<PAGE>
As filed with the Securities and Exchange Commission on November 14, 1997
File No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ARIEL CORPORATION
<TABLE>
<CAPTION>
Delaware 3571 13-3137699
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2540 Route 130
Cranbury, NJ 08512
(609) 860-2900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Mr. Anthony M. Agnello
Ariel Corporation
2540 Route 130
Cranbury, NJ 08512
(609) 860-2900
(Name, address and telephone number of agent for service)
Copies to:
Harold W. Paul, Esq.
Berger & Paul, LLP
630 Third Avenue
New York, New York 10017
(212) 661-2727
Fax (212) 661-7060
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of each class of Amount being Offering Price Aggregate Registration
securities to be registered Registered Per Share Offering Price(1) Fee
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.00l par value
per share .................. 125,000(1) $2.72 $ 340,000 $103.02
- -----------------------------------------------------------------------------------------------------
125,000(2) $7.50 $ 937,500 $284.06
- -----------------------------------------------------------------------------------------------------
Total ..................... 250,000 $1,277,500 $387.08
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Issuable upon exercise of outstanding Common Stock Purchase Warrants at
$2.72 per share.
(2) Issuable upon exercise of outstanding Common Stock Purchase Warrants at
$7.50 per share.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Registration Statement
Item Number and Caption Prospectus Caption
- ----------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .............. Cover Page of Registration Statement and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front Cover Page of Prospectus
3. Summary Information and Risk Factors ............... Prospectus Summary; The Company; The Offering;
Risk Factors
4. Use of Proceeds .................................... Use of Proceeds
5. Dilution .......................................... Not Applicable
6. Information with Respect to Registrant ............... Business; Properties; Legal Proceedings; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Management; Executive Compensation;
Security Ownership of Certain Beneficial Owners and
Management; Certain Relationships and Related
Transactions; Financial Statements
7. Description of Securities to be Registered ......... Description of Securities
8. Selling Security Holders ........................... Selling Stockholders
9. Plan of Distribution .............................. Cover Page; Plan of Distribution
10. Interests of Named Experts and Counsel ............... Legal Matters; Experts
11. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ..... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION NOVEMBER 14, 1997
PROSPECTUS
250,000 SHARES COMMON STOCK
OF
ARIEL CORPORATION
This Prospectus offers solely on behalf of Selling Stockholders 250,000
shares of Common Stock, par value $.001 per share (the "Common Stock") of Ariel
Corporation, a Delaware corporation (the "Company" or "Ariel"), comprised of
250,000 shares issuable upon the exercise of certain outstanding warrants (the
"Outstanding Warrants").
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS".
From January 24, 1995 to December 14, 1995 the Company's Common Stock
traded principally on the Nasdaq SmallCap Market. Since December 15, 1995 the
Common Stock has been listed and traded on NASDAQ. The closing price of the
Common Stock reported by Nasdaq on October 31, 1997 was $7.25. As of September
30, 1997 there were 9,229,125 shares issued and outstanding, of which
approximately 7,620,425 shares were eligible for public sale without
restriction. If all of the shares registered herein were issued, the common
shares eligible for trading without restriction would increase by 250,000. Were
a substantial number of these shares to be publicly sold in a short time period,
it might have an adverse effect on their market price. Therefore, recent market
price may not accurately reflect the stock's trading value following this
offering. See "Risk Factors."
Common Stock shares are issuable upon the exercise of the Outstanding
Warrants at the following exercise prices per share: 125,000 at $2.72 and
125,000 at $7.50.
Securities Offered
to Public by Selling Proceeds to Net Proceeds to
Stockholders Company (1) Company
- ---------------------- ------------- ----------------
250,000 $1,277,500 $1,277,500
- ------------
(1) Assumes conversion of all warrants into 250,000 shares.
The Company receives net proceeds only upon such sales from warrant
conversion and not from the sale of the offered shares. Selling Stockholders
may periodically sell the shares offered under this Prospectus in one or more
transactions at varying prices determined at the time of sale. Such sales may
be made to purchasers directly by the Selling Stockholders who will be required
to provide a prospectus. See "Certain Transactions", "Selling Stockholders" and
"Plan of Distribution".
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other then those contained in this
Prospectus in connection with the offering herein contained and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create an implication that there
has been no change in the facts herein set forth since the date hereof.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Securities and Exchange Commission (the
"Commission") . Such reports and proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; and copies of such material can be obtained
from the Public Reference Section of the Commission in Washington, D.C., at
prescribed rates.
The date of this Prospectus is November 14, 1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus. See "Glossary" on page 32 for explanations of certain technical
terms used in this Prospectus.
The Company
Ariel Corporation ("Ariel" or the "Company"), incorporated in 1982 in
Delaware is a technology company that has historically had digital signal
processing ("DSP") as its core strength. DSP is an enabling technology driving
the emerging or rapidly growing technology markets such as Internet Service
Providers ("ISP's") and Remote Access Service ("RAS") markets. The Company
offers one of the industry's highest density and most cost-effective remote
access data solutions for open systems platforms. The Company's remote access
products target open system servers spanning a broad range of applications
including telecommuting, Internet processing, and unified messaging.
Prior to 1996, the Company historically produced and sold DSP boards
incorporating DSP processors developed by Texas Instruments, Inc. ("TI"),
Motorola Inc., Lucent Technologies and Analog Devices, Inc. which are designed
to run on industry standard interfaces. Beginning in 1996, the Company
commenced shipping its first product aimed at the rapidly growing Computer
Telephony Integration ("CTI") market. This product, the CTI-modem, incorporates
multiple standard DSP chips in a single PC plug-in board and was targeted for
the transaction processing market. To date, the majority of such shipments have
been to one customer. During the third quarter of 1996, the Company began
shipping its T1-modem product, which provides up to thirty V.34 modems in a
single ISA bus slot connecting to T1, E1 ISDN and POTS lines. This product is
incorporated in RAS systems by major OEM customers. The Company recently
introduced its T1-Modem+ product, which can provide up to thirty 56 kbps modems
in a single ISA bus slot. In May 1997, the Company introduced an open system
networking solution called RASCAL, which can provide up to forty-eight 56 kbps
modems and a single or dual T1/primary rate ISDN interface that allows Windows
based NT systems manufactured by the various PC Original Equipment
Manufacturers ("OEM's") to function as a remote access server.
Additionally, in January 1996, the Company formed a communications system
team to begin development of an asymmetrical digital subscriber line ("ADSL")
carrier class product targeting the needs of major telecommunications and
network service providers. The team developed Horizon, a carrier class product
which is currently in a laboratory environment at a certain network service
provider. In August 1997, the Company announced its intention to proactively
seek a buyer for the Horizon product and team.
The Company's principal executive offices are located at 2540 Route 130,
Cranbury, New Jersey 08852. Its telephone number is (609) 860-2900, its e-mail
address is [email protected] and its World Wide Web home page can be accessed at
www.ariel.com.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered:
By the Selling Stockholders ........................... 250,000
Common Stock to be outstanding after the Offering ...... 9,479,125(1)
Use of proceeds ....................................... General corporate purposes.
Nasdaq ................................................ ADSP
</TABLE>
(1) Excludes 2,245,963 shares of Common Stock issuable upon exercise of
outstanding stock options at September 30, 1997. See "Shares Eligible for
Future Sale."
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Accordingly, in analyzing an investment in these securities, prospective
investors should carefully consider, along with the other matters referred to
herein, the following risk factors:
Recent Losses; Accumulated Deficit. The Company incurred a net loss of
$10,125,992 for the nine months ended September 30, 1997. The Company had an
accumulated deficit of $4,151,527 at December 31, 1995, $12,952,984 at December
31, 1996 and $23,078,969 at September 30, 1997. Operating results may be
influenced by factors such as the demand for the Company's products, the timing
of new product introductions by both the Company and its competitors, pricing
by both the Company and its competitors, inventory levels, the Company's
ability to develop and market new products, the Company's ability to
manufacture its products at high quality levels and at commercially reasonable
costs, the timing and levels of sales and marketing expenditures and general
economic conditions. If the Company is ultimately unable to increase its
revenues to achieve profitable operations, its future operating performance
would be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Technological Change. The Company believes that the industries it is
targeting with its products are subject to rapid technological change and
frequent new product introductions and enhancements. The Company believes that
its success will depend upon its ability to continuously develop new products
and product enhancements and to promptly introduce them into the market. The
Company has recently hired skilled marketing and sales personnel with extensive
experience in markets it is targeting. There can be no assurance that the
Company's competitors will not develop future generations of competitive
products that will offer superior price, features or performance which would
render the Company's products uncompetitive. Failure to develop and introduce
new products or product enhancements or to gain customer acceptance of such
products or product enhancements in a timely fashion could harm the Company's
competitive position.
