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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Commission file Number 0-25326
Ariel Corporation
(Exact name of registrant as specified in its charter.)
Delaware, U.S.A. 13-3137699
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2540 Route 130, Cranbury, NJ, U.S.A. 08512
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(609) 860-2900
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 [ ]
State the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Common Stock, $.001 Par Value - 6,912,690 shares outstanding as of
March 31, 1996.
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ARIEL CORPORATION
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Part I. Financial Information
Item 1. Financial Statements
A. Unaudited Balance Sheet as of March 31, 1996.
B. Unaudited Statements of Operations for the
three months ended March 31, 1996 and 1995.
C. Unaudited Statements of Cash Flows for the three months
ended March 31, 1996 and 1995.
D. Unaudited Notes to Financial Statments.
Item 2. Management's Discussion and Analysis or Plan of Operations.
Part II. Other Information.
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ARIEL CORPORATION
BALANCE SHEETS
As of March 31, 1996
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash $ 11,967
Accounts receivable, net
allowance for doubtful accounts
of $168 978
Other receivables 127
Inventories, net 2,580
Prepaid expenses 129
______
Total Current Assets 15,781
Property, Plant and Equipment
less accumulated depreciation
of $1,024 1,197
Other Assets 349
______
TOTAL ASSETS $ 17,327
======
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<S> <C>
Current Liabilities
Accounts Payable $ 592
Accrued Expenses 956
Notes Payable - Current 314
Royalties Payable 74
______
Total Current Liabilities 1,936
Notes Payable, related parties, net 15
______
Commitments and Contingencies -
Stockholder's Equity (Deficiency)
Preferred Stock, $0.001 par value;
2,000,000 shares authorized; shares
issued and outstanding - none
Common stock $.001 par value, 20,000,000
shares authorized, 6,912,690 and
4,758,625 issued and outstanding,
repectively 7
Additional Paid-in Capital 21,521
Accumulated deficit (6,151)
_______
Total Stockholders' Equity $ 15,377
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 17,327
=======
<FN>
See Accompanying Notes to Unaudited Financial Statements
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PART I. - FINANCIAL INFORMATION
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
Three months ended
March 31
__________________
1996 1995
______ ______
<S> <C> <C>
Net Sales $ 1,522 $ 2,096
Cost of goods sold 820 971
______ ______
Gross Profit(Loss) 703 1,124
Expenses:
Sales and marketing 949 563
General and administrative 832 671
Research and Development 1,096 449
______ ______
Loss from operations (2,174) (558)
Interest income, net 159 13
Other income 15 6
______ ______
Net Loss (2,000) (539)
========= ========
PER SHARE DATA:
Weighted Average number of common
Shares outstanding 6,871,615 4,472,063
========== =========
Net Loss Per Share $ (.29) $ (.12)
======== =========
<FN>
See Accompanying Notes to Unaudited Financial Statements
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ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Amounts in thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash Flow From Operating Activities:
Loss From Operations $ (2,000) $ (539)
_______ _______
Adjustments To Reconcile Net
Loss to Net Cash Used in
Operating Activities
Depreciation and Amortization 106 39
Amortization of Discount
on Royalties Payable 8 7
(Increase) Decrease In Assets:
Accounts Receivable 532 (267)
Other Receivables (77) (5)
Inventories (319) (174)
Prepaid Expenses (26) (57)
Other assets 112 (1)
Increase (Decrease) in Liabilites:
Accounts payable 108 155
Accrued expenses (91) (143)
Royalties Payable, related parties (2) (66)
_______ _______
Net Cash Used In Operating Activities $ (1,649) $ (1,051)
_______ _______
Cash Flows Used In Investing Activities:
Purchase of Equipment $ (751) $ (160)
________ ________
Net Cash Used In
Investing Activities $ (751) $ (160)
________ ________
Cash Flow From Financing Activities:
Proceeds From Sale of Common Stock,
net of expenses - $ 5,708
Proceeds From Exercise of Warrants,
net of expenses 387 -
_______ _______
Net Cash Provided By
Financing Activities $ 387 $ 5,708
_______ _______
Net (Decrease) Increase in Cash (2,012) 4,497
Cash and Cash Equivalents,
Beginning of Year $13,979 $ 313
________ ________
Cash and Cash Equivalents,
End of Period $11,967 $ 4,810
<FN>
See Accompanying Notes to Unaudited Financial Statements
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ARIEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
Note 1. Basis of Presentation
The financial statements included herein have been prepared by the
Company, 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 condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that the disclosure contained herein
is adequate to make the information presented not misleading. The financial
statements should be read in conjunciton with the financial statements and notes
thereto included in the Company's Form 10-KSB for the year ended December 31,
1995. Certain prior period amounts have been reclassified in order to conform to
the current period presentation.
