-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OsTGl+5gOhNWCJboPrfuVr9ctUosFhyu/07dJly0DGCbsTvmvvJSBSJl5wdlp3CP SfkcEezY/YNVjKPT33VEuA== 0000891618-96-002608.txt : 19961113 0000891618-96-002608.hdr.sgml : 19961113 ACCESSION NUMBER: 0000891618-96-002608 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961024 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUREAL SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000892433 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 943117385 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22626 FILM NUMBER: 96657780 BUSINESS ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 BUSINESS PHONE: 5102524245 MAIL ADDRESS: STREET 1: 4245 TECHNOLOGY DR CITY: FREMONT STATE: CA ZIP: 94538-6339 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA VISION TECHNOLOGY INC DATE OF NAME CHANGE: 19931210 10-Q 1 AUREAL SEMICONDUCTOR, INC. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. AUREAL SEMICONDUCTOR INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3117385 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4245 TECHNOLOGY DRIVE FREMONT, CA 94538 (Address of principal executive offices) (510) 252-4245 (Telephone) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant has filed all documents required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- At November 5, 1996, 39,133,010 shares of common stock, $0.001 par value, of the registrant were outstanding. This report on Form 10-Q, (including exhibits) contains 45 pages. The exhibit index is located on page 16. 2 AUREAL SEMICONDUCTOR INC. FORM 10-Q Table of Contents
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements................................................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................... 14 Item 5. Other Information..................................................................... 15 Item 6. Exhibits and Reports on Form 8-K...................................................... 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AUREAL SEMICONDUCTOR INC. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Interim Condensed Consolidated Financial Statements of Aureal Semiconductor Inc. (the "Company") have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The disclosures included in the Interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited financial statements at December 31, 1995 and the notes thereto included in the Company's 1995 Annual Report on Form 10-K . The preparation of financial statements in conformity with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Interim Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results of operations for the fiscal quarter and three quarters ended September 29, 1996 are not necessarily indicative of the results that may be expected for any subsequent quarter or the entire fiscal year ending December 29, 1996. 3 4 AUREAL SEMICONDUCTOR INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
September 29, December 31, 1996 1995 ------------ ------------ (Unaudited) ASSETS: Current assets: Cash and cash equivalents $ 85 $ 22 Restricted cash -- 393 Accounts receivable 127 59 Inventories 107 178 Prepaid expenses and other current assets 280 1,115 --------- --------- Total current assets 599 1,767 Property and equipment: Machinery and equipment 2,281 1,961 Furniture, fixtures and improvements 915 913 --------- --------- 3,196 2,874 Accumulated depreciation and amortization (2,327) (1,813) --------- --------- Net property and equipment 869 1,061 Reorganization asset, less accumulated amortization of $10,471 in 1996 and $8,596 in 1995 3,125 5,000 Other assets 176 120 --------- --------- Total assets $ 4,769 $ 7,948 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 665 $ 836 Accrued compensation and benefits 578 448 Restructuring obligations 892 2,146 Other accrued liabilities 2,820 2,929 Current portion of pre-petition claims 818 946 --------- --------- Total current liabilities 5,773 7,305 TCW Credit Facility 7,105 19,300 Long-term portion of pre-petition claims and deferred obligations 4,701 5,176 --------- --------- Total liabilities 17,579 31,781 --------- --------- Stockholders' equity (deficit): Common stock, $0.001 par value Authorized shares - 100,000,000; Issued and outstanding shares - 39,129,796 in 1996, 20,000,000 in 1995 39 20 Additional paid-in capital 104,933 79,980 Accumulated deficit (117,782) (103,833) --------- --------- Total stockholders' (deficit) (12,810) (23,833) --------- --------- Total liabilities and stockholders' (deficit) $ 4,769 $ 7,948 ========= =========
See accompanying notes. 4 5 AUREAL SEMICONDUCTOR INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarter Ended Three Quarters Ended ------------- -------------------- September 29, October 1, September 29, October 1, 1996 1995 1996 1995 ------------- ---------- ------------- ---------- (unaudited) (unaudited) Net sales $ 237 $ 7,292 $ 3,280 $ 47,260 Cost of sales 44 7,324 286 53,320 --------- --------- --------- --------- Gross margin 193 (32) 2,994 (6,060) Operating expenses: Research and development 1,521 1,626 4,843 5,026 Sales and marketing 880 1,794 1,285 13,082 General and administrative 502 863 1,794 4,025 Amortization of reorganization asset 625 625 1,875 7,971 Restructuring charges -- 8,000 -- 61,626 Write-off of acquired research and development in progress -- -- 6,013 -- --------- --------- --------- --------- Total operating expenses 3,528 12,908 15,810 91,730 Operating loss (3,335) (12,940) (12,816) (97,790) Interest expense (342) (721) (1,845) (2,371) Interest income 16 41 154 134 Other income (expense) 362 (27) 558 (24) --------- --------- --------- --------- Loss from operations before income taxes (3,299) (13,647) (13,949) (100,051) Provision for income taxes -- -- -- -- Net loss $ (3,299) $ (13,647) $ (13,949) $(100,051) ========= ========= ========= ========= Net loss per share $ (0.08) $ (0.68) $ (0.44) $ (5.00) ========= ========= ========= ========= Shares used in calculating per share amounts 38,930 20,000 31,412 20,000
See accompanying notes. 5 6 AUREAL SEMICONDUCTOR INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Quarters Ended -------------------- September 29, October 1, 1996 1995 ------------- ---------- OPERATING ACTIVITIES (unaudited) Net loss from continuing operations $ (13,949) $(100,051) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Restructuring charges -- 61,626 Depreciation and amortization 2,388 9,787 Write-off of acquired research and development in process 6,013 -- Changes in operating assets and liabilities - net of assets acquired and liabilities assumed in 1996: Restricted cash used for purchase of inventory -- 2,838 Accounts receivable 148 13,387 Inventories 145 8,980 Prepaid expenses and other current assets 1,019 3,011 Other assets 155 492 Accounts payable (288) (953) Accrued compensation and benefits, and other accrued liabilities (1,712) (7,685) --------- --------- Net cash used in operating activities (6,081) (8,568) INVESTING ACTIVITIES Payment for acquisition of business, net of cash acquired (2,970) -- Acquisition of property and equipment (273) (277) Proceeds from disposition of property and equipment -- 290 --------- --------- Net cash provided by (used in) investing activities (3,243) 13 FINANCING ACTIVITIES Proceeds from TCW Credit Facility 2,733 9,805 Repayment of TCW Credit Facility (14,928) -- Principal payments on pre-petition claims (552) (1,542) Proceeds from issuance of common stock, net of issuance costs 22,134 -- --------- --------- Net cash provided by financing activities 9,387 8,263 Net increase (decrease) in cash and cash equivalents 63 (292) Cash and cash equivalents at beginning of period 22 590 --------- --------- Cash and cash equivalents at end of period $ 85 $ 298 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 2,163 $ 653