Competition. The Company competes in its markets based upon
price/performance advantages offered by a number of its products, certain
product features and its ability to meet customer delivery requirements on a
timely basis. Many of the Company's competitors have substantially greater
financial resources, larger research and development and sales staffs and
greater name recognition than the Company. The primary competition for Ariel
products are engineering and manufacturing departments within OEMs, third party
RAS manufacturers and third party modem board manufacturers. The Company
believes it has substantially strengthened its competitive position in the data
communications marketplace with the introduction of its T1-Modem, T1-Modem+,
and RASCAL products. There is no assurance that the Company will be able to
compete successfully or develop competitive products in the future. See
"Competition".
Dependence on Contract Manufacturers and Third-Party Suppliers. The
Company utilizes contract manufacturing for substantially all of its
manufacturing processes, thereby allowing the Company to focus resources on
product research and development and customer support. The Company's internal
manufacturing operations consist primarily of production of prototypes, test
engineering, materials purchasing and inspection and quality control. In 1996,
the Company implemented systems within operations
4
<PAGE>
to be full turnkey on its high volume product lines. The procurement of
components, assembly, testing and quality control of the Company's printed
circuit board assemblies are coordinated through a limited number of high
quality contract manufacturers. The Company believes that such manufacturers
are able to meet the Company's needs by reducing working capital requirements,
producing high quality products and allowing the Company to focus its efforts
on design rather than production. The Company monitors the performance and
quality of the work performed by its outside contractors by using the Company's
internal quality assurance procedures and by making regular visits to
manufacturing facilities.
The Company purchases DSP chips and certain other components from TI,
Rockwell International Inc., Lucent Technologies, and Analog Devices, Inc.,
each of which manufacturers and is the sole supplier of DSP chips upon which
specific products have been developed. The Company does not have long-term
agreements with any of these suppliers. Although the Company has not
experienced any material difficulties in obtaining supplies or manufactured
products, any reduction or interruption in supply or manufacturing from these
third party contractors would adversely affect its ability to continue to
deliver its products.
The Company intends to implement procedures necessary to satisfy the
requirements for ISO-9000 certification. These procedures apply to design,
procurement, production, inspection, testing, sales, technical assistance and
maintenance. The Company currently does not have ISO-9000 certification for its
products, but will evaluate in 1998 the feasibility of receiving certification
during calendar year 2000. The Company believes that obtaining ISO-9000
certification will improve its ability to successfully compete in the European
Union Countries since a growing number of potential customers in that region
are demanding that their suppliers be ISO-9000 certified.
Lack of Patent Protection; Intellectual Property. The Company believes
that its success is dependent upon its proprietary technology. The Company
seeks to maintain the proprietary nature of its technology by several methods.
First, substantially all of the Company's hardware products contain security
codes which deter duplication by third parties. Second, the Company copyrights
certain aspects of its products. Third, the Company generally enters into
confidentiality agreements with its employees and limits access to its
proprietary information. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain information that the Company regards as proprietary. Since the Company
does not actively pursue patent protection on its products and does not hold
patents on any of its current products, in the event competitors are able to
create substantially similar or duplicate products, the Company will not be
able to avail itself of the protection afforded by the patent laws.
The Company believes that due to the rapid pace of innovation within its
industry, factors such as the technological expertise of its personnel and
ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than the
pursuit of various legal protections of its technology.
The Company also depends upon development, supply, marketing, licensing
and other operative relationships with third parties for complementary
technologies incorporated in the Company's products. These cooperative
relationships, many of which have been in place for a number of years, are with
hardware and software developers pursuant to which the Company and the
developers make their technology available to the other for the purpose of
achieving compatible products. Some of these relationships are based upon
annually renewable license agreements under which the Company obtains
technology necessary to produce its products. Although the Company has no
reason to believe that these mutually beneficial relationships will end, these
relationships are generally non-exclusive and terminable, and there can be no
assurance that the Company will be able to maintain these relationships or to
initiate additional similar relationships. The loss of certain cooperative
relationships, particularly with any of the DSP chip suppliers, may have a
material adverse impact on the Company's business.
On May 2, 1995, the Company obtained a two year license to port AT&T's
VCOS software for use with the Company's products running under the UNIX, OS/2,
Windows NT and Apple OS operating systems. During the term of the license, and
for a period of one year thereafter, AT&T will not compete with
5
<PAGE>
the Company by using ported versions of VCOS. Any ownership of ported versions
of VCOS remains with AT&T. In March 1996, the Company and AT&T Corp. executed
an amendment to such agreement to extend the term for an additional five years,
through March 2001.
On September 12, 1997, the Company announced it had signed a five year
cooperative development and licensing agreement with TI. Under terms of the
agreement the Company will participate in the development of products which
incorporate the Company's proprietary software into DSP products to be sold by
TI. The Company will receive an initial fee for its non-recurring expenses, and
additional non-recurring development fees in accordance with achievement of
defined milestones.
Additionally, the Company will grant to TI a royalty bearing, and
non-exclusive license to distribute DSP products using Ariel's technology. The
Company will receive a per-unit royalty fee for every product shipped as
defined in the agreement.
Dependence on Key Personnel; Need to Attract New Personnel. The Company's
success is largely dependent upon the personal efforts of Anthony M. Agnello,
its Chairman of the Board, and Chief Executive Officer, as well as other key
personnel. The loss of Mr. Agnello's services could have a materially adverse
effect upon the Company. The Company maintains key man life insurance on Mr.
Agnello in the amount of $1.0 million. It has not obtained, nor does it intend
to obtain, similar policies on the other executive officers. The Company has
entered into employment agreements with its three executive officers, including
in the case of Messrs. Agnello, and Hoerl, non-competition and non-solicitation
agreements. Effective September 26, 1997, the Company has terminated the
employment agreement of Jeffrey Sasmor, its Vice Chairman and Secretary, and
entered into a Termination Agreement with him under which he will receive total
compensation of $285,000 payable in installments of $80,000 on September 26,
1997 and two equal payments of $102,500 on January 2, and July 1, 1998. The
Company had also agreed to fully vest Mr. Sasmor in any stock options that are
not currently vested and to pay for medical and dental insurance through
December 31, 1998. The Company's future success is also dependent on its
ability to recruit and retain additional experienced engineering and marketing
personnel. Although to date the Company has not experienced undue difficulties
in hiring qualified personnel, there can be no assurance that the Company will
be able to retain or hire other necessary personnel. Loss of the services of,
or failure to recruit, key personnel could be significantly detrimental to the
Company's business. See "Management."
Effect of Outstanding Options and Warrants. As of September 30, 1997,
there were outstanding options to purchase 2,245,963 shares of Common Stock and
warrants to purchase 250,000 shares of Common Stock. The exercise of such
outstanding stock options and warrants will dilute the percentage ownership of
the Company's stockholders. Any sales in the public market of shares of Common
Stock underlying such stock options and warrants may adversely affect
prevailing market prices for the Common Stock. Moreover, the terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected since the holders of such outstanding securities can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than those
provided in such stock options and warrants. See "Management."
No Dividends. The Company has never paid cash dividends on its Common
Stock and does not anticipate that any cash dividends will be declared or paid
in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy."
Future Sales of Common Stock. Upon completion of this Offering, the
Company will have outstanding 9,479,125 shares of Common Stock. The outstanding
shares of Common Stock include 1,608,700 shares constituting "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933 as amended ("Restricted Shares") which may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Of the Restricted Shares, all are eligible for sale under Rule 144. The
Company is unable to predict the effect that sales made under Rule 144 or
otherwise may have on the market price of the Common Stock. However, the
possibility that substantial amounts of Common Stock may be sold in the public
market may have an adverse effect on the market prices for the Company's Common
Stock. See "Shares Eligible For Future Sale."
6
<PAGE>
Issuance of Preferred Stock, Anti-Takeover Provisions. Pursuant to its
Restated Certificate of Incorporation, the Company has an authorized class of
2,000,000 shares of Preferred Stock which may be issued by the Board of
Directors with such terms and such rights, preferences and designations as the
Board may determine and without any vote of the shareholders. Issuance of such
Preferred Stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. Issuance of additional shares of Common Stock could
result in dilution of the voting power of the Common Stock purchased in this
Offering. In addition, certain "anti-takeover" provisions of the Delaware
General Corporation Law ("DGCL:') among other things, may restrict the ability
of the stockholders to approve a merger or business combination or obtain
control of the Company. See "Description of Securities-Preferred Stock" and
"--Delaware Law."