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments, consisting of normal recurring
accruals, which are necessary to present fairly the financial position of the
Company as of March 31, 1996 and the results of operations and statements of
cash flows for the three months ended March 31, 1996 and 1995. The results for
interim periods are not necessarily indicative of results for the full year.
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ARIEL CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
Comparison of Results of Operations:
The following table sets forth, for the periods indicated, the percentage
relationship that certain items of the Company's results of operations bear
to total revenue.
<CAPTION>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Sales 100% 100%
Cost of goods sold 54 46
_______ _______
Gross profit 46 54
Expenses
Sales and marketing 62 27
General and administrative 55 32
Research and development 72 22
_______ ________
Loss from operation (143) (27)
Interest Income 11 1
Interest Expense (1) -
Other Income 1 -
_______ _______
Loss before income tax
benefit (provision) (132) (26)
Income tax benefit (provision)
_______ _______
Net Loss (132%) (26)%
======== =======
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Three Months Ended March 31, 1996 as Compared to Three Months Ended March
31, 1995.
Net Sales
- ---------
Worldwide sales were $1,522,379 for the three months ended March 31, 1996,
a decrease of $573,131 or 27% compared to net sales of $2,095,510 for the three
months ended March 31, 1995. Domestic sales were $1,109,814 for the three months
ended March 31, 1996 compared to $1,650,575 for the three months ended March 31,
1995. The Company experienced lower bookings in the months of December 1995 and
January 1996 compared to the corresponding months of the prior year, thus
resulting in lower shipments from its backlog of orders. Bookings increased
significantly in February, 1996 and remained strong in March and April, 1996.
Additionally, sales for the first quarter of 1995 included $291,000 related to
a $1.4 million purchase order that was fulfilled in calender year 1995. Export
sales were $412,565 for the first quarter of 1996 compared to $444,935 for the
first quarter of 1995, a decrease of $32,370 or 7%.
Gross Profits
- --------------
Gross profit decreased to $702,662 for the three months ended March 31,
1996 from $1,124,394 for the three months ended March 31, 1995. Gross profit
margin decreased to 46.2% for the three months ended March 31, 1996 from 53.7%
for the three months ended March 31, 1995. The decrease in gross profit margin
reflects an underabsorption of fixed production costs related to salaries and
wages and allocation of certain overhead expenses.
Sales and marketing
- --------------------
Sales and marketing expenses were $949,259 for the first quarter of 1996
compared to $562,701 for the first quarter of 1995. The increase of $386,558 or
69% for the first quarter of 1996 includes approximately $169,000 in salaries
and wages reflecting additions to the field sales force in San Francisco,
California which primarily focuses on sales in Far Eastern markets, and
expansion of the marketing and sales support groups. Advertising and marketing
expenses increased by approximately $111,000 reflecting print advertising
brochure expenses and programs related to the introduction of certain new
products focused on OEM and computer telephony integration ("CTI") markets.
General and administrative
- ---------------------------
General and administrative expenses were $831,565 for the first quarter of
1996 compared to $670,699 for the first quarter of 1995. The increase of
$160,866 or 24% includes an increase of $44,000 in salaries and wages related
to the addition of a Chief Financial Officer (effective May 1, 1995) and
certain other staff and clerical positions. Relocation expenses increased by
$93,000 reflecting payment of certain expenses related to the relocation of
certain employees. Rent expense increased by $66,000 related to the Company's
occupancy of its 30,000 square foot Corporate Headquarters in January 1996.
The Company previously occupied 9,500 square feet and paid rent on such space
through January 1996. Consulting expenses decreased by approximately $72,000 of
which approximately $58,000 was expense related to the use of a financial
consultant to assist the Company in its Initial Public Offering and Form 10-KSB
filing in 1995. Commercial insurance costs increased $27,000 reflecting
increases in premium expense due to an increase in coverage for directors and
officers liability insurance.
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Research and Development
- ------------------------
Research and development expenditures were $1,095,667 for the three months
ended March 31, 1996 compared to $448,911 for the three months ended March 31,
1995, an increase of $647,000 or 144%. Salaries and wages increased by $303,000
due primarily to hiring additional engineers to meet the demands for internal
product development testing and engineering activities related to developing
products specifically for the OEM and CTI marketplace. Additionally, three
senior level managers were hired related to the certain product efforts in the
CTI marketplace. Expenditures related to development boards and component
materials increased by $97,000 as the Company focused its development effort
on certain OEM and CTI prototype boards.
For the foregoing reasons, the Company incurred a net loss of $1,999,818
for the three months ended March 31, 1996 compared to a net loss of $538,867
for the three months ended March 31, 1995.
Liquidity and Capital Resources
- -------------------------------
On December 20, 1995, the Company completed a secondary offering of its
securities pursuant to which it sold 2,040,000 common shares at $7.50 per share.
After payment of certain expenses associated with the offering, the Company
received net proceeds of approximately $14 million.