See accompanying notes. 6 7 AUREAL SEMICONDUCTOR INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. RECENT EVENTS The Company emerged from Chapter 11 bankruptcy protection in December 1994. At that time, it derived substantially all of its revenues from the design, development and sale of multimedia add-in systems for PC's marketed through electronics retailers and distributors. In August 1995, the Company announced that it was divesting its multimedia components business to implement a business plan based on the development and sale of software and semiconductor solutions providing advanced audio for the PC and consumer electronics markets. Given the Company's change in business plan, revenues are not expected to be significant in 1996 as the Company completes development of its newest audio technologies and begins to market such products. The Company expects to incur operating losses at least through fiscal 1996, and there is no assurance that the Company will achieve profitability thereafter. During the first quarter of 1996, the Company sold the Media Vision brand name, related trade names and other assets of its previous retail business to a third party. The sales agreement transferred the retail customer service and technical support obligations to the buyer. It also provides for a potential royalty stream on future sales made under the Media Vision brand name, and a commitment by the buyer to purchase products incorporating the Company's current advanced audio solutions for the PC audio market. In conjunction with the Company's change in business, it formally changed its name to Aureal Semiconductor Inc. at its Annual Stockholders' Meeting in May 1996. Its stock symbol on the OTC Bulletin Board is AURL. In three transactions from February through June 1996, the Company completed the private sale of 18.9 million shares of common stock for $22 million. The proceeds from the sale of this common stock has been used for working capital, to pay down the existing TCW Credit Facility and to partially fund the acquisition of Crystal River Engineering, Inc. (see below). In conjunction with this equity infusion, the total availability under the Company's line of credit was reduced from $22 million to $20 million. The Company, in May 1996, acquired 100% ownership of Crystal River Engineering, Inc. ("CRE"), a privately held firm specializing in 3D audio technology development. The total recorded cost of the acquisition was $6.4 million. Aureal recorded, in the second quarter, a write-off of $6.0 million due to the recognition that in-process research and development efforts associated with CRE's 3D audio technology had not reached technological feasibility with respect to the Company's product line at the date of acquisition. In early September 1996, the Company introduced Aureal 3D, the first interactive 3D audio solution for implementation in both the PC and consumer home theater applications. The introduction included announcement of 3D technology licensing agreements with Diamond Multimedia and Oak Technology. Also in September, the Company announced the VSP901 Dolby(R) Pro Logic(R) Surround Processor, an Aureal proprietary semiconductor designed to produce a complete Dolby surround sound solution utilizing only two speakers. Also in September 1996, CRE was awarded a Small Business Innovative Research (SBIR) Program Phase II contract by the Office of Naval Research. The initial award of $250,000 is subject to increase in two further segments expected to be received in the near future, pending appropriation of funding. Anticipating the exercise of the further options by the Navy, the contract can total $613,000. Receipt of actual payments will follow specific milestone achievements, as set forth in the contract. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Interim Condensed Consolidated Financial Statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. 7 8 The preparation of financial statements in conformity with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Interim Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results of operations for the quarter and three quarters ended September 29, 1996 are not necessarily indicative of the results that may be expected for any subsequent quarter or the entire fiscal year ending December 29, 1996. Certain reclassifications have been made to the prior year's interim financial statements to conform to the 1996 presentation. Cash and Cash Equivalents The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Substantially all cash and cash equivalents are on deposit with one financial institution. Inventories Inventories, which consist predominantly of finished goods at both balance sheet dates presented, are stated at the lower of cost or market value. Revenue Recognition The Company's major sources of revenue consist of sales of proprietary design, advanced audio semiconductor chips, licensing of related audio technology and sales of PC hardware and software for utilization of the audio technology. Revenue is recognized upon shipment for product sales. With respect to licensing transactions, revenue is recognized upon delivery of certain technologies for development fees, and upon reported sales of licensed units for royalties. Loss Per Share Loss per share is based upon the weighted average common shares outstanding for the period. No stock option information is incorporated into the calculation as, due to the net loss, any affect would be anti-dilutive. Amortization of Reorganization Asset At December 31, 1994, the Company was reorganized under Chapter 11 of the federal bankruptcy code. The reorganization value of the Company exceeded its net assets by $44.1 million, thus giving rise to an intangible asset recorded on the consolidated balance sheet of the Company ("Reorganization Asset"). The value of the Reorganization Asset was reduced in the second quarter of 1995 as the Company exited the retail products business. The net remaining Reorganization Asset of $5.0 million as of December 31, 1995 is being amortized over two years ($625,000 per quarter). 3. ACQUISITION OF CRYSTAL RIVER ENGINEERING, INC. ("CRE") During the second quarter of 1996, the Company acquired 100% ownership of CRE, a privately held firm specializing in the development of 3D audio technologies. The acquisition consideration included purchase of stock totaling approximately $2.9 million, the exchange of stock options valued at $2.8 million and other cash considerations (both current and deferred) totaling approximately $0.6 million. The acquisition was recorded using purchase accounting. The fair value of CRE assets and liabilities at the date of acquisition were recorded in the Company's consolidated financial statements. As part of the allocation of fair values, the Company recorded a non-recurring write-off of approximately $6.0 million in the second quarter due to recognition that in-process research and development efforts associated with CRE's 3D audio technology had not reached technological feasibility with 8 9 respect to the Company's product line at the date of acquisition. The Company plans to incorporate the CRE 3D audio technology into a number of its future products. Comparable pro-forma statements of operations for the year-to-date periods in both 1996 and 1995 assuming the acquisition had taken place at the beginning of each fiscal year are shown below.