7
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $1,277,500. The Company will only receive proceeds from the
exercise of the warrants and will not receive any of the proceeds from the
shares being sold by the Selling Stockholders and not from the sale of the
offered shares. The Company intends to use the net proceeds for general
corporate purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the sale of the 250,000 shares of
Common Stock, upon exercise of the warrants, offered by the Selling
Stockholders and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------
Actual As Adjusted
---------------- ----------------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.001 par value
Authorized: 2,000,000 shares .................................
Common Stock, $.001 par value
Authorized: 20,000,000 shares
Issued and outstanding: 9,229,125 actual shares ............ 9,229 9,479
and 9,479,125 as adjusted(1)
Additional paid-in capital .................................... 30,701,382 31,978,632
Unearned compensation expense relating to stock options ...... (44,702) (44,702)
Accumulated deficit .......................................... (23,078,969) (23,078,969)
------------ ------------
Total stockholders' equity .................................... 7,586,940 8,864,440
============ ============
</TABLE>
- ------------
(1) Excludes 2,245,963 shares of Common Stock issuable upon exercise of
outstanding stock options.
8
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
From January 24, 1995 to December 14, 1995, the Company's Common Stock and
warrants were traded principally on the Nasdaq SmallCap Market and also on the
Boston Stock Exchange ("BSE"). Effective December 15, 1995, the Company's
Common Stock and warrants began trading on NASDAQ and ceased trading on the
BSE. Effective June 28, 1996, subsequent to a call of the warrants, all
warrants were either exercised or expired, and trading in the warrants
terminated. The following table sets forth the high and low prices for the
Company's Common Stock during the period indicated:
High Low
-------- ------
1995
January 25 through March 31 ...... 5 4 3/8
2nd Quarter ..................... 5 1/2 4 1/4
3rd Quarter ..................... 7 5/8 4 1/2
4th Quarter ..................... 11 1/2 6 5/8
1996
1st Quarter ..................... 11 7 1/8
2nd Quarter ..................... 18 7
3rd Quarter ..................... 12 7/8 6 1/4
4th Quarter ..................... 14 1/4 9 1/8
1997
1st Quarter ..................... 13 3/8 6 1/2
2nd Quarter ..................... 8 3/4 5 5/8
3rd Quarter ..................... 9 6 7/8
October 1-31, 1997 ............... 8 1/16 6 5/8
On October 31, 1997, the closing price of the Company's common stock was
$7.25.
There were approximately 72 shareholders of record as of September 30,
1997, excluding the beneficial owners whose securities are held in street name
which the Company approximates at 2,000.
The Company has never paid any cash dividends on its Common Stock and has
no intention to pay cash dividends on its Common Stock in the foreseeable
future. Management intends to reinvest earnings, if any, in the development and
expansion of the Company's business. Any future declaration of cash dividends
will be at the discretion of the Board of Directors and will depend upon the
earnings, capital requirements and financial position of the Company, general
economic conditions and other pertinent factors.
9
<PAGE>
BUSINESS
General
The Company, incorporated in 1982 in Delaware is a technology company that
has historically had DSP as its core strength. DSP is an enabling technology
driving the emergence of rapidly growing technology markets such as ISP and RAS
markets. In August 1997, the Company announced its intent to focus on the RAS
market opportunity through product offerings that provide high density and cost
effective remote access data solutions for open system platforms. The Company's
remote access products target open system servers spanning a broad range of
applications including telecommuting, internet processing and unified
messaging. The RAS market is projected to grow from $2.5 billion in 1996 to
over $8 billion by the year 2000 by IDC.
Prior to 1996, the Company historically produced and sold DSP boards
incorporating DSP processors developed by Texas Instruments, Inc., Motorola
Inc., Lucent Technologies and Analog Devices, Inc. which are designed to run on
industry standard interfaces. The Company provided solutions to a customer's
high-end DSP system needs either by the use of a company standard product,
thereby reducing time-to-market, or by utilizing the Company's DSP expertise to
custom design a DSP hardware and software solution. These products were
marketed to OEMs and the U.S. Department of Defense through an internal sales
force and independent sales representatives in the United States and through
independent sales representatives and dealers internationally. In recent years,
the consolidation of various defense prime contractors has negatively impacted
this market sector for DSP board business.
Beginning in 1996, the Company commenced shipping its first product aimed
at the rapidly growing CTI market. This product, the CTI-modem, incorporated
multiple standard DSP chips in a single PC plug-in board and was targeted for
the transaction processing market. To date, the majority of such shipments have
been to one customer. During the third quarter of 1996, the Company began
shipping its T1-modem product which provides up to thirty v.34 modems in a
single ISA bus slot which is incorporated by OEMs in RAS systems. The Company
recently introduced its T1-Modem+ which can provide up to thirty 56 kbps modems
in a single ISA bus slot.
In January 1996, the Company formed a communications systems team to begin
development of an ADSL carrier class product targeting the needs of major
telecommunications and network service providers. Over the past 18 months, the
team developed Horizon, a carrier class product which is currently in
laboratory environments at a certain network service provider. In October 1996,
the Company retained Needham and Company, Inc. ("Needham") as a financial
adviser to contact prospective strategic marketing partners. For purposes of
developing a strategic marketing relationship with regard to the Company's ADSL
product. The Company's recent strategic decision to focus on the RAS
marketplace has led to the Company announcing in August 1997 its intent to seek
a buyer for the Horizon product and team. The carrier class product does not
fit well into the Company's markets and customer base. Needham is representing
the Company in this effort.
In May 1997, the Company introduced an open system networking solution
called RASCAL, that allows windows based NT servers manufactured by various PC
OEMs to function as a remote access server. This product will be sold through
the Company's internal sales force and value added resellers directly to
end-users.
For the nine months ended September 30, 1997, the Company reported net
sales of $10,104,405 and a net loss of $10,125,992 or $1.11 per share. Working
capital amounted to $6,686,867, including cash and marketable securities of
$5,057,362. For a more complete discussion of the results of operations see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Industry Background
DSP is the conversion of signals-electrical representations of light,
sound and other naturally occurring analog waveforms-into a stream of digital
values (i.e., ones and zeroes) which may then be processed, manipulated,
exchanged or stored by electronic systems in ways not possible when the signals
are in analog form. DSP provides several processing advantages over analog
technologies, including: (i) higher degrees of audio and video compression,
resulting in greater storage and communication capacity; (ii) a greater ability
to process and manipulate digital data, resulting in enhanced product
performance; (iii) easier development and upgrades of
10
<PAGE>
multi-functional products through the use of reconfigurable software rather
than dedicated analog hardware components, and (iv) the ability to provide a
wide range of functions including integrated computer telephony, fax and data
modems, voice mail, Internet access and CD quality audio in a single plug-in
board which is upgradable over time. The Company believes that DSP's processing
advantages over analog position DSP as an important technology for future
generations of communications and consumer electronics products and personal
computers, as well as emerging multimedia products. These advantages, combined
with the declining cost of DSP chips, have resulted in significant growth in
the uses of DSP.
Products
The Company currently offers a number of DSP hardware and software
products. They include:
OEM Products
Hydra Series VME Boards. The Hydra series comprises VMEbus DSP boards
based on two or four Texas Instruments TMS32OC4x DSP chips. The Company
believes that Hydra is well-suited to large processing tasks that require
multiple DSP chips in an industrial or defense environment. The Company
introduced an enhanced version of Hydra, called HydraPlus, in mid 1995, which
supports a memory capacity approximately four times greater than the original
Hydra.
PC-Hydra. PC-Hydra, first introduced in August 1994, is a modular version
of Hydra for the PC ISA bus. Based on industry-standard TIM-40 modules,
PC-Hydra can be configured with one to eight 50 MHz TMS32OC4x DSP chips. Its
modular architecture eases upgrading to newer technologies, as available.
Hammer Head V200. Hammer Head V200 was introduced in March 1997. It is a
SHARC VME bus board equipped with six 40-MHZ SHARC floating point digital
signal processors. The Hammer Head V200 also features two open I/O based board
access sites based on Ariel's Open Hardware Architecture ("OHA"). The two sites
enable designers to take advantage of off-the-shelf radar and sonar I/O
modules. Hammer Head V200 is based on Analog Devices 40-MHZ ADSP210260 and
21062 DSPs.
Data Communications Products
CTI-Modem. CTI-Modem currently provides sixteen V.32 modems in a single
ISA slot and supports both MVIP and SCSA protocols. CTI-Modem runs on the
Company's DC-5 product which implements multiple DSP's on a single ISA plug in
board. Coordination and control of simultaneous modem tasks running on multiple
processors is managed by AT&T's VCOS operating system running on the DC-5
board. In addition, the Company has developed a modem API (Application
Programing Interface) to ease the task of software integration. The Company
believes that CTI-Modem addresses the requirements of the transaction
processing markets.