Net cash used in operating activities was $1,648,923. The negative cash
flow from operations was the result of the Company's net loss of $1,999,818 for
the three months ended March 31, 1996 and an increase in inventories of
$319,044 (principally raw materials) as the Company sought to meet customer
demands on a more timely basis. Trade accounts receivable decreased by $531,750
from December 31, 1995 reflecting lower shipments for the three months ended
March 31, 1996. Other receivables increased by $77,274 for the same period,
reflecting interest income earned on cash equivalents. Other assets decreased
by $112,190 as certain deposits related to purchases of furniture and telephone
eqiupment were released.
Cash used in investing activities for the three months ended March 31,
1996 amounted to $750,765 and reflected purchase of office equipment and
furniture related to the Company's relocation to its new corporate headquarters.
In addition, the Company purchased $285,775 of computer and peripheral equipment
related to the increase in engineers and professional staff compared to the
three months ended March 31, 1995. The Company also incurred approximately
$88,000 of leasehold expense related to the new headquarters space.
Cash flow from financing activities were $387,358 reflecting proceeds of
$399,227 from the exercise of the Company's public warrants at $3.50 per
warrant. Effective January 24, 1996, if the public trading price of the
Company's common stock is above $6.00 per share on each of the 20 consecutive
trading days as defined, the Company has the option after obtaining certain
approvals from the Company's underwriter of its initial public offering of
calling its publicly traded warrants for redemption at a price of $0.01 per
warrant. Each holder of a warrant called for redemption may, within thirty
days, elect to preempt the redemption by exercising the warrant and purchase
one share of the Company's common stock for $3.50. At March 31, 1996, 1,610,935
warrants remain outstanding. In the event that all outstanding warrants are
exercised, the Company will receive approximately $5,600,000. The Board of
Directors has given the Company full discretion to call such warrants when it
is deemed necessary to do so.
The Company has entered into a lease for 30,000 square feet of office and
light assembly space in Cranbury, New Jersey for a term of five years at an
annual base rental (not including common charges) that ranges from $300,000 in
the first year to $330,000 in the final year.
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Impact of the Adoption of Recently Issued Accounting Standards
- ---------------------------------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121") in March 1995.
SFAS 121 required companies to review their long-lived assets and certain
identifiable intangibles (collectively, "Long-Lived Assets") for impairment
whenever events or changes in circumstances indicate that the carrying value of
a Long-Lived Asset may not be recoverable. Impairment is measured using the
lower of a Long-Lived Asset's book value or fair value, as defined. The Company
will be required to adopt the provisions of SFAS 121 at the beginning of the
year ended December 31, 1996. The Company believes that, based upon current
operations and prospects, the future adoption of SFAS 121 will not have a
material impact on the Compnay's financial position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") in October 1995. The Company will be required to adopt the provisions of
SFAS 123 at the begining of the year ending December 31, 1996. SFAS 123
requires companies to estimate the fair value of common stock, stock options,
or other equity instruments ("Equity Instruments") issued to employees using
pricing models which take into account various factors such as current price of
the common stock, volatility and expected life of the Equity Instrument. SFAS
123 permits companies to either provide pro forma note disclosure, or adjust
operating results, for the amortization of the estimated value of the Equity
Instruments over the vesting period of the Equity Instrument. The Company has
elected to account for stock options under Accounting Principles Board Opinion
No. 25.
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Part II. Other Information
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A) Exibits - Exibit 11
B) Reports on Form 8-K - None.
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Signature
Pursuant to the requirements of the Securites Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Ariel Corporation
-----------------
Registrant
/S/
------------------
Gerard E. Dorsey
Chief Financial Officer
and Principal Accounting
Officer
Date: May 10, 1996
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EXHIBIT 11
AREIL CORPORATION
STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
For the Three Months Ended March 31, 1996 and 1995
<CAPTION>
1996 1995
--------------- ----------------
<S> <C> <C>
Primary:
Net loss for the period $(1,999,818) $(538,867)
Weighted average number of shares _______________ ______________
of common stock outstanding 6,871,615 4,317,792
Shares issuable upon exercise of
outstanding options and warrants - -
Shares assumed to be aquired in accordance
with the treasury stock method - -
--------------- --------------
Shares used in computing per share loss 6,871,615 4,317,792
-------------- --------------
Net loss per share $ (0.29) $ (0.12)
============= ==============
Fully Diluted:
Net loss for the period $(1,999,818) $(494,170)
Weighted average number of shares _______________ ______________
of common stock outstanding 6,871,615 4,317,792
Shares issuable upon exercise of
outstanding options and warrants 3,271,387 2,299,208
Shares assumed to be aquired in accordance
with the treasury stock method (3,691,904) (951,725)
--------------- --------------
Shares used in computing per share loss 6,451,098 5,665,275
-------------- --------------
Net loss per share $ (0.31) $ (0.09)
============== =============
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