Year to Date September 29, October 1, 1996 1995 ---- ---- Revenues $ 3,704 $ 48,662 Costs and expenses 18,313 149,446 --------- --------- Net loss $ (14,609) $(100,784) ========= ========= Net loss per share $ (0.47) $ (5.04) ========= =========
4. INCOME TAXES The Company was not required to provide for income taxes in the first three fiscal quarters of 1996 or the entire fiscal year of 1995 due to its net operating losses. No tax benefit has been recorded for the losses due to the uncertainty as to the realizability. At December 31, 1995, the Company had available net operating loss carryforwards ("NOL's") of approximately $253 million to reduce future taxable income. The Company's ability to use NOL's originating in years prior to 1995 to offset future taxable income is subject to restrictions under the Internal Revenue Code of 1986 ("the Code"), as amended. The restrictions imposed under Section 382 (l)(5) of the Code severely limit the Company's future use of its NOL's should the Company undergo a significant ownership change (as defined in the Code) prior to December 31, 1996. The Company does not believe that any recent or historical changes in stock ownership have resulted in an ownership change through the date of these financial statements. 5. LINE OF CREDIT The Company maintains a line of credit, with a maturity date of March 31, 1998, with certain entities managed by TCW Special Credits, an affiliate of the TCW Group, Inc., ("TCW"). In conjunction with the private placement of equity finalized in June 1996, the line of credit was reduced from $22 million to $20 million. Borrowings under the facility are secured by all the assets of the Company. At November 5, 1996, $8.3 million was outstanding under the line. Additionally, as of November 5, 1996, TCW and affiliated entities controlled approximately 44% of the Company's outstanding common stock. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995, CONTAINED IN FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, DEPENDENCE ON NEW TECHNOLOGY, FOUNDRY CAPACITY AVAILABILITY AND RELIABILITY; DEPENDENCE ON THE PC AND CONSUMER ELECTRONICS INDUSTRIES AND ON A PRODUCT LINE BASED ON A NEW TECHNOLOGY; COMPETITION AND PRICING PRESSURES; AND OTHER RISKS DETAILED BELOW AND FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. OVERVIEW During 1995 and the first three quarters of 1996, a number of significant changes took place in the Company's business (see Note 1 to the Interim Condensed Consolidated Financial Statements in Item 1). The company has exited its prior business of designing, developing, and selling PC multimedia upgrade kits in the retail marketplace, and is focusing all of its efforts on the development of advanced audio solutions (combination of semiconductor products and related software) for use in the PC and consumer electronics markets. This change in business was announced in August 1995, with the transition taking place over the second half of 1995. Due to this change in business, the financial results of operations for the first three fiscal quarters of 1996 and 1995 are not considered comparable. While some comparative comments are included herein, the composition of the business varied greatly between the periods in the years presented, as described above. The audio semiconductor industry is extremely competitive, and is characterized by rapid technological change, evolving industry standards, changing market conditions and frequent new product introductions and enhancements. The introduction of products embodying new technologies or standards can render existing products or products under development obsolete or unmarketable. Many of the Company's competitors have more extensive engineering, manufacturing, marketing, financial and personnel resources than those of the Company. Accordingly, the Company's success in implementing its strategy to focus on the audio semiconductor business will depend in large part on its ability to anticipate industry changes and to develop and introduce new products on a timely basis. Development and customer acceptance of new products is inherently uncertain, and there can be no assurance that the Company will successfully complete the development of its advanced audio solutions on a timely basis or that such products will be commercially successful. RESULTS OF OPERATIONS Net Sales Net sales for the third quarter of 1996 totaled $237,000 comprised primarily of sales of CRE's "Accoustetron II", a stand-alone sound system offering Aureal 3D interactive three dimensional sound for real-time graphics workstations. Year-to-date revenues of $3.3 million consist primarily of technology licensing transactions along with sales of semiconductor products of pre-existing technology in the first two fiscal quarters. In addition to licenses for Aureal's pre-existing legacy audio technology, which account for virtually all of the licensing revenues to date, the Company has entered into 3D audio technology ("Aureal A3D") licenses with Diamond Multimedia and Oak Technology, companies which are anticipated to utilize the technology in the PC marketplace. As indicated in earlier quarterly filings, the Company has not anticipated significant revenues in 1996. The Company's primary goal for the second half of 1996 has been to generate significant visibility for Aureal's technology in both the PC and home electronic entertainment markets. Important steps toward this goal have been taken with the September announcements of Aureal 3D ("A3D") technology and the VSP901 semiconductor chip. The Company anticipates making the VSP901 available to customers in the first quarter of 1997. 10 11 Revenues will not be recognized until finished products are shipped to customers. There can be no assurance that the Company can complete development and arrange for the successful manufacturing of these semiconductor products, nor that such products will be successful in the marketplace. Revenues in the third quarter and first three quarters of 1995 were $7.3 million and $47.3 million respectively, consisting primarily of PC multimedia upgrade kit sales prior to the termination of that business in the second half of 1995. Gross Margin Gross margin for the third quarter and first three quarters of 1996 were $193,000 and $3.0 million respectively. A significant percentage of net sales for the three quarters consisted of licensing revenues from the Company's pre-existing audio technologies. Virtually no current costs were directly associated with the licensing of the Company's pre-existing audio technology. Consequently, the gross profit was near 100% for those revenues. Gross margins associated with sales of semiconductor products were approximately 50% for the year to date. Negative gross margin for the year to date in 1995 reflects the negative market conditions for the Company as it struggled in the retail PC upgrade marketplace, until the August 1995 announcement that it was exiting that business. A virtually break-even gross margin for the third quarter resulted from a second quarter write-down of all inventories to liquidation value as the Company terminated its retail business. Research and Development Research and development expenditures remained relatively constant at $1.52 million in third quarter of 1996, as compared to $1.62 million and $1.70 million in the first and second quarters of the year. The research and development efforts are expected to continue at current levels, or increase as work on audio technologies and enhancements continue. Year to date expense comparisons ($4.8 million in 1996 versus $5.0 million in 1995) reflect increased focus on only audio R&D efforts in 1996. With the elimination of efforts in non-audio areas, the actual spending on audio technology efforts has increased in 1996. Selling and Marketing Selling and marketing expenditures have increased each quarter in 1996 as the Company moves closer to releasing products for sale. Increases included additions to staffing as well as incremental travel costs due to increased contact with potential domestic and international customers. Specific product designs as well as reference designs to utilize Aureal semiconductor technologies for customer products have been developed and are currently being demonstrated to a number of major home entertainment and PC peripheral manufacturers. 