T1-Modem. T1-Modem provides a twenty-four V.34 modem port solution in a
single ISA slot for network OEMs. T1-Modem+ provides a thirty 56-kbps modem
port solution in a single ISA slot for network OEMS. The Company believes that
T1-Modem product line addresses the requirements of the RAS concentrator market
place.
RASCAL RS1000. RASCAL RS1000 is a PC-board set that enhances any existing
Windows NT-based server with a complete departmental remote access solution.
RASCAL includes up to forty-eight 56-kbps digital modems and a single or dual
PRI/T1 digital telephony interface. The Company believes RASCAL RS1000
addresses the installed base of Windows based servers that are currently not
RAS capable.
Manufacturing and Quality Control
The Company utilizes contract manufacturing for substantially all of its
manufacturing processes, thereby allowing the Company to focus resources on
product research and development and customer support. The Company's internal
manufacturing operations consist primarily of production of prototypes, test
engineering, materials purchasing and inspection and quality control. In 1996,
the Company implemented systems within operations to be full turnkey on its
high volume product lines. The procurement of components, assembly, testing and
quality control of these printed circuit board assemblies will be coordinated
through a limited number
11
<PAGE>
of high quality contract manufacturers. The Company believes that such
manufacturers are able to meet the Company's needs by reducing working capital
requirements, producing high quality products and allowing the Company to focus
its efforts on design rather than production. The Company monitors the
performance and quality of the work performed by its outside contractors by
using the Company's internal quality assurance procedures and by making regular
visits to manufacturing facilities.
The Company purchases DSP chips and certain other components from Lucent
Technologies, Rockwell International, Inc., Motorola Inc., Texas Instruments
Inc., and Analog Devices, Inc., each of which manufacturers and is the sole
supplier of DSP chips upon which specific products have been developed. The
Company does not have long-term agreements with any of these suppliers.
Although the Company has not experienced any material difficulties in obtaining
supplies or manufactured products, any reduction or interruption in supply or
manufacturing from these third party contractors would adversely affect its
ability to continue to deliver its products.
The Company intends to implement procedures necessary to satisfy the
requirements for ISO-9000 certification. These procedures apply to design,
procurement, production, inspection, testing, sales, technical assistance and
maintenance. The Company currently does not have ISO- 9000 certification for
its products, but will evaluate in 1998 the feasibility of receiving
certification during calendar year 2000. The Company believes that obtaining
ISO-9000 certification will improve its ability to successfully compete in the
European Union Countries since a growing number of potential customers in that
region are demanding that their suppliers be ISO-9000 certified.
Sales, Marketing and Customers
The Company markets its product in the United States primarily through a
direct sales force and through independent sales representatives. The Company
recently hired a Vice President-Sales with over 20 years experience selling
data communications products. Additionally, sales managers have been hired for
territorial coverage in Nashville, Tennessee, Thousand Oaks, California and
North Bend, Washington. Internationally, the Company sells its products through
value added resellers and distributors in Europe, Israel and the Far East and
maintains a sales office for one salesman in Berlin, Germany. The Company also
maintains regional sales offices in San Diego, California, San Francisco,
California and Cranford, New Jersey.
The Company's direct sales force has historically targeted high-volume
system integrators and OEM customers. An OEM customer who wishes to incorporate
DSP technology into an end product can either design the DSP sub-system
internally (make) or purchase (buy) the sub-system from a third party such as
the Company. In a make versus buy scenario, buy decisions are often driven by
time-to-market processes and cost consideration. The RASCAL product is the
Company's first end-user product. Up to now, the Company's products offerings
have been components in an OEM product.
The Company obtains most new sales prospects through advertising, existing
customers, strategic relationships and trade show participation. Principal
marketing activities include display advertising in trade publications, direct
mail, trade show participation and a home page on the World Wide Web.
The Company believes that customer service and support have been a
significant factor in distinguishing the Company from other DSP providers.
Technical support is provided by customer support employees located at the
Company's headquarters. The Company also offers extensive documentation
describing its products and provides telephone and electronic mail support to
assist its customers.
The Company markets its products to Fortune 500 companies, research
laboratories, computer instrumentation companies and numerous branches of U.S.
and foreign governments. In 1995, sales to AVID Technology, Inc. accounted for
approximately 14% of the Company's sales and in 1996, sales to Corsair Inc.
accounted for approximately 32% of the Company's sales. For the nine months
ended September 30, 1997, sales to Corsair accounted for approximately 24% of
the Company's sales. All outstanding purchase orders for this customer were
completed during the first calendar quarter of 1997.
Product Research and Development
The Company has continued to focus its research and development efforts on
data communication products targeting the RAS and ISP markets as well as a
carrier class product for the emerging ADSL market. The Company's ongoing
product development activities also include the enhancement of current
products, the adaptation
12
<PAGE>
of third-party technologies to its products and the development of new product
options and features. From time to time, the Company has employed consultants
to perform certain research and development functions. The Company has
continued this practice in 1997 as a means of augmenting its internal research
and development capabilities.
The Company incurred $4,280,640 in research and development expense for
the nine months ended September 30, 1996, which represented 48% of sales. This
compared to $7,760,244 or 77% of sales for the nine months ended September 30,
1997. The Company incurred $6,860,665 or 53% of sales in research and
development expenses for 1996 compared to $2,482,561 or 26% of sales for 1995
and $1,111,394 or 16% of sales for 1994.
Intellectual Property
The Company believes its success is dependent, in part, on proprietary
technology. The Company seeks to maintain the proprietary nature of its
technology by several methods. First, substantially all of the Company's
hardware products contain security codes which deter duplication by third
parties. Second, the Company copyrights certain aspects of its products. Third,
the Company generally enters into confidentiality agreements with its employees
and limits access to its proprietary information. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain information that the Company regards as proprietary.
Since the Company does not actively pursue patent protection on its products
and does not hold patents on any of its current products, in the event
competitors are able to create substantially similar or duplicate products, the
Company will not be able to avail itself of the protection afforded by the
patent laws.
The Company believes that due to the rapid pace of innovation within its
industry, factors such as the technological expertise of its personnel and
ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than the
pursuit of various legal protections of its technology.
The Company also depends upon development, supply, marketing, licensing
and other operative relationships with third parties for complementary
technologies incorporated in the Company's products. These cooperative
relationships, many of which have been in place for a number of years, are with
hardware and software developers pursuant to which the Company and the
developers make their technology available to the other for the purpose of
achieving compatible products. Some of these relationships are based upon
annually renewable license agreements under which the Company obtains
technology necessary to produce its products. Although the Company has no
reason to believe that these mutually beneficial relationships will end, these
relationships are generally non-exclusive and terminable, and there can be no
assurance that the Company will be able to maintain these relationships or to
initiate additional similar relationships. The loss of certain cooperative
relationships, particularly with any of the DSP chip suppliers, may have a
material adverse impact on the Company's business.
On May 2, 1995, the Company obtained a two year license to port AT&T's
VCOS software for use with the Company's products running under the UNIX, OS/2,
Windows NT and Apple OS operating systems. During the term of the license, and
for a period of one year thereafter, AT&T will not compete with the Company by
using ported versions of VCOS. Any ownership of ported versions of VCOS remains
with AT&T. In March 1996, the Company and AT&T executed an amendment to such
agreement to extend the term for an additional five years, through March 2001.
On September 12, 1997, the Company announced it had signed a five year
cooperative development and licensing agreement with TI. Under terms of the
agreement, the Company will participate in the development of products which
incorporate the Company's proprietary software into DSP products to be sold by
TI. The Company will receive an initial fee for its non-recurring expenses and
additional non-recurring development fees in accordance with achievement of
defined milestones. Additionally, the Company will grant to TI a royalty
bearing, and non-exclusive license to distribute DSP products using the
Company's technology. The Company will receive a per unit royalty fee for every
product shipped as defined in the agreement.
Backlog
Firm backlog shipable within a twelve month period was approximately $5.7
million at September 30, 1997 compared to $6.1 million at December 31, 1996,
and approximately $1.7 million at December 31, 1995. The
13
<PAGE>
Company's order trend is characterized by delivery cycles that dates from
several days to quantities deliverable over several months. Accordingly, a
substantial portion of sales in each fiscal quarter are derived from backlog at
the beginning of such quarter. Customers may revise scheduled delivery dates or
cancel orders.
