line of credit, we cannot guarantee that capital will be available on
acceptable terms or at all. Our inability to secure future financing, if
necessary, would materially adversely affect our business, financial condition
and results of operations.
TO COMPETE EFFECTIVELY IN THE AUDIO TECHNOLOGY MARKET, WE NEED TO DEVELOP NEW
AUDIO TECHNOLOGIES THAT ARE WIDELY ACCEPTED BY OUR CUSTOMERS
Our success depends on our ability to develop and market new audio
technologies aimed at advancing the level of audio quality in personal
computers. To be successful, we must timely develop new products that we can
sell at competitive prices to our customers who will design them into their
products. In order for our customers to design our advanced audio products into
their personal computers, we must:
- anticipate market trends;
- anticipate the performance and functionality requirements of our
current and potential customers;
- develop and produce products that meet the timing and pricing
requirements of our current and potential customers; and
- produce products that can be available in a timely manner
consistent with our current and potential customers' development
and production schedules.
We have expanded our business model to provide for an increased number
of audio-related products, including audio cards and audio communications
combination cards. We anticipate continuing to increase the number of products
within our line to include additional audio cards as well as speaker products in
the future. We may require additional working capital funds for this expansion
to provide for incremental inventory and broader marketing programs. A number of
factors may limit the success of our expansion, and each could negatively impact
our business and results of operations. These factors include:
- the failure of the market for advanced audio products to grow;
- reduced demand for our products as a result of increased
competition in this market;
- unforeseen technological change; and
- our potential failure to introduce new versions of products that
our customers and the market accept.
A failure to develop new audio technologies that will be accepted by
our customers could materially adversely affect our ability to generate
revenues.
NEW GENERATIONS OF MICROPROCESSORS AND OTHER NEW TECHNOLOGIES MAY DECREASE
DEMAND FOR OUR PRODUCTS
New generations of microprocessors that are capable of performing
advanced audio functions may greatly reduce demand for our advanced audio
products. Each successive generation of microprocessors has provided increased
performance, which could, in the future, result in a microprocessor capable of
performing advanced audio functions to an extent that diminishes or eliminates
the need or preference for our products. In addition, each new generation of
technology, including digital audio technology, generally requires increased
processing power. The increased capabilities of microprocessors in the future
may lower demand for our products which will materially adversely affect our
business, financial condition and results of operations.
INTENSE COMPETITION IN THE MARKET FOR ADVANCE AUDIO PRODUCTS AND TECHNOLOGIES
COULD PREVENT US FROM INCREASING REVENUE AND ACHIEVING PROFITABILITY
The markets for advanced audio products and technologies are intensely
competitive and are characterized by evolving industry standards that result in:
- short product life cycles,
- significant pressure to improve price and performance; and
- frequent new product introductions.
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We expect competition to increase from existing competitors and from
other companies that may enter the markets for advanced audio products with
devices that may be less costly or provide higher performance or additional
features than the products we currently offer. However, we are unable to predict
the timing and nature of any such competitive product offerings.
In addition, we anticipate that we will compete for the development of
new technologies and for the sale of semiconductor products with a number of
companies who have more extensive resources, including financial, manufacturing,
technical, marketing and distribution. Furthermore, some of these competitors
have greater intellectual property rights, broader product lines and
longer-standing relationships with their customers than we do. In addition to
our established competitors, we may also face competition from a number of
emerging companies. To remain competitive, we believe we must, among other
things, invest significant resources in developing new products and enhancing
our current products and maintaining customer satisfaction. If we fail to do so,
our products will not compete favorably with those of our competitors and our
revenue could be materially adversely affected.
WE MAY NOT HAVE AN ADEQUATE SUPPLY OF OUR PRODUCTS BECAUSE WE DEPEND ON
FOUNDRIES AND FACTORIES TO PRODUCE OUR PRODUCTS AND OUR PRODUCTS ARE DIFFICULT
TO MANUFACTURE
We do not manufacture our own products, and we depend on outside
manufacturing resources for production of all of our products. Currently, we
utilize one foreign semiconductor foundry and one contract manufacturer for
production of our board level products. These facilities have indicated to us
that they have the manufacturing availability to provide for our planned levels
of production of each of our products for the next 12 months; however, our
production relationship with them is based only upon purchase orders.
Consequently, they may not continue to adequately provide manufacturing capacity
to us for our current level of production or any potential increases in our
production levels. In the event that they cease to manufacture our products, we
would have to contract with alternative facilities. However, we may not be able
to timely contract with alternative facilities or to contract with them at all.
Such a situation could materially adversely affect our ability to sell products
to our customers, which in turn would materially adversely affect our financial
condition and results of operations.
During September 1999, Taiwan sustained significant damage as a result
of a major earthquake and related aftershocks. The foundry we depend upon for
our semiconductor products is located in Taiwan. It sustained some damage and
was non-operational for a number of days due to power outages. While there was
some minor delay in the delivery of some chips in process at the time of the
earthquake, no significant impact to our chip delivery schedule is currently
expected as a result of the earthquake. Other factories that supply a number of
electronic components to the PC industry were impacted to various degrees by the
earthquake and resultant power outages. While we are not aware of any specific
product shortages that may adversely impact our products, as a result of the
earthquake, these shortages may occur. If the events in Taiwan impact the
availability of components for our products, the manufacture of our products
could be delayed, which could adversely impact our business.
The manufacture of semiconductor products is a highly complex and
precise process. Minute levels of contaminants in the manufacturing environment,
defects in the masks used to print circuits on wafers, difficulties in the
fabrication process and other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer not to
function. Many of these problems are difficult to diagnose and potentially
time-consuming or expensive to remedy. The foundries that we employ may, in the
future, experience irregularities or adverse yield fluctuations in the
manufacturing processes of our products. In such event, our business, financial
condition and results of operations may be materially adversely affected.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER OF AUREAL
Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of delaying or preventing a change of control or
changes in our management. These provisions include, among others:
- the division of the board of directors into three separate
classes;
- the right of the board to elect the director to fill a space
created by the expansion of the board;
- the ability of the board to alter our bylaws; and
- the requirement that at least 10% of the outstanding shares are
needed to call a special meeting of stockholders.
Furthermore, because we are incorporated in Delaware, we are subject to
the provisions of section 203 of the Delaware General Corporation Law. These
provisions prohibit certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a
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corporation unless (1) 66 2/3% of the shares of voting stock not owned by this
large stockholder approve the merger or combination or (2) the board of
directors approves the merger or combination or the transaction which resulted
in the large stockholder owning 15% or more of our outstanding voting stock.
WE MAY NOT BE ABLE TO RETAIN OUR KEY ENGINEERING, MARKETING, SALES AND
MANAGEMENT PERSONNEL THAT WE NEED TO SUCCESSFULLY MANAGE OUR BUSINESS
Our success depends to a significant extent upon the continued services
of key engineering, marketing, sales and management personnel. Our employees may
voluntarily terminate their employment with us at any time. We recognize the
value of the contributions of each of our employees, and we have developed
compensation programs, including stock programs open to all employees, designed
to retain our employees. However, competition for these employees is intense,
particularly in Silicon Valley, and the loss of the services of any one of these
employees could materially adversely affect our business, financial condition
and results of operations.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY AND THIS TECHNOLOGY MAY INFRINGE ON
THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
Our ability to compete successfully will depend, in part, on our
ability to protect our proprietary technology. We rely on a combination of
patents, trade secrets, copyright and trademark laws, nondisclosure agreements
and other contractual provisions and technical measures to protect our
proprietary rights. Nevertheless, such measures may not be adequate or safeguard
the proprietary technology underlying our advanced audio products. In addition,
employees, consultants and others who participate in the development of our
products may breach their agreements with us regarding our intellectual
property, and we may not have adequate remedies for any such breach. We also
realize that our proprietary information and trade secrets may become known
through other means not currently foreseen by us. Moreover, notwithstanding our
efforts to protect our intellectual property, our competitors may be able to
develop products that are equal or superior to our products without infringing
on any of our intellectual property rights. In addition, we may not be able to
effectively protect our intellectual property rights in certain countries. Our
failure to protect our proprietary technology may materially adversely affect
our financial condition and results of operations.
Although we do not believe that our products infringe the proprietary
rights of any third parties, third parties may still assert infringement or
invalidity claims, or claims for indemnification resulting from infringement
claims, against us. The assertion of these claims could materially adversely
affect our business, financial condition and results of operations. In addition,
irrespective of the validity or the successful assertion of any claims, we could
incur significant costs in defending against these claims. In defending claims
of alleged infringement, we could incur significant expenses and waste resources
that could have a material adverse affect on our business, financial condition
and results of operations.
WE ARE INVOLVED IN LAWSUITS WITH CREATIVE AND E-MU WHICH COULD NEGATIVELY IMPACT
OUR BUSINESS
In February 1998, Creative Technology Ltd. and its subsidiary, E-Mu
Systems, Inc., served us with a lawsuit alleging patent infringement that
Creative and E-Mu filed in the U.S. District Court, Northern District of
California. The lawsuit asserts that our original Vortex product infringes on a
patent that describes a specific implementation for an electronic musical
instrument designed by E-Mu. Creative and E-Mu seek, among other things, a
preliminary and permanent injunction against alleged continuing acts of
infringement by us and an accounting of damages plus interest. In response, we
filed a motion for summary judgment. In August 1998, E-Mu and Creative filed a
motion for a preliminary injunction with respect to our original Vortex and
updated Vortex2 products. In October 1998, the court denied Creative's motion
for preliminary injunction. At that time, our motion for summary judgment was
also denied. We believe that the actions that Creative and E-Mu filed are
without merit, and we are vigorously defending against these actions. The case
is currently scheduled for trial in November 1999.