1995 sales and marketing expenses related to the domestic and international efforts in the retail PC upgrade kit marketplace. Those efforts were reduced in the third quarter of 1995 and eliminated by year-end 1995. General and Administrative General and administrative expenditures of $502,000 and $1.8 million for the third quarter and three quarters respectively, of 1996, reflect continued cost containment efforts in the administrative functions. Legal costs, noted as increased in the second quarter of 1996 for prosecution of pending patent applications, were lower in the third quarter. General and administrative costs are anticipated to increase in support of the Company's activities as product shipments commence. As with other cost categories above, general and administrative costs in 1995 supported the retail products organization. With the change in business in late 1995, these costs were reduced in line with the overall size of the Company. 11 12 Amortization of Reorganization Asset The Reorganization Asset originated pursuant to the Company's valuation upon its exit from bankruptcy on December 30, 1994 whereby the fair value of the Company exceeded its net assets by $44.1 million. The Reorganization Asset initially was being amortized over three years at the rate of $3.7 million per fiscal quarter. During the second quarter of 1995 it was determined that the Reorganization Asset could no longer be assured of recovery and a $30.5 million write-off was necessary (see Restructuring Charges below). The remaining asset value after the write-off is being amortized through 1997 at the rate of $625,000 per fiscal quarter. Restructuring Charges During 1995, the Company announced a plan to divest its worldwide retail operations and provided a $61.6 million restructuring provision to reflect a writedown of assets and record incremental costs. This provision was included as a component of operating expenses for the second and third quarters of 1995 totaling $53.6 million and $8.0 million respectively. Interest Expense Interest expense for the three quarters of both years consisted primarily of interest on the TCW Credit Facility at the rate of prime plus 5%. The TCW Credit Facility was a primary source of working capital during 1995. Equity funding totaling $22 million in the first half of 1996 was utilized to both fund current working capital needs and pay down the TCW Credit Facility. The reduction in the debt balance outstanding reduced interest expense in the second and third quarters of 1996. The balance on the TCW Credit Facility is expected to increase over future fiscal quarters as it is utilized as a source of working capital. Interest and Other Income Interest income of $16,000 declined in the third quarter of 1996 from the prior two quarters ($65,000 in the first quarter and $72,000 in the second quarter). Virtually all the interest income was generated on funds received from the private placement of common stock in February and March of 1996. Terms of these transactions placed certain restrictions on the Company's ability to use the proceeds to reduce the outstanding balance on the TCW Credit Facility. The invested cash declined during the second and third quarters as it was utilized for ongoing operations costs as well as in the acquisition of CRE. With cash balances at a minimum at the end of the third quarter, future interest income is not expected to be significant. The Company has recognized $558,000 of other income in 1996 from a number of sources, including receipt of prior year VAT refunds and other old business sources (together totaling approximately $298,000 in the third quarter in excess of previously recorded amounts), recovery of property loss insurance proceeds, and miscellaneous other receipts. Interest income for 1995 was earned primarily on certificates of deposit utilized to collateralize the purchase of certain inventory items, a program terminated in the third quarter of that year. Income Taxes The Company was not required to provide for income taxes in the first three fiscal quarters of 1996 or the entire fiscal year of 1995 due to its net operating losses. No tax benefit has been recorded for the losses due to the uncertainty as to the realizability. 12 13 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents have remained essentially flat (net increase of $63,000) over the first three fiscal quarters of 1996. In addition to ongoing operations during this period, a number of significant transactions occurred affecting capital resources. The Company raised approximately $22 million from the sale of its common stock, reduced outstanding debt by $12.7 million and invested cash of $3.0 million in the acquisition of CRE. In addition, the Company continues to reduce its liabilities associated with the 1995 restructuring. The Company believes that current cash on hand together with the $20 million TCW Credit Facility, of which $11.7 million was available for borrowings as of November 5, 1996, will provide adequate financial resources to sustain its business for the next twelve months. The Company may be required to seek additional financing to expand its business unless revenues increase to a level sufficient to generate positive cash flow. There can be no assurance that the Company will be able to attain such revenue levels or generate positive cash flows in the future or to obtain such financing on favorable terms, if at all. RISK FACTORS In evaluating the Company's business, the following factors should be considered in addition to the other information in this Form 10-Q. Pre-revenue Stage Company The Company is a pre-revenue stage operation relative to its primary product line and has generated only minimal revenues since its transition to an audio technology firm. As discussed above, the Company has made progress toward development and marketing of its technologies and specific products, but there is no assurance that the Company will be successful in its efforts to complete development of its products or to commercialize its products or generate positive cash flow from anticipated product sales. Emerging Technology - Product Concentration The primary technology for the Company's anticipated products is new and emerging in the marketplace. The Company is working to set standards for Audio 3D in both the PC and home entertainment markets. There is no assurance that the markets will develop and recognize the value of the Company's products, or that such events will occur over a time period to allow the Company to successfully participate in the markets' anticipated growth. In addition, the Company is seeking to compete in an area of rapid technological change and potentially short product life cycles. The Company must develop, market and sell products in timeframes appropriate to the marketplace. The Company expects that potential competition may come from companies who have financial and other resources significantly greater than those of the Company. Need for Foundry Access The Company is a "fabless semiconductor firm" which depends on outside manufacturing resources for production of its semiconductor products. As such, the Company places a high value on maintaining strong relationships with potential manufacturing sources. Such foundry relationships can take many forms, and the company is constantly exploring the expansion of existing relationships. The Company believes it currently has access to sufficient foundry capacity to provide manufacturing resources for its currently anticipated products. This capacity is subject to overall industry demand as well as individual factors which can impact any specific manufacturer's ability or intention to provide product manufacturing resources to the Company. There is no assurance that the Company can continue to obtain sufficient foundry capacity, or maintain such capacity at acceptable costs. 