Competition
The Company competes in its markets based upon price/performance
advantages offered by a number of its products, certain product features and
its ability to meet customer delivery requirements on a timely basis. Many of
the Company's competitors have substantially greater financial resources,
larger research and development and sales staffs and greater name recognition
than the Company. The primary competition for Ariel products are engineering
and manufacturing departments within OEMS, third party RAS manufacturers and
third party modem board manufacturers.
There is no assurance that the Company will be able to compete
successfully or develop competitive products in the future. The Company
believes it has substantially strengthened its competitive position in the CTI
marketplace with the introduction of the T1-Modem, T1-Modem+, and RASCAL
products.
Employees
As of September 30, 1997, the Company had 118 employees, including 4
part-time employees. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company experienced any work
stoppage. The Company believes its relationship with its employees is
satisfactory.
Properties
The Company maintains office and light assembly space comprising
approximately 30,000 square feet at 2540 Route 130, Cranbury, New Jersey
pursuant to a lease, expiring January 2001, at an annual rental of
approximately $384,000. The Company has two five-year options to renew the
lease at fair market value. The Company also currently maintains a branch
office in San Diego, California and a regional sales offices in Berlin, Germany
and a regional marketing office in Santa Barbara, California.
In December 1996, the Company leased 11,740 square feet in Piscataway, New
Jersey for office and laboratory use related to its ADSL product development
efforts. This lease expires in December 2001 and has an annual rental of
$197,915. The Company has two five year options to renew the lease at fair
market value and also has an option (which expires December 31, 1997), to lease
an additional 4,500 square feet under the same terms and conditions as the
existing lease.
Legal Proceedings
The Company is not engaged in any material legal proceedings.
Selected Financial Data
The Selected Financial Data of Ariel Corporation, as of and for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the
Company's audited financial statements, which were audited by Coopers & Lybrand
L.L.P., independent accountants. The reports of such accountants with respect
thereto, as of December 31, 1995 and 1996 and for the years ended December 31,
1994, 1995, and 1996 appear elsewhere in this Prospectus. The Selected Financial
Data of Ariel Corporation as of September 30, 1997 and for the nine months ended
September 30, 1996 and 1997 were derived from the unaudited financial
statements, included elsewhere herein, and which, in management's opinion
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation. The results of operations for interim periods
are not necessarily indicative of results to be expected for the full fiscal
year.
14
<PAGE>
The Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," and the Financial Statements of the Company and the Notes to
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
--------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Sales .............................. $ 13,030,637 $ 9,515,433 $ 6,865,249 $5,805,711 $6,008,869
Operating costs and expenses ...... 22,576,475 12,935,571 8,356,429 6,225,905 5,638,509
Operating income (loss) ............ (9,545,838) (3,420,138) (1,491,180) (420,194) 370,360
Income (loss) before income taxes (8,801,457) (3,232,401) (1,456,473) (385,102) 371,358
Net income (loss) per share ...... (1.10) (.68) (.47) (.12) .10
Financial Position:
Cash, cash equivalents, and
marketable securities ............ $ 10,625,960 $ 13,979,009 $ 313,189 $1,375,850 $ 35,202
Working capital .................. 13,795,613 16,084,594 844,478 2,129,919 519,025
Equipment, net ..................... 2,036,897 567,941 441,141 361,113 241,584
Total assets ..................... 20,103,064 18,932,434 3,010,579 3,838,518 2,032,157
Notes payable -- long term ......... -- -- -- -- --
Stockholders' equity ............... 16,198,895 16,989,104 1,015,913 2,511,916 781,914
<CAPTION>
Nine Months Ended September 30,
1997 1996
---------------- ---------------
<S> <C> <C>
Results of Operations
Sales .............................. $10,104,405 $ 8,943,415
Operating costs and expenses ...... 20,509,819 14,995,680
Operating income (loss) ............ (10,405,414) (6,052,265)
Income (loss) before income taxes (10,125,992) (5,501,660)
Net income (loss) per share ...... (1.11) (.72)
Financial Position:
Cash, cash equivalents, and
marketable securities ............ $ 5,057,362 $ 13,847,764
Working capital .................. 6,686,867 17,204,865
Equipment, net ..................... 2,495,400 1,487,627
Total assets ..................... 13,997,047 21,718,485
Notes payable -- long term ......... 2,400,000 --
Stockholders' equity ............... 7,586,940 19,080,409
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The discussion and analysis below should be read in conjunction with the
Financial Statements of the Company and the Notes to Financial Statements
included elsewhere in this Prospectus.
<PAGE>
Results of Operations
The following table sets forth certain Statements of Operations data as a
percentage of sales for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Years ended December 31, September 30,
1996 1995 1994 1997 1996
------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Sales .............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 51.8 48.5 48.0 55.2 51.3
--------- --------- --------- ---------- ---------
Gross profit ........................ 48.2 51.5 52.0 44.8 48.7
Sales and marketing expenses ......... 33.3 30.7 28.2 35.4 33.2
General and administrative
expenses ........................... 35.5 30.6 29.3 31.8 35.3
Research and development
expenses ........................... 52.6 26.1 16.2 76.8 47.9
Restructuring Charge .................. -- -- -- 3.8 --
--------- --------- --------- ---------- ---------
Total Operational Expenses ......... 121.4 87.4 73.7 147.8 116.4
Loss from operations ............... (73.2) (35.9) (21.7) (103.0) (67.7)
Other, net ........................... 5.7 2.0 .5 2.8 6.2
--------- --------- --------- ---------- ---------
Loss before income tax benefit ...... (67.5) (33.9) (21.2) (100.2) (61.5)
Income tax benefit .................. -- -- .8 -- --
--------- --------- --------- ---------- ---------
Net Loss ........................... (67.5)% (33.9)% (20.4)% (100.2)% (61.5)%
========= ========= ========= ========== =========
</TABLE>
Nine months ended September 30, 1997 as compared to nine months ended September
30, 1996
Net Sales
Worldwide sales were $10,104,405 for the nine months ended September 30,
1997, an increase of $1,160,990 or 13% compared to worldwide sales of
$8,943,415 for the nine months ended September 30, 1996. Domestic sales were
$9,321,958 for the nine months ended September 30, 1997 compared to $7,606,663
for the
15
<PAGE>
nine months ended September 30, 1996. The increase in domestic sales for the
nine months ended September 30, 1997 reflects increased shipments of the
Company's T1-Modem and CTI Modem products offset by decreased shipments of
various DSP OEM products. Export sales were $782,447 for the nine months ended
September 30, 1997 compared to $1,336,752 for the nine months ended September
30, 1996.
Gross Profit
Gross profit increased $168,441 or 4% to $4,528,272 for the nine months
ended September 30, 1997 compared to $4,359,831 for the nine months ended
September 30, 1996. Gross profit margin as a percentage of sales was 45% for
the first nine months of 1997 compared to 49% for the first nine months of
1996. The decrease is the result of a shift in product mix from DSP OEM
products to shipments of data communications products.
Sales and Marketing
Sales and marketing expenses were $3,583,142 or 35% of sales for the nine
months ended September 30, 1997 compared to $2,972,661 or 33% of sales for the
nine months ended September 30, 1996. The increase of $610,481 reflects
increased trade show expenses of approximately $253,000 relating to first time
attendance at certain trade shows where the Company's RASCAL and ADSL DSLAM
carrier class products were introduced. Advertising and marketing expenses
increased by approximately $144,000 reflecting increased expenditures related
to T1-Modem and RASCAL product lines.
General and Administrative
General and administrative expenses increased by $52,051 from $3,158,795
or 35% of sales for the nine months ended September 30, 1996 to $3,210,846 or
32% of sales for the nine months ended September 30, 1997. The increase
reflects higher salaries and benefits of approximately $238,000 related to
seven new hires, along with approximately $98,000 of various operating expenses
related to these hires. The nine months ended September 30, 1996 included
approximately $284,000 of non-recurring severance expenses related to certain
management personnel.
Research and Development
Research and development expenses were $7,760,244 or 77% of sales for the
nine months ended September 30, 1997 compared to $4,280,640 or 48% of sales for
the nine months ended September 30, 1996. The increase of $3,479,604 reflects
an increase of approximately $1,196,000 in salaries and related expenses
reflecting an increase in engineers to meet the demands for internal product
development in the data communication and CSG product groups. Additionally,
outside contract labor expenses increased by approximately $935,000 for
projects related to forward looking technologies.