In December 1998, we filed a lawsuit alleging patent infringement
against Creative and E-Mu. We believe that Creative and E-Mu have infringed on
two of our patents, Patent No. 5,596,644 entitled "Method and Apparatus for
Efficient Presentation of Hi-Quality 3-Dimensional Audio" and Patent No.
5,802,180 entitled "Method and Apparatus for Efficient Presentation of
3-Dimensional Audio Including Ambient Effects."
Additional litigation may be necessary to resolve the claims asserted
by Creative and E-Mu and to resolve our claims against Creative and E-Mu and any
other claims asserted in the future to defend against claims of
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infringement or invalidity or to enforce and protect our intellectual property
rights. We cannot assure you that we will prevail in any litigation with either
of them. Also, any litigation, whether or not determined in our favor or settled
by us, would be costly and would divert the efforts and attention of our
management and technical personnel from normal business operations; this could
materially adversely affect our business, financial condition and results of
operations. Adverse determinations in litigation could result in the loss of our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties or prevent us from producing certain core products.
Any of these results could have a material adverse affect on our business,
financial condition and results of operations.
THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS
We use a number of computer software programs and operating systems in
our internal operations, including applications used in financial business
systems and various administration functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year 2000, some level of modification or even possible
replacement of such source code or applications could be necessary. Given the
current information, we currently do not anticipate that such year 2000 costs
will have a material impact upon us. We have requested and obtained information
regarding year 2000 compliance from suppliers and providers of all of our
mission critical software systems. Based on the information we currently have,
all mission critical systems appear to be year 2000 compliant. We are currently
contacting major vendors and customers to obtain year 2000 compliance
certificates. The failure of any of our key suppliers or customers to be year
2000 compliant could have a material adverse effect on our business, financial
condition and results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISKS
There has not been a material change in our exposure to interest rate and
foreign currency risks since the date of the 1998 Form 10-K.
Interest Rate Risk. Our expose to market risk for changes in interest rates
relate primarily to our borrowings under our line of credit and any cash
equivalents. Our line of credit calls for interest at the rate of prime plus 2%.
As of October 3, 1999, we did not hold any significant cash equivalents. During
much of the third quarter, and currently, we are a "net borrower" whereas we
utilized any daily positive cash flows to pay down our line of credit, and thus
did not hold any significant cash equivalent balances for any period of time.
Our line of credit balance as of October 3, 1999 was $4.1 million.
Foreign Currency Exchange Risk. We transact business with customers and
suppliers located in foreign countries. All of these transactions are
denominated in US dollars and therefore, we have no significant cash flows that
are transacted in foreign currencies.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1998, Creative Technology Ltd. and its subsidiary, E-Mu
Systems, Inc., served us with a lawsuit alleging patent infringement that
Creative and E-Mu filed in the U.S. District Court, Northern District of
California. The lawsuit asserts that our original Vortex product infringes on a
patent that describes a specific implementation for an electronic musical
instrument designed by E-Mu. Creative and E-Mu seek, among other things, a
preliminary and permanent injunction against alleged continuing acts of
infringement by us and an accounting of damages plus interest. In response, we
filed a motion for summary judgment. In August 1998, E-Mu and Creative filed a
motion for a preliminary injunction with respect to our original Vortex and
updated Vortex2 products. In October 1998, the court denied Creative's motion
for preliminary injunction. At that time, our motion for summary judgment was
also denied. Creative appealed the denial of the preliminary injunction, and on
May 6, 1999, the Federal Court of Appeals affirmed the District Court's ruling
denying the preliminary injunction. The case is currently scheduled for trial in
November 1999. We believe that the actions that Creative and E-Mu filed are
without merit, and we are vigorously defending against these actions.
In October 1998, Creative Labs, the U.S. based subsidiary of Creative,
filed a second lawsuit against us. This new lawsuit claims we have engaged in
"false advertising" and "unfair business practices." These complaints center
primarily on a comparison chart prepared by Aureal and published by third
parties on the world-wide-web. We believe that this action is without merit and
have commenced a vigorous defense of this action. We have filed a response
denying these allegations and filed counterclaims against Creative Labs.
In December 1998, we filed a lawsuit alleging patent infringement against
Creative and E-Mu. We believe that Creative and E-Mu have infringed on two of
our patents, Patent No. 5,596,644 entitled "Method and Apparatus for Efficient
Presentation of Hi-Quality 3-Dimensional Audio" and Patent No. 5,802,180
entitled "Method and Apparatus for Efficient Presentation of 3-Dimensional Audio
Including Ambient Effects."
ITEM 5. OTHER INFORMATION
Mr. L. William Krause resigned from the Board of Directors effective
September 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit index at page 21.
(b) Reports on Form 8-K: We filed no reports on Form 8-K during the third
quarter ended October 3, 1999.
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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 INC.
Date: November 16, 1999 By: /s/ Kenneth A. Kokinakis
-------------------------------------
Kenneth A. Kokinakis
President and Chief Executive Officer
Date: November 16, 1999 By:/s/David J. Domeier
----------------------------------
David J. Domeier
Senior Vice President of Finance
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
- ------- -----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization among Aureal, Aureal
Acquisition Corporation, a wholly-owned subsidiary of Aureal
and Crystal River Engineering, Inc., dated as of May 7, 1996
(1)
2.2 Second Amended Joint Plan of Reorganization dated November 10,
1994 (4)
3.1 Second Amended and Restated Certificate of Incorporation of
Aureal dated May 8, 1996 (2)
3.2 Restated Bylaws of Aureal Semiconductor Inc. (5)
4.3 Common Stock Purchase Agreement by and among Aureal and
certain entities and individuals dated August 6, 1997 (7)
4.4 Preferred Stock Regulation D Subscription Agreement (Series A
Preferred Stock) (8)
4.5 Certificate of Designation of Series A Preferred Stock of
Aureal Semiconductor Inc. (8)
4.6 Preferred Stock Registration Rights Agreement (Common stock
underlying series A preferred stock)(8)
4.7 Aureal Semiconductor Inc. regulation D Subscription Agreement
for Series C Preferred Stock (9)
4.8 Certificate of Designation of Series C Preferred Stock of
Aureal Semiconductor Inc. (9)
4.9 Registration Rights Agreement ( Common Stock underlying Series
C Preferred Stock) (9)
4.10 Loan and Security Agreement (TBCC Credit Facility) (9)
4.11 Amendments #1, #2, #7 and #8 to Loan and Security Agreement
(TBCC Credit Facility)
4.12 Form of Warrant (TBCC Warrants) (9)
4.13 8% Series B Convertible Preferred Stock Purchase Agreement (9)
4.14 Certificate of Designation of 8% Series B Convertible
Preferred Stock for Aureal Semiconductor, Inc. (9)
4.15 Amendment Number 4 to Registration Rights Agreement (9)
4.20 Form of Registration Rights Agreement among Oaktree, TCW and
Aureal Semiconductor, Inc. (10)
10.2 1995 Stock Option Plan (3)
10.3 Form of incentive option agreement and non-statutory stock
option agreement used under 1995 Stock Option Plan (3)
10.4 1994 Stock Option Plan (4)
10.5 Form of incentive option agreement and non-statutory stock
option agreement used under 1994 Stock Option Plan (4)
10.7 Form of indemnity agreement for directors and officers (5)
10.8 1996 Outside Directors Stock Option Plan (6)
10.10 Industrial space sublease with Lam Research Corporation, dated
June 7, 1999. (11)
27.1 Financial Data Schedule (Edgar Only)
</TABLE>
- --------------------
(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 the
year ended December 31, 1995
(4) Incorporated by reference to the exhibits filed with Form 10-K for the
year ended December 31, 1994
(5) Incorporated by reference to the exhibits filed with Form 10-Q for the
quarter ended September 29, 1996
(6) Incorporated by reference to the exhibits filed with Form 10-K for the
year ended December 29, 1996.
(7) Incorporated by reference to the exhibits filed with Form S-3 (As
Post-Effective Amendment No. 1, Registration number 333-3870) filed
September 12, 1997.
(8) Incorporated by reference to the exhibits filed with Form 8-K dated March
16, 1998
(9) Incorporated by reference to the exhibits filed with Form 8-K dated June
15, 1998.
(10) Incorporated by reference to exhibits filed with Form S-3 (Registration
number 333-75631) filed April 2, 1999.
(11) Incorporated by reference to exhibits filed with Form 10-Q for the quarter
ended July 4, 1999.
21
<PAGE> 1
EXHIBIT 4.11
AMENDMENT NUMBER ONE AND WAIVER TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER ONE AND WAIVER TO LOAN AND SECURITY AGREEMENT (this
"AMENDMENT") dated as of March ___, 1999, is entered into among AUREAL
SEMICONDUCTOR INC., a Delaware corporation ("Borrower"), on the one hand, and,
on the other hand, Agent (as hereinafter defined) and the financial institutions
(collectively, the "Lenders" and individually, a "Lender") that are signatories
to that certain Loan and Security Agreement, dated as of June 5, 1998 (as
amended, restated, supplemented, or otherwise modified from time to time, the
"Loan Agreement"), entered into between Borrower, Lenders, and TRANSAMERICA
BUSINESS CREDIT CORPORATION, a Delaware corporation, as agent (herein, in such
capacity, referred to as "Agent") for Lenders thereunder, in light of the
following:
W I T N E S S E T H
WHEREAS, the Parties desire to amend the Loan Agreement, in accordance with
the amendment provisions of Section 16.1 thereof, as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree to amend the
Loan Agreement, effective immediately, as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement, as amended
hereby.