13 14 New Management Team; Dependence on Personnel Only one of the Company's current officers served as an officer of the Company prior to March 1995. All of the Company's four current directors were elected to the Board of Directors at or subsequent to December 1994. The Company's management team and Board of Directors face significant challenges in delivering emerging technology products in a cost effective, and profitable manner. The Company is highly dependent upon continued services of key engineering, marketing, sales and management personnel. The Company's employees may voluntarily terminate their employment with the Company at any time. The competition for such employees is intense and the loss of their services could have a material adverse effect on the Company's business. Proprietary Rights and Related Litigation The Company's ability to compete successfully will depend, in part, on its ability to protect its proprietary technology. Although the Company continues to implement protective measures and intends to defend its proprietary rights, there can be no assurance that measures to deter or prevent unauthorized use of the Company's technology will be successful. The Company relies on a combination of copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish and protect its proprietary rights. In addition, the Company has certain issued patents and patent applications pending in the United States and in foreign countries and intends to file additional applications as appropriate for patents covering its technologies and products. There can be no assurance that patents will issue from any of these pending applications, or, if patents do issue, that any claims allowed will be sufficiently broad to protect the Company's technology. There can also be no assurance that any patents that may be issued to the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. In addition, the laws of certain foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. From time to time the Company has received, and may receive in the future, notice of claims of infringement of other parties' proprietary rights. Although the Company does not believe that its products infringe the proprietary rights of any third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted against the Company or that any such assertions will not materially adversely affect the Company's business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, the Company could incur significant cost and diversion of management efforts with respect to the defense thereof which could have a material adverse effect on the Company's business, financial condition or results of operations. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that under such circumstances, a license would be available under reasonable terms or at all. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In July 1996, the Company received correspondence from Yamaha Corporation asserting that the Company's FM synthesis semiconductor device may infringe on a number of Yamaha's patents. The Company has requested more specific information regarding Yamaha's assertions, however it does not believe that its FM synthesis device infringes upon any of Yamaha's patents. Yamaha has aggressively brought patent infringement actions against other companies which have developed replacement FM synthesis devices. There can be no assurance that Yamaha will not seek litigation against the Company. In October 1996, the Company became aware of, but has not been served with, a counterclaim filed by the Company's prior auditors, Ernst and Young LLP ("E&Y") naming the Company as a third-party defendant in a lawsuit involving the Company's prior creditors and E&Y. The third-party complaint seeks indemnification and contribution from the Company for lawsuits filed against E&Y resulting from pre-bankruptcy activities. The Company believes that any such alleged obligations were discharged by bankruptcy court confirmation of the Company's Plan of Reorganization in 1994. The Company plans to aggressively pursue its rights to dismiss the suit and vigorously argue that any alleged obligations have been discharged in the bankruptcy proceedings. See Item 3 of Company's 1995 Annual Report on Form 10-K. 14 15 ITEM 5. OTHER INFORMATION On August 2, 1996, the Company filed a registration statement on Form S-8 to register a total of 2,644,845 shares of Aureal Common Stock in conjunction with stock options granted by Crystal River Engineering, Inc., and assumed by Aureal in connection with the acquisition of CRE by Aureal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit index at page 16. (b) Reports on Form 8-K: On July 17, 1996 the Company filed an amendment to its Form 8-K originally filed May 22, 1996 to include the audited and pro forma financial statements of Crystal River Engineering, Inc., pursuant to Article 11 of Regulation S-X. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUREAL SEMICONDUCTOR INC. Date: November 5, 1996 By: /S/ Kenneth A. Kokinakis ------------------------ Kenneth A. Kokinakis President and Chief Executive Officer Date: November 5, 1996 By: /s/David J. Domeier ------------------- David J. Domeier Vice President, Finance and Chief Financial Officer 15 16 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGES - ----------- ----------------------- ------------ 2.1 Agreement and Plan of Reorganization among the Company, Aureal Acquisition Corporation, a wholly-owned subsidiary of the Company and Crystal River Engineering, Inc., dated as of May 7, 1996 (1) 3.1 Second Amended and Restated Certificate of Incorporation of the Company dated May 8, 1996 (2) 3.2 Restated Bylaws of Aureal Semiconductor Inc. 18-33 4.1 Common Stock Purchase Agreement by and among the Company and certain beneficial owners of 5% or more of the Company's Common Stock, as amended (3) 4.2 Common Stock Purchase Agreement by and among the Company and certain entities and individuals dated June 10, 1996 (5) 10.1 Amended and Restated Loan Agreement dated as of December 30, 1994 with TCW Special Credits, and the First Amendment thereto dated March 22, 1995 (4) 10.2 Second Amendment to Amended and Restated Loan Agreement dated as of July 24, 1995 (3) 10.3 Third Amendment to Amended and Restated Loan Agreement dated as of February 16, 1996 (3) 10.4 Letter Agreement between TCW Special Credits and the Company dated 34-37 June 5, 1996 reducing loan commitment from $22 million to $20 million 10.5 1995 Stock Option Plan (3) 10.6 Form of incentive option agreement and non-statutory stock option agreement used under 1995 Stock Option Plan (3) 10.7 1994 Stock Option Plan (4) 10.8 Form of incentive option agreement and non-statutory stock option agreement used under 1994 Stock Option Plan (4) 10.10 Industrial Space Sublease with Chemical Waste Management, Inc. dated September 13, 1995 (3) 10.11 Offer Letter Agreement with Kenneth A Kokinakis dated December 8, 1995 (3) 10.12 Form of Indemnity Agreement for Directors and Officers 38-45 11.1 Statement regarding computation of per share earnings - see Note 2 to Condensed Consolidated Financial Statements in Item 1 of this report
16 17 27.1 Financial Data Schedule (Edgar only) - ---------------- (1) Incorporated by reference to the exhibits filed with Form 8-K dated May 22, 1996 (2) Incorporated by reference to the exhibits filed with Form S-8 (Registration number 333-09531) filed August 2, 1996 (3) Incorporated by reference to the exhibits filed with Form 10-K for year ended December 31, 1995 (4) Incorporated by reference to the exhibits filed with Form 10-K for year ended December 31, 1994 (5) Incorporated by reference to the exhibits filed with Form S-3 (Registration number 333-3870) filed June 26, 1996 EX-3.2 2 RESTATED BYLAWS OF AUREAL SEMICONDUCTOR INC. 1 RESTATED BYLAWS OF AUREAL SEMICONDUCTOR INC. 2 TABLE OF CONTENTS Page ---- I STOCKHOLDERS........................................................ 1 1.1 Annual Meeting............................................. 1 1.2 Special Meeting............................................ 1 1.3 Notice of Meetings......................................... 1 1.4 Quorum..................................................... 2 1.5 Conduct of the Stockholders' Meeting....................... 2 1.6 Conduct of Business........................................ 2 1.7 Notice of Stockholder Business............................. 3 1.8 Proxies and Voting......................................... 3 1.9 Stock List................................................. 4 1.10 Action Without Meeting..................................... 4 II BOARD OF DIRECTORS.................................................. 4 2.1 Number and Term of Office.................................. 4 2.2 Vacancies and Newly Created Directorships.................. 5 2.3 Removal.................................................... 5 2.4 Regular Meetings........................................... 6 2.5 Special Meetings........................................... 6 2.6 Quorum..................................................... 6 2.7 Participation in Meetings by Conference Telephone.......... 6 2.8 Conduct of Business........................................ 6 2.9 Powers..................................................... 6 2.10 Compensation of Directors.................................. 7 2.11 Nomination of Director Candidates.......................... 7 III COMMITTEES.......................................................... 8 3.1 Committees of the Board of Directors....................... 8 3.2 Conduct of Business........................................ 8 IV OFFICERS............................................................ 9 4.1 Generally.................................................. 9 4.2 Chairman of the Board...................................... 9 4.3 President.................................................. 