Restructuring Charge
In September 1997, the Company announced a reduction in workforce of 11
employees. Additonally, effective September 26, 1997, the Company terminated
the employment agreement of Jeffrey Sasmor, its Vice Chairman and Secretary,
and entered into a termination agreement with Mr. Sasmor. (See "Employment
Agreement"). As a result of the reduction in workforce and Mr. Sasmor's
termination agreement, the Company recorded a restructuring charge of $379,454
which reflects severance and related employee benefits payments, of which
$143,072 was paid as of September 30, 1997.
Other Matters
In January 1996, the Company formed a communications systems team to begin
development of an ADSL carrier class product targeting the needs of major
telecommunications and network service providers. To date, the team has
developed Horizon, a carrier class product which is currently in laboratory
environments at a certain network service provider. The Company's recent
strategic decision to focus on the RAS marketplace has led to the Company's
announcing in August 1997 its intent to seek a buyer for the Horizon product
and team. The carrier class product does not fit well into the Company's
markets and customer base. Needham and Company is representing the Company in
this effort.
16
<PAGE>
The Company has incurred approximately $4.9 million in costs and expenses
on a cumulative basis from January 1, 1996 through September 30, 1997, related
to this product effort. For the nine months ended September 30, 1997, costs and
expenses approximate $3.1 million for such product. The Company expects to
incur approximately $1.0 million of costs and expenses in the fourth quarter of
1997 with respect to this product. The Company is currently in discussion with
a number of companies concerning a purchase of the Horizon product and team,
but no definitive sale agreement has been reached as of October 31, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Worldwide sales were $13,030,637 for 1996, an increase of $3,515,204 or
37% from $9,515,433 for 1995. Domestic sales for 1996 were $11,476,056 compared
to $7,578,844 for 1995, an increase of $3,897,212 or 51.4%. This increase is
the result of increased shipments of certain DSP OEM products as well as first
time shipments of the Company's T1-Modem product to certain telecommunications
customers. Export sales were $1,554,581 for 1996 compared to $1,936,589 for
1995. The decrease of $382,008 is a result of lower shipments in 1996 to a user
of DSP boards in the audio industry. One customer purchased one DSP OEM product
that accounted for 32% of total sales for 1996. The Company's backlog at
December 31, 1996 included approximately $2,500,000 of orders for this
customer, which will be shipped by March 31, 1997.
Gross profit increased to $6,277,608 for 1996 from $4,900,084 for 1995.
Gross profit margin, however, decreased from 51.5% in 1995 to 48.2% for 1996.
The decrease in gross profit margin for 1996 is a result of net sales for 1996
containing a high content of DSP OEM product sales that carried lower gross
margins than in 1995.
Sales and marketing expenses were $4,341,151 or 33.3% of sales for 1996
compared to $2,922,826 or 30.7% of sales for 1995. The increase of $1,418,325
includes $346,000 for salaries and wages reflecting the addition of several
full-time employees in the Company's sales support area. Advertising and
marketing expenses increased approximately $459,000 reflecting expenditures for
print advertising brochures and marketing programs associated with the
introduction of the Company's CTI and TI-Modem products as well as certain OEM
DSP products. Sales commissions incurred by direct sales employees increased by
approximately $118,000 reflecting the increase in volume for 1996.
General and administrative expenses were $4,621,630 or 35.5% of net sales
for 1996 compared to $2,914,835 or 30.6%, an increase of $1,706,796 or 58.6%.
Salaries and wages increased by approximately $459,000 reflecting non-recurring
severance expense of $284,000 related to certain management personnel and the
addition of human resource and accounting managers. Recruitment expenses
increased by $256,000 reflecting placement fees for certain staff positions and
recruitment print advertising in major cities for engineers and support staff.
Relocation expense increased by $171,000 reflecting the relocation of a senior
executive to our corporate office and the closing of the Company's liaison
office in Paris, France. Rent expense increased by $290,000 reflecting
principally the Company's occupancy of its 30,000 square foot corporate
headquarters in January 1996. Legal fees increased by $131,000 due primarily to
increased activity in licensing and labor law and OEM agreements. Investor
relations expense increased by $191,000 reflecting increased listing fees
associated with the Company's listing on the NASDAQ National Market, and a
significant increase in investor relations activity related to financial public
relations.
Research and development expenditures were $6,860,665 or 52.6% of sales
compared to $2,482,561 or 26.1% of sales, an increase of $4,378,104. Salaries
and wages increased to $1,278,000 reflecting a significant increase in hiring
of engineering staff to meet the demand of internal product development in both
the CTI and CSG groups. Additionally, the Company incurred increased consulting
expenses of $1,486,000 related to certain product development provided for CTI
and CSG. For 1997, the Company anticipates that overall spending for research
and development is expected to increase over the 1996 level in order to meet
scheduled release dates for new products.
For the foregoing reasons, the Company incurred a net loss of $8,801,457
for 1996 compared to a net loss of $3,233,401 for 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Worldwide sales increased by $2,650,184 or 39% to $9,515,433 for 1995 from
$6,865,249 for 1994. Domestic sales for 1995 were $7,578,844 compared to
$5,608,080 for 1994, an increase of $1,970,764 or
17
<PAGE>
35.1%. The increase in sales was due to the introduction of several new OEM
products during 1994 as part of the Company's shift in marketing strategy,
which had minimal impact on sales during 1994. Export sales increased to
$1,936,589 for 1995 from $1,257,169 in 1994, an increase of $679,420 or 54.0%.
The increase was the result of sales to a foreign affiliate of a domestic OEM
customer.
Gross profit increased to $4,900,084 for 1995 from $3,569,931 for 1994.
Gross profit margin decreased slightly to 51.5% in 1995 from 52.0% in 1994. The
slight decrease in gross profit margin reflects the change in product mix to
the OEM market which resulted in higher unit volumes with reduced gross profit
margins compared to prior years. Over the last six months of 1995, gross profit
margin was 53.9% compared to 52.3% for the last six months of 1994. The
improved gross profit margin trend over the last six months of 1995 reflects a
positive mix of sales of products and product configurations with higher gross
margins.
Sales and marketing expenses were $2,922,826 or 30.7% of sales for 1995
compared to $1,937,227 or 28.2% of sales for 1994. The increase of $985,599 or
51% for 1995 includes approximately $370,000 in salaries and wages reflecting
additions to the field sales force and to technical staff in San Francisco,
California and Paris, France, as well as expansion of the marketing and sales
support groups during 1995. Sales commissions increased by approximately
$235,000 as a result of the increase in sales volume for 1995. Travel and
related expenses increased by approximately $177,000 reflecting the significant
increase in travel for the Company's field sales force and senior sales
executives for 1995 compared to 1994. The Company expects sales and marketing
expenses to increase as the Company further expands sales and marketing efforts
as part of the expansion of its CTI business.
General and administrative expenses were $2,914,835 or 30.6% of sales for
1995 compared to $2,012,490 or 29.3% of sales for 1994. The increase of
approximately $902,000 or 45% includes an increase of $203,131 in salaries and
wages related to the addition of a Chief Financial Officer (effective May 1,
1995), a Corporate Controller (November 1994), and certain other staff and
clerical positions, some of whom were not employed by the Company until 1995.
Payroll related expenses increased by approximately $101,000 reflecting the
employee headcount increase December 31, 1994 to December 31, 1995. Recruitment
and relocation expenses increased by $95,000 as a result of the recruitment and
relocation of certain senior level management and engineering personnel.
Commercial insurance costs increased by $122,000, principally reflecting
premium expense for directors and officers liability insurance, which was not
in effect in 1994. Health and life insurance expenses increased by $100,000 due
to the increase in headcount in 1995. Consulting and contracting expenses
increased by $101,000, primarily related to the retention of a consultant who
provides management advisory services.
Research and development expenditures were $2,482,561 or 26.1% of sales
for 1995 compared to $1,111,394 or 16.2% of sales for 1994, an increase of
$1,371,167 or 123.4%. The increase was due primarily to hiring additional
engineers to meet the demands for product development testing and engineering
activities related to developing products specifically for the OEM marketplace.
Additionally, during the second quarter of 1995, the Company hired a core group
of senior level software engineers and a general manager to pursue
opportunities in the CTI industry.
For the foregoing reasons, the Company incurred a net loss of $3,223,401
for 1995 compared to a net loss of $1,399,072 for 1994.