2. AMENDMENTS TO LOAN AGREEMENT. Upon the effectiveness of this Amendment, the
parties hereby agree as follows:
(a) The Loan Agreement hereby is amended to add the following new Section
2.2(d):
(d) Anything to the contrary in the Agreement notwithstanding,
Agent shall impose, and Borrower hereby consents to the establishment
of, a reserve against the Maximum Tranche B Amount equal to 35% of the
Maximum Tranche B Amount (i.e., $2,625,000.00). Agent may not change
the amount of the reserve established under this subsection without
the prior written consent of all of the Lenders.
(b) Section 2.11(b) of the Loan Agreement hereby is amended and restated
in its entirety to read as follows:
(b) Supplemental Origination Fee. A one-time supplemental
origination fee in the amount of $200,000, such fee to be fully earned
on the Effective Date and due and payable on the first anniversary of
the Effective Date or such earlier date (if any) on which this
Agreement is terminated; provided, however, if all of the Obligations
owing to Goldman Sachs Credit Partners L.P., a Bermuda limited
-1-
<PAGE> 2
partnership ("Goldman"), have been paid in full, in cash, on or prior
to March 31, 1999, and all of the Commitments of Goldman are
terminated on or prior to March 31, 1999, then, in connection
therewith, Goldman hereby agrees to waive Goldman's Pro-Rata Share of
the supplemental origination fee.
(c) Section 3.6 of the Loan Agreement is hereby amended and restated in
its entirety to read as follows:
3.6 EARLY TERMINATION BY BORROWER. Borrower has the option, at
any time upon 5 days prior written notice to Agent to terminate this
Agreement by paying to Agent, for the ratable benefit of the Lender
Group, in cash, the Obligations, in full, together with a premium (the
"Early Termination Premium") equal to $250,000; provided, however, if
the Obligations owing to Goldman have been paid in full, in cash, on
or prior to March 31, 1999, and all of the Commitments of Goldman are
terminated on or prior to March 31, 1999, then, in connection
therewith, Goldman hereby agrees to waive Goldman's Pro-Rata Share of
the Early Termination Premium and surrender Goldman's Warrant to
Borrower.
3. WAIVERS OF EXISTING EVENTS OF DEFAULT. Upon the effectiveness of this
Amendment, Lender hereby waives each of the Events of Default existing as of the
date of this Amendment and identified on Schedule A attached to this Amendment
(each, a "Specified Event of Default"). Such waiver is specific in time and in
intent and does not constitute, nor should it be construed as constituting,
except to the extent expressly set forth herein, a waiver or modification of any
term of, or right, power, or privilege under, the Loan Agreement, the other Loan
Documents, or any agreement, contract, indenture, document, or instrument
mentioned therein. Such waiver does not preclude any exercise of any right,
power, or privilege under any Loan Document, based upon any Event of Default
other than the Specified Events of Default.
4. CONDITION PRECEDENTS TO AMENDMENT. The satisfaction of each of the
following unless waived or deferred by Agent in its sole discretion, shall
constitute conditions precedent to the effectiveness of this Amendment and each
and every provision hereof:
(a) The representations and warranties in the Loan Agreement as amended by
this Amendment, and the other Loan Documents shall be true and correct in all
respects on and as of the date hereof, as though made on such date (except to
the extent that such representations and warranties relate solely to an earlier
date).
(b) No injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
governmental authority against the Agent or Lenders.
(c) Agent shall have received fully executed counterpart signatures to
this Amendment.
-2-
<PAGE> 3
(d) Agent shall have received fully executed counterpart signatures to
that certain Amendment Number Two to Put Agreement, dated as of the date hereof,
by and among each of the funds managed by, or other affiliates of, Oaktree
Capital Management LLC identified on Schedule 1A thereto or TCW Special Credits
identified on Schedule 1 thereto and Goldman Sachs Credit Partners, L.P., a
Bermuda limited partnership.
(e) Agent shall have received fully executed counterpart signatures to
that certain Amendment Number Two to Put Agreement, dated as of the date hereof,
by and among each of the funds managed by, or other affiliates of, Oaktree
Capital Management LLC identified on Schedule 1A thereto or TCW Special Credits
identified on Schedule 1 thereto and Transamerica Business Credit Corporation, a
Delaware corporation.
5. CONSTRUCTION. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to its
conflicts-of-laws principles (other than any provisions thereof validating the
choice of the laws of the State of New York as the governing law).
6. ENTIRE AMENDMENT. This Amendment, and terms and provisions hereof,
constitute the entire agreement among the parties pertaining to the subject
matter hereof and supersedes any and all prior or contemporaneous amendments
relating to the subject matter hereof. Except as expressly amended hereby, the
Loan Agreement and other Loan Documents shall remain unchanged and in full force
and effect. To the extent any terms or provisions of this Amendment conflict
with those of the Loan Agreement or other Loan Document, the terms and
provisions of this Amendment shall control. This Amendment shall be deemed part
of and is hereby incorporated into the Loan Agreement.
7. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Amendment by
signing any such counterpart. Delivery of an executed counterpart of this
Amendment by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile also shall deliver an
original executed counterpart of this Amendment, but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.
8. AMENDMENTS. This Amendment cannot be altered, amended, changed or modified
in any respect or particular unless each such alteration, amendment, change or
modification shall have been agreed to by each of the parties and reduced to
writing in its entirety and signed and delivered by each party.
9. MISCELLANEOUS. (a) Upon the effectiveness of this Amendment, each reference
in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or
words of like import referring to the Loan Agreement shall mean and refer to the
Loan Agreement as amended by this Amendment.
-3-
<PAGE> 4
(b) Upon the effectiveness of this Amendment, each reference in the Loan
Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words
of like import referring to the Loan Agreement shall mean and refer to the Loan
Agreement as amended by this Amendment.
[Signature page follows.]
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered as of the date first written above.
TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation,
as Agent and a Lender
By:
-------------------------------------
Title:
----------------------------------
GOLDMAN SACHS CREDIT PARTNERS L.P.,
a Bermuda limited partnership
By:
-------------------------------------
Title:
----------------------------------
AUREAL SEMICONDUCTOR INC.
a Delaware corporation
By:
-------------------------------------
Title:
----------------------------------
S-1
<PAGE> 6
SCHEDULE A
SPECIFIED EVENTS OF DEFAULT
(1) Borrower has failed to maintain the minimum Tangible Net Worth
required by Section 7.20(a) of the Loan Agreement for the quarter
ending January 3, 1999.
(2) Borrower has failed to maintain the minimum Profitability required by
Section 7.20(b) of the Loan Agreement for the quarter ending January
3, 1999.
(3) Borrower has failed to maintain the minimum Total Revenues required by
Section 7.20(c) of the Loan Agreement for the quarter ending January
3, 1999.
Each of the items identified in paragraphs (1), (2), and (3) above
constitute an Event of Default under Section 8.2 of the Loan Agreement.
<PAGE> 7
AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this "Amendment")
dated as of March ___, 1999, is entered into among AUREAL SEMICONDUCTOR INC., a
Delaware corporation ("Borrower"), on the one hand, and, on the other hand,
Agent (as hereinafter defined) and the financial institutions (collectively, the
"Lenders" and individually, a "Lender") that are signatories to that certain
Loan and Security Agreement, dated as of June 5, 1998 (as amended, restated,
supplemented, or otherwise modified from time to time, the "Loan Agreement"),
entered into between Borrower, Lenders, and TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation, as agent (herein, in such capacity,
referred to as "Agent") for Lenders thereunder, in light of the following:
W I T N E S S E T H
WHEREAS, the Parties desire to amend the Loan Agreement, in accordance with
the amendment provisions of Section 16.1 thereof, as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree to amend the
Loan Agreement, effective immediately, as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement, as amended
hereby.
2. AMENDMENTS TO LOAN AGREEMENT. Upon the effectiveness of this Amendment, the
parties hereby agree as follows:
(a) Section 2.2(d) of the Loan Agreement hereby is deleted in its entirety
from the Loan Agreement.
(b) Section 2.11(b) of the Loan Agreement hereby is amended and restated
in its entirety to read as follows:
(b) Supplemental Origination Fee. A one-time supplemental
origination fee in the amount of $200,000, such fee to be fully earned
on the Effective Date and due and payable on the first anniversary of
the Effective Date or such earlier date (if any) on which this
Agreement is terminated; provided, however, if all of the Obligations
owing to Goldman Sachs Credit Partners L.P., a Bermuda limited
partnership ("Goldman"), have been paid in full, in cash, on or prior
to May 26, 1999, and all of the Commitments of Goldman are terminated
on or prior to May 26, 1999, then, in connection therewith, Goldman
hereby agrees to waive Goldman's Pro-Rata Share of the supplemental
origination fee.
-1-
<PAGE> 8
(c) Section 3.6 of the Loan Agreement is hereby amended and restated in
its entirety to read as follows:
3.6 Early Termination by Borrower. Borrower has the option, at
any time upon 5 days prior written notice to Agent to terminate this
Agreement by paying to Agent, for the ratable benefit of the Lender
Group, in cash, the Obligations, in full, together with a premium (the
"Early Termination Premium") equal to $250,000; provided, however, if
the Obligations owing to Goldman have been paid in full, in cash, on
or prior to May 26, 1999, and all of the Commitments of Goldman are
terminated on or prior to May 26, 1999, then, in connection therewith,
Goldman hereby agrees to waive Goldman's Pro-Rata Share of the Early
Termination Premium and surrender Goldman's Warrant to Borrower.
3. CONDITION PRECEDENTS TO AMENDMENT. The satisfaction of each of the
following unless waived or deferred by Agent in its sole discretion, shall
constitute conditions precedent to the effectiveness of this Amendment and each
and every provision hereof:
(a) The representations and warranties in the Loan Agreement as amended by
this Amendment, and the other Loan Documents shall be true and correct in all
respects on and as of the date hereof, as though made on such date (except to
the extent that such representations and warranties relate solely to an earlier
date).
(b) No injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
governmental authority against the Agent or Lenders.