9 4.4 Vice President............................................. 9 4.5 Treasurer.................................................. 9 4.6 Secretary.................................................. 10 4.7 Delegation of Authority.................................... 10 4.8 Removal.................................................... 10 4.9 Action With Respect to Securities of Other Corporations.... 10 i 3 V STOCK............................................................... 10 5.1 Certificates of Stock...................................... 10 5.2 Transfers of Stock......................................... 10 5.3 Record Date................................................ 10 5.4 Lost, Stolen or Destroyed Certificates..................... 11 5.5 Regulations................................................ 11 VI NOTICES............................................................. 11 6.1 Notices.................................................... 11 6.2 Waivers.................................................... 11 VII MISCELLANEOUS....................................................... 11 7.1 Facsimile Signatures....................................... 11 7.2 Corporate Seal............................................. 12 7.3 Reliance Upon Books, Reports and Records................... 12 7.4 Fiscal Year................................................ 12 7.5 Time Periods............................................... 12 VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS........................... 12 8.1 Right to Indemnification................................... 12 8.2 Right of Claimant to Bring Suit............................ 13 8.3 Non-Exclusivity of Rights.................................. 13 8.4 Indemnification Contracts.................................. 13 8.5 Insurance.................................................. 13 8.6 Effect of Amendment........................................ 13 IX AMENDMENTS.......................................................... 13 ii 4 AUREAL SEMICONDUCTOR INC., A DELAWARE CORPORATION RESTATED BYLAWS ARTICLE I STOCKHOLDERS I.1 Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place (within or without the State of Delaware), on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. I.2 Special Meeting. Except as otherwise required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation), special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (ii) by the holders of not less than ten percent (10%) of all shares entitled to cast votes at the meeting, voting together as a single class and shall be held at such time, date and place (within or without the State of Delaware) as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. I.3 Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. I.4 Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall 1 5 constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, starting that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. I.5 Conduct of the Stockholders' Meeting. At every meeting of the stockholders, the Chairman, if there is such an Officer, or if not, the President of the Corporation, or in his absence the Vice President designated by the President, or in the absence of such designation any Vice President, or in the absence of the President or any Vice President, a chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 8 of these Bylaws to act by proxy, and officers of the Corporation. I.6 Conduct of Business. The Chairman shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 6 and in Section 7, below. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 6 and of Section 7, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. I.7 Notice of Stockholder Business. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice 2 6 of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a stockholder, or (d) properly brought before a special meeting by a stockholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by stockholders. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which notice of the date of the proposed meeting was mailed or public disclosure of such date was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. I.8 Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. No stockholder may authorize more than one proxy for his shares. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the Chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast. I.9 Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of 3 7 each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. I.10 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II BOARD OF DIRECTORS II.1 Number and Term of Office. The authorized number of directors initially shall be five (5), and thereafter may be increased or decreased from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors; provided that the authorized number of directors which shall constitute the whole Board of Directors shall not be less than five (5) nor more than seven (7). The directors shall be divided into three (3) classes, as nearly equal in number as reasonably possible. Each director shall serve for a term ending on the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending at the annual meeting to be held in 1996, the directors first elected to Class II shall serve for a term ending at the annual meeting to be held in 1997, and the directors first elected to Class III shall serve for a term ending at the annual meeting to be held in 1998. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose terms then expire as directorships of another class in order to more nearly achieve equality of the number of directors among the classes. Notwithstanding the rule that the three (3) classes shall be as nearly equal in number of directors as possible, in the event of any changes in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. The directors shall be elected at each annual meeting of stockholders, but if any annual meeting is not 4 8 held, or the directors are not elected thereat, the directors may be elected at any special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. II.2 Vacancies and Newly Created Directorships. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors than in office, through less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. II.3 Removal. Any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies on the Board of Directors resulting from such removal may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present or by unanimous written consent of the stockholders. Directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires. II.4 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. II.5 Special Meetings. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not fewer than five (5) days before the meeting or by telegraphing or personally delivering the same not fewer than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. II.6 Quorum. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. II.7 Participation in Meetings by Conference Telephone. Members of the Board of 5 9 Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. II.8 Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. II.9 Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (a) To declare dividends from time to time in accordance with law; (b) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (c) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (d) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (e) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (f) To adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (g) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (h) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs. II.10 Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as 6 10 directors, including, without limitation, their services as members of committees of the Board of Directors. II.11 Nomination of Director Candidates. Nominations for the election of Directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a stockholder nomination for a director shall be received at the Corporation's principal executive offices not less than 21 days nor more than 60 days prior to any meeting of stockholders called for the election of directors; provided, however, that if less than 21 days notice of the meeting is given to shareholders, such notice of intention to nominate shall be received at the Corporation's principal executive offices not later than the close of business on the 7th day following the day on which the notice of meeting was mailed. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. In the event that a person is validly designated as a nominee in accordance with this Section 11 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee upon delivery, not fewer than five (5) days prior to the date of the meeting for the election of such nominee, of a written notice to the secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Section 11 had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. If the Chairman of the meeting for the election of directors determines that a nomination of any candidate for election as a director at such meeting was not made in accordance with the applicable provisions of this Section 11, such nomination shall be void. ARTICLE III COMMITTEES 7 11 III.1 Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. III.2 Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS IV.1 Generally. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chairman of the Board, if there shall be such an officer, and the President shall each be members of the Board of Directors. Any number of offices may be held by the same person. IV.2 Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. 8 12 IV.3 President. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation. IV.4 Vice President. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. IV.5 Treasurer. Unless otherwise designated by the Board of Directors, the Chief Financial Officer of the Corporation shall be the Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation and shall have custody of all monies and securities of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. IV.6 Secretary. The Secretary shall issue all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders, the Board of Directors, and all committees of the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. IV.7 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. IV.8 Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. IV.9 Action With Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK 9 13 V.1 Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. V.2 Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. V.3 Record Date. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. V.4 Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. V.5 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES VI.1 Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or by telegram or mailgram. VI.2 Waivers. A written waive of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, 10 14 shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS VII.1 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. VII.2 Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. VII.3 Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. VII.4 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. VII.5 Time Periods. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS VIII.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware 11 15 law, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights that said law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit or his or her heirs, executors and administrators; provided, however, that, except as otherwise provided in Section 2 of this Article VIII, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. VIII.2 Right of Claimant to Bring Suit. If a claim under Section 1 of this Article VIII is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such 12 16 applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. VIII.3 Non-Exclusivity of Rights. The rights conferred on any person in Sections 1 and 2 shall be in addition to any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. VIII.4 Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. VIII.5 Insurance. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. VIII.6 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VIII shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENTS The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal by Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. In addition to any vote of the holders of any class or series of stock of this Corporation required by law or by these Bylaws, the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provisions of the Bylaws of the Corporation. Notwithstanding anything to the contrary contained in this Article IX, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal Bylaws of the Corporation that relate to the matters described in Article I, Section 2, Article II, Sections 1, 2 and 3, and Article VIII of these Bylaws. 13 EX-10.4 3 LETTER AGREEMENT BETWEEN TCW AND THE COMPANY 1 June 5, 1996 Aureal Semiconductor Inc. (formerly known as Media Vision Technology Inc.) 4245 Technology Drive Fremont, California 94538 Attention: Brendan O'Flaherty, Esq. Gentlemen: We refer to that certain Amended and Restated Loan Agreement dated as of December 30, 1994, as amended to the date hereof (as so amended, the "Loan Agreement", the terms defined therein being used herein as therein defined), among Aureal Semiconductor Inc. (formerly known as Media Vision Technology Inc.), as Borrower ("Borrower" or "Company"), and TCW Special Credits, as Agent for the entities set forth on Schedule A hereto, as Lender ("Lender"). Company has informed Lender that Company's Board of Directors has authorized issuance of two warrants for purchase of 50,000 shares each of Company's common stock to Financing for Science International and to Hambrecht & Quist. Company has also informed Lender that it intends to issue $12 million in Securities and reduce the Commitment from $22 million to $20 million. Company has requested that upon such issuance described in the second sentence of this paragraph, the Commitment be reduced from $22 million to $20 million. At the request of Company, Lender hereby waives compliance with the provisions of subsection 7.8 of the Loan Agreement to the extent, and only to the extent, necessary to permit such issuance; provided that upon such issuance described in the second sentence of this paragraph, the Commitment shall be reduced from $22 million to 20 million. Without limiting the generality of the provisions of subsection 10.1 of the Loan Agreement, the waiver set forth herein shall be limited precisely as written and relates solely to the noncompliance by Company with the provisions of subsection 7.8 of the Loan Agreement in the manner and to the extent described above, and nothing in this Limited Waiver shall be deemed to (a) constitute a waiver of compliance by Company with respect to (i) subsection 7.8 of the Loan Agreement in any other instance or (ii) any other term, provision or condition of the Loan Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that Lender may now have or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Loan Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. 2 This Limited Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. The limited waiver set forth herein shall become effective as of the date hereof upon the execution of counterparts hereof by Company and each of its Subsidiaries and by Lender. THIS LIMITED WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. TCW SPECIAL CREDITS, as agent and nominee for the entities listed on Schedule A annexed hereto By: TWC ASSET MANAGEMENT COMPANY, its managing general partner By: /s/ Bruce A. Karsh ____________________________ Title: Authorized Signatory By: /s/ Kenneth Liang ____________________________ Title: Authorized Signatory ACCEPTED AND AGREED: AUREAL SEMICONDUCTOR INC. (FORMERLY KNOWN AS MEDIA VISION TECHNOLOGY INC.) By: /s/ David J. Domeier ____________________________ Title: Vice President, Finance and Chief Financial Officer 3 By its execution of a counterpart of this Limited Waiver, the undersigned as Guarantor under that certain Guaranty dated as of December 30. 1994 (the "Guaranty") in favor of Lender, hereby acknowledges that it has read this Limited Waiver and consents to the terms thereof and further hereby confirms and agrees that, notwithstanding the effectiveness of this Limited Waiver, the obligations of the undersigned under the Guaranty shall not be impaired or affected and the Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all aspects. MEDIA VISION TECHNOLOGY, LTD. BY: /s/ Brendan O'Flaherty ____________________________ TITLE: Director MEDIA VISION TECHNOLOGY GmbH By: /s/Brendan O'Flaherty ____________________________ Title: Managing Director EX-10.12 4 FORM OF INDEMNITY AGREEMENT 1 INDEMNITY AGREEMENT This Indemnity Agreement, dated as of ___________________________, by and between Aureal Semiconductor Inc., a Delaware corporation (the "Company"), and ____________________, an officer, director, or key employee of the Company or its subsidiaries (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers; B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take; C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of officers and directors; D. The Company believes that it is unfair for its directors and officers and the directors and officers of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director or officer received no personal profit and in cases where the director or officer was not culpable; E. Based upon their experience, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as officers and directors of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its officers and directors and the officers and directors of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such officers and directors in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's shareholders; F. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its officers, directors, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive; G. The Company, after reasonable investigation prior to the date hereof, has determined that the liability insurance coverage available to the Company and its subsidiaries as of the date hereof may be inadequate. The Company believes, therefore, that the interests of the Company's shareholders would best be served by a combination of such insurance and the indemnification by the Company of the directors and officers of the Company and its subsidiaries; 1 2 H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company; and I. The Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Agent. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) Expenses. For purposes of this Agreement, "expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise; provided, however, that unless otherwise expressly provided below, expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as an agent of the Company, at the will of the Company (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the by-laws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing, provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 2 3 3. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all policies of D&O Insurance, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not an officer or director but is a key employee. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. Mandatory Indemnification. The Company shall indemnify the Indemnitee: (a) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and (b) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; except that no indemnification under this subsection shall be made in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of his duty to the Company unless and only to the extent that the Court of Chancery or the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper; and (c) Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, 3 4 ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by or for him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, prior to, during the pendency of, or after completion of such proceeding Indemnitee is deceased, except that in a proceeding by or in the right of the Company no indemnification shall be due under the provisions of this subsection in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company, by a court of competent jurisdiction, due to willful misconduct of a culpable nature in the performance of his duty to the Company, unless and only to the extent that the Court of Chancery or the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper; and (d) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by D&O Insurance. 5. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding but not entitled, however, to indemnification for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion thereof to which the Indemnitee is not entitled. 6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined pursuant to Section 8 hereof that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such 4 5 proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. Determination of Right to Indemnification. (a) To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding referred to in subsections 4(a), 4(b), or 4(c) of this Agreement or in the defense of any claim, issue or matter described therein, the Company shall indemnify the Indemnitee against expenses actually and reasonably incurred by him in connection with the investigation, defense, or appeal of such proceeding. (b) The Indemnitee shall be entitled to select the forum in which the validity of the Company's claim that the Indemnitee is not entitled to indemnification will be heard from among the following, which forums shall determine that the Indemnitee is entitled to such indemnification unless the Company shall prove by clear and convincing evidence that: (i) the Indemnitee has not met the applicable standard of conduct required to entitle the Indemnitee to such indemnification or that indemnification is otherwise not required pursuant to Section 9 hereof, and (ii) the requirements of Section 8(a) have not been met: (1) A quorum of the Board consisting of directors who are not parties to the proceeding for which indemnification is being sought; (2) The shareholders of the Company; (3) Legal counsel selected by the Indemnitee, and reasonably approved by the Board, which counsel shall make such determination in a written opinion; or (4) A panel of three arbitrators, one of whom is selected by the Company, another of whom is selected by the Indemnitee and the last of whom is selected by the first two arbitrators so selected. (c) As soon as practicable, and in no event later than 30 days after written notice of the Indemnitee's choice of forum pursuant to Section 8(b) above, the Company shall, at its own expense, submit to the selected forum in such manner as the Indemnitee or the Indemnitee's counsel may reasonably request, its claim that the Indemnitee is not entitled to indemnification, and the Company shall act in the utmost good faith to assure the Indemnitee a complete opportunity to defend against such claim. (d) Notwithstanding a determination by any forum listed in Section 8(b) hereof that Indemnitee is not entitled to indemnification with respect to a specific proceeding, the Indemnitee shall have the right to apply to the Court of Chancery of Delaware, the court in which that proceeding is or was pending, or any other court of competent jurisdiction, for the purpose of enforcing the Indemnitee's right to indemnification pursuant to this Agreement. Such court shall find that the Indemnitee is entitled to indemnification if the Indemnitee proves by a preponderance of the evidence that he or she has met the applicable standard of conduct required to entitle the Indemnitee to such indemnification unless 5 6 indemnification is otherwise not required pursuant to Section 9 hereof, and if the requirements of Section 8(a) have been met. (e) Notwithstanding any other provision in this Agreement to the contrary, the Company shall indemnify the Indemnitee against all expenses incurred by the Indemnitee in connection with any hearing or proceeding under this Section 8 involving the Indemnitee and against all expenses incurred by the Indemnitee in connection with any other proceeding between the Company and the Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the claims and/or defenses of the Indemnitee in any such proceeding was frivolous or made in bad faith. 9. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; or (b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 10. Non-exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's certificate of incorporation or bylaws, the vote of the Company's shareholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 11. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent now or hereafter permitted by law. 12. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, 6 7 that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 12 hereof. 13. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 14. Successors and Assigns. The terms of this agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto. 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 17. Consent to Jurisdiction. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. AUREAL SEMICONDUCTOR INC. Address: 4245 Technology Drive Fremont, California 94538 By: _______________________________ Brendan R. O'Flaherty INDEMNITEE: _______________________________ Address: _______________________________ _______________________________ 7 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-29-1996 JAN-01-1996 SEP-29-1996 1 85 0 127 0 107 599 3,196 2,327 4,769 5,773 0 0 0 39 (12,849) 4,769 3,280 3,280 286 16,096 0 0 1,845 (13,949) 0 (13,949) 0 0 0 (13,949) (0.44) (0.44)
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