Liquidity and Capital Resources
On June 12, 1997, the Company announced it had completed a $10 million
credit facility with Transamerica Business Credit Corporation's Technology
Finance Division, of Farmington, Connecticut. This facility provides a
five-year, $6.0 million term loan and a three-year, $4.0 million revolving
credit facility ("Revolver"). The term loan provides for an immediate advance
of $3.0 million and a second advance of $3.0 million upon achievement of any
one of certain milestones such as profitability, net proceeds of at least $7
million from the sale of common stock, or achievement of a significant
strategic partner relationship. The Revolver provides for up to $4.0 million in
advances based on a formula of eligible accounts receivable and inventory. This
Revolver can be increased to $7.0 million in the event that the Company
achieves one of the milestones, but elects not to draw the second advance under
the term loan. Additionally, the Revolver can be extended for two additional
one-year periods. As of September 30, 1997, there was $3.0 million outstanding
under the term loan and there were no
18
<PAGE>
outstanding advances under the Revolver. Payments of principal and interest are
due in arrears in twenty consecutive quarterly installments, payable on the
first day of each calendar quarter commencing October 1, 1997. The interest
rate under the term loan is based on the weekly average of the interest rate on
five year U.S. Treasury Securities for stated periods plus an agreed upon
number of additional basis points. At September 30, 1997, the interest rate in
effect was 11.66%. The interest rate in effect under the Revolver is based on
the prime rate plus 2.50%. Under terms of the credit agreement, the Company
must maintain agreed upon levels of financial performance, including the
maintenance of cash or cash equivalents on hand at all times of not less than
$3.0 million during the fiscal year ended December 31, 1997 and $4.0 million
during the fiscal year ended December 31, 1998 and $4.5 million thereafter.
In addition, the credit agreement includes a material adverse effect
clause, whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions (financial or otherwise) are deemed to have a material
adverse effect on the Company or its ability to meet its obligations.
In anticipation of possible noncompliance of certain financial covenants at
December 31, 1997, Transamerica has given the Company an unconditional waiver
with respect to each of these financial covenants for the fiscal year ending
December 31, 1997, with the exception of the accounts receivable collection
period for which the Company is and expects to be in compliance. Additionally,
Transamerica has agreed to waive the minimum cash on hand covenant through
December 31, 1998, which allows the Company to use all of its cash, as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September 30, 1997 and its forecasted balance sheets and statements of
operations and cash flows dated October 16, 1997 for the fourth quarter of 1997
and calendar years 1998 and 1999, and does not deem such information contained
in such documents as a material adverse event. Management believes such
forcasted balance sheets and statements of operations and cash flows are
reasonable and the likelihood of the occurrence of a material adverse event is
remote.
During the nine months ended September 30, 1997, there was a net increase
in cash and cash equivalents of $430,779, including a net amount of $5,993,634
in proceeds from the maturity and sale of investments in marketable securities
which were used to fund operations. On June 13, 1997 the Company received gross
proceeds of $3,000,000 under the above referenced term loan. At September 30,
1997, cash and cash equivalents amounted to $5,057,362. Working capital
amounted to $6,686,867 at September 30, 1997 compared to $13,795,613 at
December 31, 1996, a decrease of $7,108,746.
Net cash used in operating activities for the nine months ended September
30, 1997 amounted to $8,343,606. The negative cash flow from operations was
primarily the result of the Company's net loss of $10,125,992. Additionally,
trade accounts payable and accrued expenses decreased by $1,090,228 reflecting
lower shipments during the third quarter of 1997.
Net cash provided by investing activities for the nine months ended
September 30, 1997 amounted to $4,695,884. This included net proceeds of
$5,993,634 from the maturity and subsequent sale of high quality government
agency securities. Capital expenditures of $1,297,750 reflected purchases of
computer and peripheral equipment related to engineering staff and final test
and assembly in manufacturing and also office furniture related to the
Company's relocation of its CSG group to Piscataway, New Jersey in January
1997.
Net cash provided by financing activities for the nine months ended
September 30, 1997 amounted to $4,078,501, reflecting a draw down of $3,000,000
under the Transamerica term loan and $1,078,501 in proceeds from the exercise
of common stock options.
The financial statements have been prepared on a going-concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. The Company expects to incur costs and expenses in
excess of expected revenues during the ensuing six months as the Company
continues to execute its business strategy in the Remote Access market. There is
no assurance that the Company will generate sufficient cash flow from product
sales to liquidate liabilities as they become due. Accordingly, the Company may
require additional funds to meet planned obligations through December 31, 1998
and will seek to raise such amounts through a variety of options, including
equity financing, proceeds from the sale of the Horizon product and team,
borrowings under the existing Revolver, and the expected future cash flows from
operations. In the event the Company is unable to liquidate its liabilities,
planned operations will need to be scaled back. Continuance of the Company as a
going concern is dependent upon the Company's ability to generate capital and
its attainment of profitable operations. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
During 1996, there was a net decrease in cash and cash equivalents of
$9,352,426, of which a net amount of $5,930,544 was used to purchase marketable
securities, resulting in a year-end cash balance of $4,626,583. Cash and cash
equivalents at December 31, 1995 amounted to $13,979,000. Working capital
amounted to $13,795,613 in December 31, 1996 compared to $16,084,594 at
December 31, 1995, a decrease of $2,288,981.
19
<PAGE>
Net cash used in operating activities for 1996 was $9,147,539. The
negative cash flow from operations was the result of the Company's net loss of
$8,801,457 for the year ended December 31, 1996. Additionally, trade accounts
receivables increased by $1,874,607 reflecting increased sales volume during
the fourth quarter of 1996, and specifically in the month of December 1996.
Inventories increased by $1,312,492 as a result of the Company's decision to
order key raw material components in ample quantity to meet anticipated demand
of its CTI TI-Modem product which began shipping during the third quarter of
1996. Net cash used in operating activities for 1995 was $5.1 million. The
negative cash flow from operations was due primarily to a loss of approximately
$3.2 million and an increase in inventory of approximately $1.2 million in
anticipation of meeting increased customer demand on a timely basis. In
addition, accounts receivable increased by approximately $745,000 reflecting
the significant increase in sales for 1995.
Net cash used in investing activities for 1996 amounted to $8,011,951
reflecting a net amount of $5,930,544 used to purchase high quality government
agency securities with maturities greater than three months, and $2,081,407
reflecting purchases of computer and peripheral equipment to support the
increase in engineering and professional staff and purchase of the equipment
and leasehold improvements related to the Company's relocation to a larger
facility in January 1996. Net cash used in investing activities for 1995
included approximately $437,000 in capital expenditures which was used
primarily for the acquisition of computer hardware for engineering and
professional staff added in 1996.
Effective January 24, 1996, the Company's outstanding publicly traded
warrants became eligible for exercise and under certain circumstances, could be
called for redemption by the Company at a price per warrant of $0.01. On May
26, 1996, the Company notified all registered holders of warrants that it had
elected to redeem on or after June 28, 1996 all warrants outstanding on the
redemption date. Each holder of a warrant called for redemption could, within
30 days, elect to preempt the redemption by exercising the warrant and
purchasing one share of common stock of the Company at an exercise price of
$3.50. The Company received net proceeds of approximately $6,555,000 with
respect to the exercise of such warrants.
Cash flows from financing activities for 1996 amounted to $7,807,064. As
previously discussed, the Company received $6,554,501 from the exercise of the
outstanding publicly traded warrants. Additionally, the Company received
$768,000 resulting from the exercise of 150,000 unit purchase options issued to
the Company's underwriters in conjunction with its Initial Public Offering.
Such options entitle the holder to purchase for an aggregate consideration of
$768,000, 150,000 Underwriter Units. Upon exercise, each Underwriter Unit
entitles the holder to one share of common stock and one warrant. The Company
also received $516,087 from the exercise of outstanding stock options. Cash
flows from financing activities for 1995 were approximately $19.2 million. On
December 31, 1995, the Company had working capital of $16,084,594, including
$13,979,000 in cash and cash equivalents. The Company began 1995 with cash and
cash equivalents of approximately $313,000 and in January 1995 received net
proceeds of approximately $5.7 million from its initial public offering. In
December 1995, the Company received net proceeds of approximately $13.5 million
from its secondary stock offering.
Statements contained in this Prospectus that are not historical facts are
forward looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward looking
statements involve risks and uncertainties, including the timely development
and acceptance of new products, the impact of competitive products and pricing,
changing market conditions and the other risks detailed in the Company's
prospectus and from time to time in other filings. Actual results may differ
materially from those projected. These forward looking statements represent the
Company's judgment as of the date of this document. The Company disclaims,
however, any intent or obligation to update these forward looking statements.