(c) Agent shall have received fully executed counterpart signatures to
this Amendment.
(d) Agent shall have received fully executed counterpart signatures to
that certain Amendment Number Three to Put Agreement, dated as of the date
hereof, by and among each of the funds managed by, or other affiliates of,
Oaktree Capital Management LLC identified on Schedule 1A thereto or TCW Special
Credits identified on Schedule 1 thereto and Goldman Sachs Credit Partners,
L.P., a Bermuda limited partnership.
(e) Agent shall have received fully executed counterpart signatures to
that certain Amendment Number Three to Put Agreement, dated as of the date
hereof, by and among each of the funds managed by, or other affiliates of,
Oaktree Capital Management LLC identified on Schedule 1A thereto or TCW Special
Credits identified on Schedule 1 thereto and Transamerica Business Credit
Corporation, a Delaware corporation.
5. CONSTRUCTION. This Amendment shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to its
conflicts-of-laws principles (other than any provisions thereof validating the
choice of the laws of the State of New York as the governing law).
-2-
<PAGE> 9
6. ENTIRE AMENDMENT. This Amendment, and terms and provisions hereof,
constitute the entire agreement among the parties pertaining to the subject
matter hereof and supersedes any and all prior or contemporaneous amendments
relating to the subject matter hereof. Except as expressly amended hereby, the
Loan Agreement and other Loan Documents shall remain unchanged and in full force
and effect. To the extent any terms or provisions of this Amendment conflict
with those of the Loan Agreement or other Loan Document, the terms and
provisions of this Amendment shall control. This Amendment shall be deemed part
of and is hereby incorporated into the Loan Agreement.
7. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Amendment by
signing any such counterpart. Delivery of an executed counterpart of this
Amendment by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Amendment. Any party delivering an
executed counterpart of this Amendment by telefacsimile also shall deliver an
original executed counterpart of this Amendment, but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Amendment.
8. AMENDMENTS. This Amendment cannot be altered, amended, changed or modified
in any respect or particular unless each such alteration, amendment, change or
modification shall have been agreed to by each of the parties and reduced to
writing in its entirety and signed and delivered by each party.
9. MISCELLANEOUS. (a) Upon the effectiveness of this Amendment, each reference
in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or
words of like import referring to the Loan Agreement shall mean and refer to the
Loan Agreement as amended by this Amendment.
(b) Upon the effectiveness of this Amendment, each reference in the Loan
Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words
of like import referring to the Loan Agreement shall mean and refer to the Loan
Agreement as amended by this Amendment.
[Signature page follows.]
-3-
<PAGE> 10
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered as of the date first written above.
TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation,
as Agent and a Lender
By:
-------------------------------------
Title:
----------------------------------
GOLDMAN SACHS CREDIT PARTNERS L.P.,
a Bermuda limited partnership
By:
-------------------------------------
Title:
----------------------------------
AUREAL SEMICONDUCTOR INC.
a Delaware corporation
By:
-------------------------------------
Title:
----------------------------------
<PAGE> 11
AMENDMENT NUMBER SEVEN
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER SEVEN (this "Amendment"), to LOAN AND SECURITY
AGREEMENT, dated as of June 5, 1998, among AUREAL INC., a Delaware corporation
formerly known as Aureal Semiconductor Inc. (the "Borrower"), the financial
institutions from time to time parties thereto as lenders (the "Lenders") and
TRANSAMERICA BUSINESS CREDIT CORPORATION, as agent (in such capacity, the
"Agent") for the Lenders, is made as of September 14, 1999 among the Borrower,
the undersigned Lenders and the Agent.
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders and the Agent are parties to the Loan
and Security Agreement, dated as of June 5, 1998 (as heretofore amended, the
"Loan Agreement"; capitalized terms used herein shall have the meanings assigned
to such terms in the Loan Agreement unless otherwise defined herein); and
WHEREAS, the Borrower has requested that the Lenders amend certain
provisions of the Loan Agreement and certain other Loan Documents, and the
Lenders are agreeable to such requests on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto hereby agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. Effective as of the date hereof, and
subject to the satisfaction of the conditions to effectiveness set forth in
Section 7 hereof, the Loan Agreement is hereby amended as follows:
(a) The definition of "Average Unused Portion of the Maximum Amount"
in Section 1.1 is amended by inserting after the word "month" the following: ",
less (c) the average amount of undrawn Letters of Credit outstanding during the
immediately preceding month."
(b) The definition of "Loan Documents" in Section 1.1 is amended by
inserting after the words "the Warrants," the following: "the Letters of Credit,
the Letter of Credit Agreement, the Guaranty,".
<PAGE> 12
(c) The definition of "Material Adverse Change" in Section 1.1 is
amended by deleting the word "Borrower" from each place it appears and
substituting therefor the following: "any Loan Party."
(d) The definition of "Maximum Amount" in Section 1.1 is amended and
restated as follows:
"'Maximum Amount' means $12,187,000."
(e) The definition of "Maximum Tranche B Amount" in Section 1.1 is
amended and restated as follows:
"'Maximum Tranche B Amount' means $5,000,000."
(f) The definition of "Obligations" in Section 1.1 is amended by
inserting after the phrase "principal," the following: "reimbursement
obligations,".
(g) The definition of "Pro Rata Share" in Section 1.1 is amended by
inserting after the phrase "to make Tranche A Advances and receive payments of
principal and interest with respect thereto" the following: "and to purchase
participations in Letters of Credit and receive payment with respect thereto."
(h) The definition of "Revolving Facility Usage" in Section 1.1 is
amended by inserting after the phrase "Tranche B Advances outstanding" the
following: ", plus (c) the aggregate undrawn face amount of all Letters of
Credit outstanding."
(i) The definition of "Tranche A Availability" in Section 1.1 is
amended and restated as follows:
"'Tranche A Availability' means the amount that Borrower is entitled
to borrow as Tranche A Advances under Section 2.1 and the undrawn face
amount of Letters of Credit the Borrower is entitled to request under
Section 2.13, such amount being the difference derived when (a) the
aggregate principal amount of Tranche A Advances then outstanding
(including any amounts that the Lender Group may have paid for the
account of Borrower pursuant to any of the Loan Documents and that are
reimbursed by Borrower by being charged to the Loan Account as Tranche
A Advances) plus the aggregate undrawn face amount of Letters of
Credit then outstanding is subtracted from (b) the lesser of (i) the
Maximum Tranche A Amount or (ii) the Borrowing Base."
(j) Section 1.1 is amended by adding the following definitions in
their proper alphabetical order:
-2-
<PAGE> 13
"'Federal Funds Effective Rate' means for any day, the rate equal to
the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as such weighted average is published for such
day (or, if such day is not a Business Day, for the immediately
preceding Business Day) by the Federal Reserve Bank of New York, or,
if such rate is not so published for such Business Day, the average of
the quoted rates for such Business Day on such transactions received
by the Agent from three federal funds brokers of recognized standing
selected by the Agent. Each determination by the Agent of the Federal
Funds Effective Rate shall, in the absence of manifest error, be
conclusive."
"'Guaranty' means the Guaranty, in the form of Exhibit G-1 attached
hereto, made by OCM in favor of the Agent."
"'Issuing Bank' means Bank of America or another bank selected by the
Agent and reasonably acceptable to the Borrower."
"'Letter of Credit Agreement' means the agreement entered into by the
Agent and the Issuing Bank pursuant to which the Agent causes the
Issuing Bank to issue Letters of Credit for the account of the
Borrower in accordance with the terms of this Agreement."
"'Letters of Credit' means the letters of credit issued for the
account of the Borrower under Section 2.13, and all amendments,
renewals, extensions or replacements thereof."
"'Loan Parties' means the Borrower and OCM."
"'OCM' means OCM Opportunities Fund II, L.P., a Delaware limited
partnership."
(k) Section 2.1(a) is amended by deleting the phrase "not to exceed"
and substituting therefor "which, when combined with the aggregate undrawn face
amount of all outstanding Letters of Credit, does not exceed."
(l) Section 2.1(b) is amended and restated as follows:
-3-
<PAGE> 14
"(b) The Lenders shall have no obligation to make further Tranche A
Advances hereunder to the extent they would cause (i) the aggregate
outstanding amount of Tranche A Advances plus the aggregate undrawn
face amount of all outstanding Letters of Credit to exceed the lesser
of the Borrowing Base and the Maximum Tranche A Amount or (ii) the
aggregate outstanding amount of all Advances plus the aggregate
undrawn face amount of all outstanding Letters of Credit to exceed the
Maximum Amount."
(m) Section 2.2(b) is amended by deleting "the outstanding
Obligations" and substituting therefor "the aggregate outstanding amount of all
Advances plus the aggregate undrawn face amount of all outstanding Letters of
Credit."
(n) Section 2.2(d) is amended and restated as follows:
"(d) Anything to the contrary in Sections 2.1 and 2.2 notwithstanding,
the Borrower shall not borrow Tranche B Advances when Tranche A
Availability is greater than zero.
(o) Section 2.2 is amended by adding at the end thereof a new clause
(e) as follows:
"(e) The Lenders shall have no obligation to make Tranche B Advances
unless the OCM Guaranty is in full force and effect."
(p) Section 2.4(b) is amended and restated as follows:
"(b) Apportionment, Application, and Reversal of Payments. All
payments shall be remitted to Agent. Except with respect to defaulting
Lenders, all Collections shall be applied: first, to pay any fees or
expense reimbursements then due to Agent from Borrower; second, to pay
any fees or expense reimbursements then due to the Lenders from
Borrower; third, to pay interest due in respect of all Advances;
fourth, to pay the outstanding principal of Tranche A Advances; fifth,
to pay the outstanding principal of Tranche B Advances; and sixth,
ratably to pay any other Obligations due to Agent or any Lender by
Borrower. For purposes of the foregoing, "payment in full" with
respect to interest shall include interest accrued after the
commencement of any Insolvency Proceeding irrespective of whether a
claim for such interest is allowable in such Insolvency Proceeding."
-4-
<PAGE> 15
(q) Section 2.6(a)(ii) is amended by deleting the phrase "5
percentage points" and substituting therefor "2 percentage points."
(r) Section 2.11(d) is amended and restated as follows:
"(d) Letter of Credit Fees. (i) On the first day of each month
(commencing October 1, 1999) during the term of this Agreement and on
the Maturity Date, a letter of credit fee equal to 3.25% per annum of
the daily average amount of the Letters of Credit outstanding during
the preceding month or during the interim period ending on the
Maturity Date, as the case may be; and
(ii) for the sole account of the Agent, on the first day of each
month (commencing October 1, 1999) during the term of this Agreement
and on the Maturity Date, all customary fees charged to the Agent by
the Issuing Bank which relate directly to the opening, amending or
drawing under Letters of Credit."
(s) Article 2 is amended by adding at the end thereof a new Section
2.13 as follows:
"2.13. Letters of Credit.
(a) The Agent, upon the request of the Borrower, shall use its best
efforts during the term of this Agreement, subject to the terms and
conditions of this Agreement, to cause the Issuing Bank to issue for
the account of the Borrower Letters of Credit of a tenor and
containing terms reasonably acceptable to the Agent and the Issuing
Bank, in a maximum aggregate face amount outstanding at any time not
to exceed One Million Five Hundred Thousand Dollars ($1,500,000),
provided that no Letter of Credit shall have an expiration date after
the Maturity Date. The Agent shall have no obligation to use its best
efforts to cause the Issuing Bank to issue Letters of Credit to the
extent they would cause (i) the aggregate outstanding amount of
Tranche A Advances plus the aggregate undrawn amount of all
outstanding Letters of Credit to exceed the lesser of the Borrowing
Base and the Maximum Tranche A Amount or (ii) the aggregate
outstanding amount of all Advances plus the aggregate undrawn amount
of all Letters of Credit to exceed the Maximum Amount.
-5-
<PAGE> 16
(b) Unless otherwise previously agreed in writing by the Borrower and
the Agent, the initial term of (i) any documentary Letter of Credit
shall not exceed one hundred twenty (120) days from the date of
issuance and (ii) any standby Letter of Credit shall not exceed one
calendar year from the date of issuance, subject to automatic renewal
unless notice to the contrary is given by the Agent or the Issuing
Bank in writing by the applicable date specified in such Letter of
Credit. Each Letter of Credit shall state that, except as otherwise
provided therein, such Letter of Credit is governed by the Uniform
Customs and Practice for Documentary Credits (as most recently
published by the International Chamber of Commerce). Notwithstanding
the purpose of any Letter of Credit or any reference therein or herein
to a Subsidiary or Affiliate of the Borrower, each Letter of Credit
shall be deemed issued for the account of the Borrower and the
obligations arising in connection therewith shall be part of the
Obligations.
(c) Immediately upon issuance or amendment of any Letter of Credit in
accordance with the procedures set forth in this Section 2.13, each
Lender shall be deemed to have irrevocably and unconditionally
purchased and received from the Agent, without recourse or warranty,
an undivided interest and participation, to the extent of such
Lender's Pro Rata Share, of the liability and obligations under and
with respect to such Letter of Credit and the Letter of Credit
Agreement (including, without limitation, all obligations of the
Borrower with respect thereto) and any security therefor or guaranty
pertaining thereto.
(d) Whenever the Borrower desires the issuance of a Letter of Credit,
the Borrower shall deliver to the Agent a written irrevocable request
no later than 10:00 a.m. (California time) at least five (5) Business
Days (or such shorter period as may be agreed to by the Agent) in
advance of the proposed date of issuance. The transmittal by the
Borrower of each such request shall be deemed to be a representation
and warranty by the Borrower that the Letter of Credit may be issued
in accordance with and will not violate any of the requirements of
this Section 2.13. Prior to the date of issuance of each Letter of
Credit, the Borrower shall provide to the Agent a precise
-6-
<PAGE> 17
description of the documents and the text of any certificate to be
presented by the beneficiary of such Letter of Credit which, if
presented by such beneficiary on or prior to the expiration date of
such Letter of Credit, would require the Issuing Bank to make payment
under such Letter of Credit. The Agent, in its reasonable judgment,
may require changes in any such documents and certificates prior to
the date of issuance of any such Letter of Credit. No Letter of Credit
shall require payment against a conforming draft to be made thereunder
prior to the second Business Day after the date on which such draft is
presented.
(e) In the event of any request for drawing under any Letter of
Credit, (i) the Borrower shall be deemed to have timely given a
borrowing request to the Agent to make Tranche A Advances on the date
on which such drawing is honored in an amount equal to the amount of
such drawing and (ii) without regard to satisfaction of the applicable
conditions specified in Article 3 and the other terms and conditions
of borrowings contained herein, the Lenders shall, on the date of such
drawing, make Tranche A Advances in the amount of such drawing, the
proceeds of which shall be applied directly by the Agent to reimburse
the Issuing Bank for the amount of such drawing or payment. If for any
reason, proceeds of Tranche A Advances are not received by the Agent
on such date in an amount equal to the amount of such drawing, the
Borrower shall reimburse the Agent, on the Business Day immediately
following the date of such drawing, in an amount in same day funds
equal to the excess of the amount of such drawing over the amount of
such Advances, if any, which are so received, plus accrued interest on
such amount at the rate applicable to Tranche A Advances.
(f) As among the Borrower, the Agent and each Lender, the Borrower
assumes all risks of the acts and omissions of the Agent and the
Issuing Bank or misuse of the Letters of Credit by the respective
beneficiaries of such Letters of Credit other than the gross
negligence or willful misconduct of the Agent or the Issuing Bank as
determined by a court of competent jurisdiction in a final
nonappealable judgment. In furtherance and not in limitation of the
foregoing, neither the Agent nor any of the Lenders shall be
responsible (i) for the form, validity, sufficiency, accuracy,
genuineness or
-7-
<PAGE> 18
legal effects of any document submitted by any party in connection
with the application for and issuance of or any drawing honored under
such Letters of Credit even if it should in fact prove to be in any or
all respects invalid, insufficient, inaccurate, fraudulent or forged,
(ii) for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any such Letter of
Credit, or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any
reason, (iii) for failure of the beneficiary of any such Letter of
Credit to comply fully with conditions required in order to draw upon
such Letter of Credit, (iv) for errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex, telecopy or otherwise, whether or not they be in
cipher, (v) for errors in interpretation of technical terms, (vi) for
any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any such Letter of Credit,
or of the proceeds thereof, (vii) for the misapplication by the
beneficiary of any such Letter of Credit of the proceeds of any
drawing honored under such Letter of Credit, and (viii) for any
consequences arising from causes beyond the control of the Issuing
Bank, the Agent or the Lenders. None of the above shall affect,
impair, or prevent the vesting of any of the Agent's rights or powers
hereunder. Any action taken or omitted to be taken by the Agent under
or in connection with any Letter of Credit, if taken or omitted in the
absence of gross negligence or willful misconduct, shall not create
any liability of the Agent to the Borrower or any Lender.
(g) The obligations of the Borrower to reimburse the Agent for
drawings honored under the Letters of Credit and the obligations of
the Lenders under this Section 2.13 shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of
this Agreement under all circumstances including, without limitation,
the following circumstances: (i) any lack of validity or
enforceability of this Agreement, any Letter of Credit, any Letter of
Credit Agreement or any other agreement or instrument relating
thereto; (ii) the existence of any claim, setoff, defense or other
right which the Borrower or any Affiliate of the Borrower may have at
any time
-8-
<PAGE> 19
against a beneficiary or any transferee of any Letter of Credit (or
any Persons or entities for whom any such beneficiary or transferee
may be acting), the Agent, any Lender or any other Person, whether in
connection with this Agreement, the other Loan Documents, the
transactions contemplated herein or therein or any unrelated
transaction; (iii) any draft, demand, certificate or other documents
presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being
untrue or inaccurate in any respect; (iv) the surrender or impairment
of any security for the performance or observance of any of the terms
of any of the Loan Documents; (v) payment by the Issuing Bank under
any Letter of Credit against presentation of a demand, draft or
certificate or other document which does not comply with the terms of
such Letter of Credit; (vi) failure of any drawing under a Letter of
Credit or any non-application or misapplication by the beneficiary of
the proceeds of any drawing; or (vii) the fact that a Potential
Default or Event of Default shall have occurred and be continuing."
(t) The introductory paragraph of Section 3.2 is amended by inserting
after the phrase "all Advances" in each place it appears the following: "and
Letters of Credit."
(u) Section 3.2(d) is amended and restated as follows:
"(d) the amount of the Revolving Facility Usage, after giving effect
to the requested Advance or Letter of Credit, shall not exceed the
lesser of the Availability and the Maximum Amount."
(v) Section 4.1(f) is deleted in its entirety.
(w) The introductory paragraph of Article 5 is amended by (i)
inserting after the phrase "the making of each Advance made thereafter" the
following: "and the issuance of each Letter of Credit issued thereafter" and
(ii) inserting after the phrase "the making of such Advance" the following: "and
the issuance of such Letter of Credit."
(x) The introductory paragraph of Article 6 is amended by inserting
after the phrase "final payment of the Obligations" the following: "and no
Letters of Credit are outstanding."
-9-
<PAGE> 20
(y) The introductory paragraph of Article 7 is amended by inserting
after the phrase "final payment of the Obligations" the following: "and no
Letters of Credit are outstanding."
(z) Section 8.2 is amended by (i) deleting the word "or" at the end
of clause (b) thereof and (ii) inserting at the end of such Section the
following: "or (d) If OCM fails or neglects to perform, keep or observe any
term, provision, condition, covenant or agreement contained in any Loan Document
to which OCM is a party and such failure continues for a period of 10 Business
Days;"
(aa) Section 8.4 is amended by deleting "Borrower's" and substituting
therefor "any Loan Party's."
(bb) Section 8.5 is amended by deleting "Borrower" and substituting
therefor "any Loan Party."
(cc) Section 8.6 is amended by deleting "Borrower" from each place it
appears and substituting therefor "any Loan Party."
(dd) Section 8.7 is amended by deleting "Borrower" from the first
place it appears and substituting therefor "any Loan Party."
(ee) Section 8.8 is amended by (i) deleting "Borrower's" from each
place it appears and substituting therefor "a Loan Party's" and (ii) adding
after the phrase "payment date thereof;" the following: "provided, however, that
none of the foregoing liens, levies or assessments on the properties or assets
of OCM shall be an Event of Default unless such liens, levies or assessments
could be reasonably expected to result in a Material Adverse Change;"
(ff) Section 8.9 is amended by (i) deleting "Borrower's" and
substituting therefor "any Loan Party's" and (ii) deleting "Borrower" and
substituting therefor "such Loan Party."
(gg) Section 8.10 is amended by (i) deleting "Borrower" and
substituting therefor "any Loan Party" and (ii) deleting "Borrower's" and
substituting therefor "such Loan Party's."
(hh) Section 8.12 is amended by deleting "Borrower" from each place it
appears and substituting therefor "any Loan Party."
(ii) Section 9.1(b) is amended by inserting immediately after the
phrase "the Lender Group" the following: ", or cease using best efforts to cause
the Issuing Bank to issue
-10-
<PAGE> 21
any Letters of Credit or to amend, renew, extend or replace any Letters of
Credit."
(jj) Section 9.1 is amended by (i) deleting the word "and" at the end
of clause (m) thereof, (ii) deleting the period at the end of clause (n) thereof
and substituting therefor "; and" and (ii) inserting at the end of such Section
a new clause (o) as follows:
"(o) With respect to all Letters of Credit outstanding at the
time of the acceleration of the Obligations under Section 9.1(a) or
otherwise at any time after the Maturity Date, require the Borrower to
deposit in a cash collateral account established by or on behalf of
the Agent an amount equal to 105% of the aggregate then undrawn and
unexpired amount of such Letters of Credit (and the Borrower agrees to
forthwith deposit such amounts in such account). Amounts held in such
cash collateral account shall be under the sole dominion and control
of the Agent and applied by the Agent to the payment of drafts drawn
under such Letters of Credit, and the balance, if any, in such cash
collateral account, after all such Letters of Credit shall have
expired or been fully drawn upon shall be applied to repay the other
Obligations. After all such Letters of Credit shall have expired or
been fully drawn upon and all Obligations shall have been paid in
full, the balance, if any, in such cash collateral account shall be
returned to the Borrower or to such other Person as may be lawfully
entitled thereto."
(kk) Section 16.1(b) is amended by (i) inserting after "principal,"
the following: "reimbursement obligation," and (ii) inserting after the phrase
"or other amounts due to" the following: "the Agent or."
(ll) Schedule C-1 to the Loan Agreement is amended and restated in the
form of Schedule C-1 attached hereto.
(mm) The Loan Agreement is amended by adding thereto a new Exhibit G-1
in the form of Exhibit G-1 attached hereto.
2. AMENDMENT TO COPYRIGHT SECURITY AGREEMENT. Effective as of the date
hereof, and subject to the satisfaction of the conditions to effectiveness set
forth in Section 7 hereof, Section 2(g) of the Copyright Security Agreement is
deleted in its entirety.
-11-
<PAGE> 22
3. AMENDMENT TO PATENT SECURITY AGREEMENT. Effective as of the date
hereof, and subject to the satisfaction of the conditions to effectiveness set
forth in Section 7 hereof, Section 2(g) of the Patent Security Agreement is
deleted in its entirety.
4. AMENDMENT TO TRADEMARK SECURITY AGREEMENT. Effective as of the date
hereof, and subject to the satisfaction of the conditions to effectiveness set
forth in Section 7 hereof, Section 2(g) of the Trademark Security Agreement is
deleted in its entirety.
5. AMENDMENT TO STOCK PLEDGE AGREEMENT. Effective as of the date hereof,
and subject to the satisfaction of the conditions to effectiveness set forth in
Section 7 hereof, Section 3 of the Stock Pledge Agreement is amended and
restated as follows: "3. [Intentionally Deleted]."
6. AMENDMENT TO DEPOSIT ACCOUNT SECURITY AGREEMENT. Effective as of the
date hereof, and subject to the satisfaction of the conditions to effectiveness
set forth in Section 7 hereof, Section 5 of the Deposit Account Security
Agreement is amended and restated as follows: "5. [Intentionally Deleted]."
7. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective
upon the Agent's receipt of an amendment fee of $50,000 for the ratable benefit
of the Lenders and the following documents, in each case in form and substance
satisfactory to the Agent:
(a) This Amendment, duly executed by the Borrower and the Required
Lenders.
(b) The guaranty, substantially in the form of Exhibit G-1 (the
"Guaranty"), duly executed by OCM Opportunities Fund II, L.P. ("OCM").
(c) Certified copies of (A) the resolutions of the Board of Directors
of OCM (together with the Borrower, the "Loan Parties") approving the Guaranty
and the transactions contemplated thereby, (B) the partnership agreement of OCM
as amended through the date hereof and (C) all documents evidencing other
necessary actions and government approvals, if any, with respect to the
Guaranty, this Amendment, the Loan Agreement as amended hereby and the documents
contemplated hereby or delivered in connection herewith (the "Amendment
Documents").
(d) A certificate of the Secretary or an Assistant Secretary of OCM
certifying the name and true signature of an authorized officer of OCM who is
authorized to sign the Guaranty.
-12-
<PAGE> 23
(e) A certificate signed by an authorized officer of the Borrower
certifying that (i) the representations and warranties contained in Section 8
hereof are true and correct in all material respects on and as of the date of
such certificate as though made on and as of such date (except to the extent
such representations and warranties expressly relate to an earlier date, in
which case such representations and warranties were true and correct on and as
of such earlier date), (ii) the representations and warranties contained in the
Loan Agreement are true and correct in all material respects on and as of the
date of such certificate as though made on and as of such date (except to the
extent such representations and warranties expressly relate to an earlier date,
in which case such representations and warranties were true and correct on and
as of such earlier date), (iii) no Potential Default or Event of Default has
occurred and is continuing and (iv) there has occurred no Material Adverse
Change since July 4, 1999.
(f) Any agreements and other instruments required pursuant to the
Loan Agreement, this Amendment or the Letter of Credit Agreement to cause to be
issued any Letters of Credit.
(g) A legal opinion of counsel to OCM covering such matters relating
to the transactions contemplated by the Guaranty as the Agent shall reasonably
request
(h) A certificate of an authorized officer of OCM to the effect that
OCM is Solvent and will be Solvent after giving effect to the consummation of
the transactions contemplated by this Amendment.
(i) Such other documents, instruments, opinions, evidence, materials
and information as the Agent may reasonably request.
8. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants as follows:
(a) Since July 4, 1999, there has occurred no Material Adverse
Change.
(b) No Potential Default or Event of Default has occurred and is
continuing.
(c) The representations and warranties contained in the Loan
Agreement are true and correct in all material respects on the date hereof as
though made on and as of the date hereof, except to the extent that such
representations and warranties expressly relate solely to an earlier date (in
which case such representations and warranties were true and correct on and as
of such earlier date).
-13-
<PAGE> 24
(d) Each Amendment Document to which any Loan Party is a party
constitutes the legal, valid and binding obligations of the such Loan Party,
enforceable against such Loan Party in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency and other laws affecting
creditors' rights generally and by general principles of equity.
(e) The execution, delivery and performance by each Loan Party of the
Amendment Documents to which it is a party, and the consummation of the
transactions contemplated thereby, are within such Loan Party's powers, have
been duly authorized by all necessary action on the part of such Loan Party and
do not (i) contravene such Loan Party's Governing Documents, (ii) violate any
law or regulation, (iii) conflict with or result in the breach of, or constitute
a default under, any contract, loan agreement, indenture, mortgage, deed of
trust, lease or other instrument binding on or affecting such Loan Party or any
of its properties or (iv) except for the Liens created under the Loan Documents,
result in or require the creation or imposition of any Lien upon or with respect
to any of the properties of such Loan Party.
(f) No consent of any Person, and no permit, approval or
authorization of, exemption by, notice or report to, or registration, filing or
declaration with, any Governmental Authority is required in connection with the
execution, delivery, performance, validity or enforceability of any Amendment
Document and the transactions contemplated thereby.
9. EXPENSES. The Borrower shall pay for all of the reasonable costs and
expenses incurred by the Agent in connection with the transactions contemplated
by the Amendment Documents, including, without limitation, the reasonable fees
and expenses of counsel to the Agent.
10. MISCELLANEOUS.
(a) Except as expressly amended herein, all of the terms and
provisions of the Loan Agreement and the other Loan Documents are ratified and
confirmed in all respects and shall remain in full force and effect.
(b) Upon the effectiveness of this Amendment, all references in the
Loan Documents to the Loan Agreement shall mean the Loan Agreement as amended by
this Amendment and all references in the Loan Agreement to "this Agreement,"
"hereof," "herein," or similar terms, shall mean and refer to the Loan Agreement
as amended by this Amendment.
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<PAGE> 25
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to or waiver
of any right, power or remedy of the Agent or the Lenders under any of the Loan
Documents, or constitute an amendment or waiver of any provision of any of the
Loan Documents.
(d) This Amendment may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement. This
Amendment may be executed and delivered by telecopier with the same force and
effect as if the same were a fully executed and delivered original manual
counterpart.
(e) This Amendment shall constitute a Loan Document.
11. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATIONS LAW).
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<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers.
AUREAL INC., formerly known as
Aureal Semiconductor Inc.
By:
-------------------------------------
Name:
Title:
TRANSAMERICA BUSINESS CREDIT
CORPORATION, as Agent and as Lender
By:
-------------------------------------
Name:
Title:
-16-
<PAGE> 27
Schedule C-1
Commitments
<TABLE>
<CAPTION>
Commitment to Make Commitment to Make Total Commitments Pro Rata
Lender Tranche A Advances Tranche B Advances* of Lenders Share
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transamerica Business $12,187,000 $5,000,000 $12,187,500 100%
Credit Corporation
Total of All Lenders $12,187,000 $5,000,000 $12,187,000 100%
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Tranche B is a Sublimit of Tranche A
<PAGE> 28
AMENDMENT NUMBER EIGHT
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER EIGHT (this "Amendment"), to LOAN AND SECURITY
AGREEMENT, dated as of June 5, 1998, among AUREAL INC., a Delaware corporation
formerly known as Aureal Semiconductor Inc. (the "Borrower"), TRANSAMERICA
BUSINESS CREDIT CORPORATION ("TBCC"), PNC BANK, NATIONAL ASSOCIATION ("PNC" and,
together with TBCC, the "Lenders") and TBCC, as agent (in such capacity, the
"Agent") for the Lenders, is made as of September 30, 1999 among the Borrower,
the Lenders and the Agent.
W I T N E S S E T H :
WHEREAS, the Borrower, TBCC and the Agent are parties to the Loan and
Security Agreement, dated as of June 5, 1998 (as heretofore amended, the "Loan
Agreement"; capitalized terms used herein shall have the meanings assigned to
such terms in the Loan Agreement unless otherwise defined herein); and
WHEREAS, the parties hereto wish to amend the Loan Agreement to, among
other things, increase the maximum amount of the credit facility and include PNC
as a Lender under the Loan Agreement and the other Loan Documents.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto hereby agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. Effective as of the date hereof, and
subject to the satisfaction of the conditions to effectiveness set forth in
Section 3 hereof, the Loan Agreement is hereby amended as follows:
(a) The definition of "Maximum Amount" in Section 1.1 is amended and
restated as follows:
"'Maximum Amount' means $25,000,000."
(b) The definition of "Maximum Tranche A Amount" in Section 1.1 is
amended and restated as follows:
"'Maximum Tranche A Amount' means $25,000,000."
(c) The definition of "Maximum Tranche B Amount" in Section 1.1 is
amended and restated as follows:
"'Maximum Tranche B Amount' means $5,000,000."
<PAGE> 29
(d) Section 1.1 is amended by adding the following definitions in
their proper alphabetical order:
"'Eligible Equipment' means the Equipment of the Borrower located in
the United States, which is free from any claim of title or Lien in
favor of any Person (other than Liens in favor of the Agent) and with
respect to which no event has occurred and no condition exists which
could be reasonably expected to impair substantially the Borrower's
ability to use such Equipment in the ordinary course of its business
and which the Agent, in good faith, shall deem eligible to serve as
collateral for Advances. No Equipment of the Borrower shall be
Eligible Equipment unless the Agent has a perfected first priority
Lien thereon. No Equipment of the Borrower shall be Eligible Equipment
unless (i) it is located on property owned by the Borrower or (ii) it
is located on property leased by the Borrower or in a contract
warehouse which is subject to a Collateral Access Agreement executed
by the mortgagee, lessor or contract warehouseman, as the case may be,
and segregated or otherwise separately identifiable from goods of
others, if any, stored on the premises."
"'Orderly Liquidation Value of Equipment' means the orderly
liquidation value of Eligible Equipment as determined from time to
time by an appraiser selected by the Agent. The Orderly Liquidation
Value of Equipment is equal to $624,120 on September 30, 1999, as such
amount may be adjusted from time to time pursuant to Section 4.6."
(e) Section 2.1(a) is amended by deleting the phrase "80% of Eligible
Accounts (net of the Foreign Accounts Reserve), less the amount, if any, of the
Dilution Reserve" and substituting therefor "an amount equal to the sum of (i)
85% of Eligible Accounts (net of the Foreign Accounts Reserve), less the amount,
if any, of the Dilution Reserve plus (ii) 75% of the Orderly Liquidation Value
of Eligible Equipment."
(f) Section 2.6(a) is amended and restated as follows:
"(a) Interest Rate. Except as provided in clause (c) below, all
Obligations shall bear interest at a per annum rate of 2 percentage
points above the Reference Rate."
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<PAGE> 30
(g) Section 2.6(d) is amended as follows:
(i) by deleting "$500,000" from each place it appears and
substituting therefor "200,000";
(ii) by deleting "(y) during the period commencing on the
Effective Date and ending on the earlier to occur of the first
anniversary of the Effective Date" and substituting therefor "(y)
during the period commencing on July 1, 1999 and ending on the earlier
to occur of June 30, 2000"; and
(iii) by deleting "(z) during the period commencing on the first
anniversary of the Effective Date and ending on the earlier to occur
of the second anniversary of the Effective Date" and substituting
therefor "(z) during the period commencing on July 1, 2000 and ending
on the earlier to occur of June 30, 2001."
(h) Section 3.4 of the Loan Agreement is hereby amended by deleting
"June 5, 2000" and substituting therefor "July 2, 2001."
(i) Section 3.6 is amended by deleting "$250,000" and substituting
therefor "the product of (a) $20,000 and (b) the number of months (rounded
upwards to the nearest whole number) from the date this Agreement is terminated
to the Maturity Date."
(j) Section 4.6 is amended by inserting at the end thereof the
following: "Without limiting the generality of the foregoing, the Borrower
agrees that the Agent may from time to time hire appraisers to redetermine the
Orderly Liquidation Value of the Equipment and the Borrower shall reimburse the
Agent for the fees, costs and expenses associated with such appraisal."
(k) Section 7.20(a) is amended and restated as follows:
"(a) [Intentionally omitted]."
(l) Section 7.20(b) is amended and restated as follows:
"(b) Profitability. Achieve EBITDA of not less than the amount shown
below for the period corresponding thereto (amounts in brackets ($)
are negative):
-3-
<PAGE> 31
<TABLE>
<CAPTION>
Period Minimum EBITDA
- --------------------------------------------------------------------------------
<S> <C>
the fiscal quarter ending on or about September 30, 1999 ($7,600,000)
the fiscal quarter ending on or about December 31, 1999 ($4,500,000)
the fiscal quarter ending on or about March 31, 2000 ($300,000)
the fiscal quarter ending on or about June 30, 2000 ($1,100,000)
the fiscal quarter ending on or about September 30, 2000 $500,000
each fiscal quarter ending thereafter $1,500,000"
</TABLE>
(m) Section 7.20(c) is amended and restated as follows:
"(c) Total Revenues. Achieve total revenues, determined in accordance
with GAAP on a basis consistent with past practice, of not less than
the amount shown below for the period corresponding thereto:
<PAGE> 32
<TABLE>
<CAPTION>
Period Minimum Total Revenue
- ------------------------------------------------------------------------------------
<S> <C>
the fiscal quarter ending on or about September 30, 1999 $7,900,000
the fiscal quarter ending on or about December 31, 1999 $12,900,000
the fiscal quarter ending on or about March 31, 2000 $16,100,000
the fiscal quarter ending on or about June 30, 2000 $12,900,000
the fiscal quarter ending on or about September 30, 2000 $16,200,000
each fiscal quarter ending thereafter $20,200,000"
</TABLE>
(n) Section 7.21 is amended and restated as follows:
"7.21 Capital Expenditures. Make capital expenditures in excess of:
(a) $2,250,000 during the fiscal year ending on or about December 31,
1999; or (b) $1,500,000 during the fiscal year ending on or about
December 31, 2000; or (c) $2,250,000 during the period commencing on
the first day immediately following the end of the fiscal year ending
on or about December 31, 2000 and ending on the Maturity Date."
(o) Section 17.9 is amended by adding the following at the beginning
of such Section:
"If (a) either (i) TBCC is liquidated, dissolved, merged or
consolidated with any Person in a transaction in which TBCC is not the
surviving entity or (ii) Aegon Corporation or one of its Affiliates
ceases to own, directly or indirectly, a majority of the capital stock
of TBCC, (b) TBCC (or its successor) ceases to conduct business as an
asset based lender and (c) the Pro Rata Share of the Commitments of
PNC Bank, National Association ("PNC") is equal to or greater than
50%, then PNC shall have the option to succeed TBCC as Agent or
appoint a successor Agent to succeed TBCC as Agent, in each case
subject to the terms set forth below."
(p) Schedule C-1 to the Loan Agreement is amended and restated in the
form of Schedule C-1 attached hereto.
-5-
<PAGE> 33
2. ASSIGNMENT.
(a) Immediately after giving effect to the amendments set forth in
Section 1 hereof, TBCC hereby sells and assigns to PNC, and PNC hereby purchases
and assumes from TBCC, that interest in and to TBCC's rights and obligations
under the Loan Documents as of the date hereof with respect to the Obligations
owing to TBCC, and the Commitments to make Advances and participate in Letters
of Credit, as is set forth on Annex A hereto.
(b) TBCC (i) represents and warrants to PNC that TBCC is the legal
and beneficial owner of the interest being assigned by TBCC hereunder and that
such interest is free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the Loan
Documents or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Loan Documents or any other instrument or document
furnished pursuant thereto; and (iii) makes no representation or warranty and
assumes no responsibility with respect to the financial condition of Borrower or
any of its Subsidiaries or the performance or observance by Borrower or any of
its Subsidiaries of any of its obligations under the Loan Documents or any other
instrument or document furnished pursuant thereto.
(c) PNC (i) confirms that it has received copies of the Loan
Agreement and the other Loan Documents, together with copies of the financial
statements referred to therein and such other documents and information as it
has deemed appropriate to make its own credit analysis and decision to enter
into this Assignment Agreement; (ii) agrees that it will, independently and
without reliance, as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Loan Documents;
(iii) confirms that it is eligible as an assignee under the terms of the Loan
Agreement; (iv) appoints and authorizes the Agent to take such action as agent
on its behalf and to exercise such powers under the Loan Documents as are
delegated to Agent by the terms thereof, together with such powers as are
reasonably incidental thereto; and (v) agrees that it will perform in accordance
with their terms all of the obligations which by the terms of the Loan Documents
are required to be performed by it as a Lender.
(d) TBCC and PNC agree that (i) all amounts accrued with respect to
the Commitments, the Advances and the Letters of Credit prior to PNC's payment
of the amount (the "Specified Amount") referred to in Section 3(f) of this
Amendment to TBCC shall be for the account of TBCC and (ii) all such amounts
accrued after PNC's payment of the Specified Amount to
-6-
<PAGE> 34
TBCC shall be for the account of the Lenders based upon their respective shares
of the Commitments and the Advances.
(e) Upon PNC's payment of the Specified Amount to TBCC, (i) PNC shall
be a party to the Loan Agreement and, to the extent provided herein, have the
rights and obligations of a Lender thereunder and under the other Loan Documents
and (ii) TBCC shall, to the extent provided herein, relinquish its rights and be
released from its obligations under the Loan Agreement and the other Loan
Documents.
3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective
upon the Agent's receipt of the following, each of which shall be in form and
substance satisfactory to the Agent:
(a) This Amendment, duly executed by the Borrower and the Lenders and
duly consented to by OCM.
(b) An amendment fee, for the ratable benefit of the Lenders, in an
amount equal to $200,000 in immediately available funds, which shall be fully
earned and non-refundable upon the effectiveness of this Amendment.
(c) Certified copies of the resolutions of the Board of Directors of
the Borrower approving this Amendment, the Loan Agreement as amended hereby and
the other documents contemplated hereby or delivered in connection herewith
(collectively, the "Amendment Documents").
(d) A certificate of the Secretary or an Assistant Secretary of the
Borrower certifying the name and true signature of an authorized officer of the
Borrower who is authorized to sign the Amendment Documents.
(e) A certificate signed by an authorized officer of the Borrower
certifying that (i) the representations and warranties contained in Section 4
hereof are true and correct in all material respects on and as of the date of
such certificate as though made on and as of such date (except to the extent
such representations and warranties expressly relate to an earlier date, in
which case such representations and warranties were true and correct on and as
of such earlier date), (ii) the representations and warranties contained in the
Loan Agreement are true and correct in all material respects on and as of the
date of such certificate as though made on and as of such date (except to the
extent such representations and warranties expressly relate to an earlier date,
in which case such representations and warranties were true and correct on and
as of such earlier date), (iii) no Potential Default or Event of Default has
occurred and is continuing and (iv) there has occurred no Material Adverse
Change since July 4, 1999.
-7-
<PAGE> 35
(f) An amount from PNC, for the benefit of TBCC, equal to PNC's
outstanding Advances (immediately after giving effect to this Amendment).
(g) A legal opinion of counsel to the Borrower covering such matters
relating to the transactions contemplated by this Amendment as the Agent shall
reasonably request.
(h) Information with respect to the status of the Creative
Technology, Ltd. litigation filed in the United States District Court for the
Northern District of California (Case No. 98-0770 WHO), which shall be
satisfactory to the Lenders.
(i) Such other documents, instruments, opinions, evidence, materials
and information as the Agent may reasonably request.
4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants as follows:
(a) Since July 4, 1999 there has occurred no Material Adverse Change.
(b) After giving effect to this Amendment, no Default or Event of
Default has occurred and is continuing.
(c) The representations and warranties contained in Section 5 of the
Loan Agreement are true and correct in all material respects on the date hereof
as though made on and as of the date hereof, except to the extent that such
representations and warranties expressly relate solely to an earlier date (in
which case such representations and warranties were true and correct on and as
of such earlier date).
(d) The Amendment Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency and other laws affecting creditors' rights generally and by general
principles of equity.
(e) The execution, delivery and performance by the Borrower of the
Amendment Documents, and the consummation of the transactions contemplated
thereby, are within the Borrower's corporate powers, have been duly authorized
by all necessary corporate action on the part of the Borrower, and do not (i)
contravene the Borrower's Governing Documents, (ii) violate any law or
regulation, (iii) conflict with or result in the breach of, or constitute a
default under, any contract, loan agreement, indenture, mortgage, deed of trust,
lease or other instrument binding on or affecting the Borrower or any of its
-8-
<PAGE> 36
properties or (iv) except for the Liens created under the Loan Documents, result
in or require the creation or imposition of any Lien upon or with respect to any
of the properties of the Borrower.
(f) No consent of any Person, and no permit, approval or
authorization of, exemption by, notice or report to, or registration, filing or
declaration with, any Governmental Authority or other Person is required in
connection with the execution, delivery, performance, validity or enforceability
of the Amendment Documents and the transactions contemplated thereby.
5. EXPENSES. The Borrower shall pay for all of the reasonable costs and
expenses incurred by the Agent in connection with the transactions contemplated
by this Amendment, including, without limitation, the reasonable fees and
expenses of counsel to the Agent.
6. MISCELLANEOUS.
(a) Except as expressly amended herein, all of the terms and
provisions of the Loan Agreement and the other Loan Documents are ratified and
confirmed in all respects and shall remain in full force and effect.
(b) Upon the effectiveness of this Amendment, all references in the
Loan Documents to the Loan Agreement shall mean the Loan Agreement as amended by
this Amendment and all references in the Loan Agreement to "this Agreement,"
"hereof," "herein," or similar terms, shall mean and refer to the Loan Agreement
as amended by this Amendment.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to or waiver
of any right, power or remedy of the Agent or the Lenders under any of the Loan
Documents, or constitute an amendment or waiver of any provision of any of the
Loan Documents.
(d) This Amendment may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement. This
Amendment may be executed and delivered by telecopier with the same force and
effect as if the same were a fully executed and delivered original manual
counterpart.
(e) This Amendment shall constitute a Loan Document.
-9-
<PAGE> 37
7. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATIONS LAW).
-10-
<PAGE> 38
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers.
AUREAL INC., formerly known
as Aureal Semiconductor Inc.
By:
-------------------------------------
Name:
Title:
TRANSAMERICA BUSINESS CREDIT
CORPORATION, as Agent and a Lender
By:
-------------------------------------
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION,
as a Lender
By:
-------------------------------------
Name:
Title:
-11-
<PAGE> 39
The undersigned Loan Party hereby consents to this Amendment and
acknowledges that the execution, delivery and performance of this Amendment does
not in any way affect its obligations under the Guaranty, all of which
obligations are ratified and confirmed, remain absolute and unconditional and
are not subject to any defense, setoff or counterclaim.
OCM OPPORTUNITIES FUND II, L.P.
By: Oaktree Capital Management,
LLC, its General Partner
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
-12-
<PAGE> 40
Commitments
<TABLE>
<CAPTION>
Commitment to Make Commitment to Make Total Commitments Pro Rata
Lender Tranche A Advances Tranche B Advances* of Lenders Share
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transamerica Business Credit $12,500,000 $2,500,000 $12,500,000 50%
Corporation
PNC Bank, National Association $12,500,000 $2,500,000 $12,500,000 50%
Total of All Lenders $25,000,000 $5,000,000 $25,000,000 100%
</TABLE>
* Tranche B is a Sublimit of Tranche A
<PAGE> 41
Annex A
Assignment from Transamerica Business Credit Corporation
("TBCC") to PNC Bank, National Association ("PNC")
<TABLE>
<S> <C> <C>
A. Total Commitment of TBCC Immediately Prior to Assignment $25,000,000
1. Commitment to Make Tranche A Advances $25,000,000
2. Commitment to Make Tranche B Advances* $5,000,000
B. Assigned Share of Commitment to Make Tranche A Advances 50%
C. Assigned Share of Commitment to Make Tranche B Advances 50%
D. Total Commitment of TBCC Immediately After Assignment $12,500,000
1. Commitment to Make Tranche A Advances $12,500,000
2. Commitment to Make Tranche B Advances* $2,500,000
E. Total Commitment of PNC Immediately After Assignment $12,500,000
1. Commitment to Make Tranche A Advances $12,500,000
2. Commitment to Make Tranche B Advances* $2,500,000
====================================================================================
</TABLE>
* Tranche B is a Sublimit of Tranche A
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCTOBER 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 9,121
<ALLOWANCES> 231
<INVENTORY> 3,239
<CURRENT-ASSETS> 13,183
<PP&E> 7,234
<DEPRECIATION> (3,978)
<TOTAL-ASSETS> 16,600
<CURRENT-LIABILITIES> 15,182
<BONDS> 262
0
0
<COMMON> 10
<OTHER-SE> 1,146
<TOTAL-LIABILITY-AND-EQUITY> 16,600
<SALES> 31,794
<TOTAL-REVENUES> 31,794
<CGS> 20,454
<TOTAL-COSTS> 20,454
<OTHER-EXPENSES> 26,037
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,358
<INCOME-PRETAX> (17,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,411)
<EPS-BASIC> (2.71)
<EPS-DILUTED> (2.71)
</TABLE>