20
<PAGE>
MANAGEMENT
The following sets forth certain information regarding the Company's
executive officers and directors. Except as otherwise set forth herein,
executive officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- ----- --------
<S> <C> <C>
Anthony M. Agnello ...... 48 Chairman of the Board of Directors, Chief Executive Officer
Brian A. Hoerl ......... 42 President and Chief Operating Officer
Gerard E. Dorsey ......... 51 Senior Vice President -- Finance and Chief Financial Officer
Jeffrey M. Sasmor ...... 46 Director
Edward D. Horowitz ...... 49 Director
Harold W. Paul ......... 49 Director
Etienne A. Perold ...... 42 Director
Robert J. Ranalli ...... 59 Director
</TABLE>
Anthony M. Agnello co-founded the Company in 1982 and has served as
Chairman of the Board and Chief Executive Officer. He also held the title of
President from 1988 until September 17, 1996.
Brian A. Hoerl was appointed President and Chief Operating Officer
effective September 17, 1996. He was previously Vice President of Sales since
November 1993. From December 1991 through October 1993, he was the Northeast
District Sales Manager for Spectron Microsystems, Inc., a California-based
manufacturer of DSP operating systems.
Gerard E. Dorsey joined the Company in April 1995. Previously, he was
President, Chief Executive Officer and Chief Financial Officer of Information
Management Technologies Corporation, from December 1990 until September 1994.
From August 1987 until December 1990, he was Corporate Treasurer of Loral
Corporation.
Jeffrey M. Sasmor has served as Vice President and Director of the Company
since 1987. He was appointed Secretary effective June 18, 1996 and Vice Chairman
of the Board of Directors on February 27, 1997. Effective September 26, 1997,
the Company terminated the employment agreement of Mr. Sasmor and entered into a
termination agreement with Mr. Sasmor. (See "Employment Agreement").
Edward D. Horowitz is a Director of the Company and a member of the Audit
Committee. From 1989 to 1996, Mr. Horowitz was employed by Viacom International
Inc., most recently as Senior Vice President -- Technology. He was also the
Chairman and Chief Executive Officer of Viacom Interactive Media, and is a
Director of Star Sight Telecast. Effective January 1997, Mr. Horowitz became
Executive Vice President of Advanced Development of CitiCorp.
Harold W. Paul is a Director of the Company and member of the Compensation
Committee. For more than five years, Mr. Paul has been a partner at Berger &
Paul, L.L.P., a New York law firm specializing in securities matters.
Etienne A. Perold is a Director of the Company and member of the
Compensation Committee. For more than five years Mr. Perold has been a
management consultant specializing in the area of organizational communication
and leadership development.
Robert J. Ranalli is a Director of the Company and a member of the Audit
Committee. Mr. Ranalli served as President of AT&T Consumer Services from 1984
until his retirement in 1994, and three year terms each as Chairman of the
Board for AT&T Universal Card Services and AT&T Transtech Services.
The Company's Board of Directors is composed of six directors. The Board
of Directors are divided into three classes and the members of each class are
elected at the annual meeting of the stockholders held in the year in which the
terms for that class expire, as follows: Messrs. Ranalli and Horowitz are Class
I Directors, with terms expiring in 2000; Messrs. Perold and Sasmor are Class
II Directors, with terms expiring in 1999; and Messrs. Agnello and Paul are
Class III Directors, with terms expiring in 1998. The incumbent Board serves as
a nominating committee for new directors.
Mr. Agnello is a full-time employee who does not receive additional
renumeration for serving as directors. In 1995, the Company compensated outside
(i.e. non-employee) directors by issuing options to purchase 30,000 shares of
common stock to Mr. Paul, options to purchase 10,000 shares of common stock to
Mr. Perold, and
21
<PAGE>
options to purchase 50,000 shares of common stock to each of Messrs. Horowitz
and Ranalli. In 1996, the Company granted 36,000 options from the 1996
Directors Plan to Mr. Perold -- 12,000 per year, for his continued services as
a director through the 1999 Annual Stockholders Meeting. In 1997 the Company
granted Messrs. Ranalli and Horowitz 25,000 options each for each year he
serves on the Board. The Company also reimburses its outside directors for
their expenses incurred in attending meetings of the Board of Directors.
Key Employees
The following employee is recognized by Ariel to play an important part in
the Company's operations.
John Lynch, 40, has been employed as Vice President of CTI since June
1995. Mr. Lynch was appointed Chief Technology Officer in March 1997. Prior
thereto, he was Research and Development Director of the AT&T ME Modem and
Multimedia Department. From 1989 to 1993, he was Program Manager of VCOS
Multimedia Products for AT&T Microelectronics.
Advisory Board
The Company has established an Advisory Board whose function is to assist
the Company in identifying technological and product development opportunities
and to provide marketing and financial advice. The role of the Advisory Board
is advisory only and, although management may be influenced by the
recommendations of the Advisory Board, the Advisory Board possesses no
decision-making authority on behalf of the Company. The members of the Advisory
Board are as follows:
Irwin Lieber has served for more than five years as President and Chief
Executive Officer of Geo Capital Corp., a registered investment advisor. Mr.
Lieber served as a director of Gates/FA from May 1987 to August 1994. He also
served from June 1985 to February 1994 as a director of Cheyenne Software, Inc.
("Cheyenne") engaged in the development and sale of computer software products.
He is also a general partner of Applewood Associates, L.P., a principal
stockholder of the Company, and a general partner of 21st Century
Communications Partners, L.P.
Eli Oxenhom served as Chairman of the Board of Cheyenne from October 1986
until May 1994 and as President and Chief Executive Officer of Cheyenne from
October 1986 to October 1993.
Barry Rubenstein was one of the founders of Cheyenne and held several
positions in its senior management. He is currently a private investor and for
more than five years has been a general partner of Woodland Partners, an
investment partnership. He is also a general partner of Applewood Associates,
L.P., a principal stockholder of the Company, and a general partner of 21st
Century Communications Partners, L.P.
Executive Compensation
The following table summarizes the compensation earned over the last three
fiscal years by the Chief Executive Officer, three executive officers and two
other individuals who were not serving as executive officers at year end, whose
earned compensation exceeded $100,000 for the year ended December 31, 1996.
22
<PAGE>
SUMMARY COMPENSATION SCHEDULE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- --------------------------------------------------
Other Annual Number of All Other
Year Salary Bonus Compensation (4) Options Compensation (5)
<S> <C> <C> <C> <C> <C> <C>
Anthony Agnello ...... 1996 $ 202,408 $65,000 $ 19,669 -- $ 4,476
1995 160,000 -- 12,863 -- 4,620
1994 186,937(l) -- -- -- 4,497
Brian Hoerl ............ 1996 159,470 36,888 13,214 50,000 --
1995 -- -- -- -- --
1994 -- -- -- -- --
Jeffrey Sasmor ......... 1996 154,166 30,000 137,747(7) -- 3,578
1995 140,000 -- 15,775 -- 2,800
1994 140,100(3) -- 12,182 95,750 2,800
Gerard E. Dorsey ...... 1996 150,000 -- 20,020 -- 4,500
1995 -- -- -- -- --
1994 -- -- -- -- --
John Lynch ............ 1996 148,847 -- 12,092 -- 4,465
1995 -- -- -- -- --
1994 -- -- -- -- --
Mark Clayton ......... 1996 72,365 -- 12,591 -- 87,291(6)
1995 150,000 -- 13,212 -- 4,500
1994 183,585(2) -- -- -- 4,497
</TABLE>
- ------------
(1) Includes $11,937 of royalties earned and $15,000 of royalties paid in 1994.
See "Certain Relationships and Related Transactions."
(2) Includes $8,585 of royalties earned and $25,000 of royalties paid in 1994.
See "Certain Relationships and Related Transactions."
(3) Includes $100 of royalties paid in 1994.
(4) Represents contributions made by the Company to the Company's medical and
life insurance plans, a Company-provided automobile and club dues.
(5) Represents the Company's contributions to the Company's 401 (k) plan and
profit sharing plan on behalf of its executive officers.
(6) Includes severance payment of $85,006.
(7) Includes $114,184 of relocation expenses.
Employment Agreements
Anthony M. Agnello and Jeffrey M. Sasmor are each employed under a
three-year employment agreement effective January 1, 1997, pursuant to which
they are paid annual base salaries of $200,000 and $180,000 respectively.
Effective September 26, 1997, the Company has terminated the employment
agreement of Jeffrey Sasmor, its Vice Chairman and Secretary and entered into
termination agreement with Jeffrey Sasmor under which Mr. Sasmor will receive
total compensation of $285,000 payable in installments of $80,000 on September
26, 1997 and two equal payments of $102,500 on January 2, and July 1, 1998. In
accordance with his employment agreement, the Company had also agreed to fully
vest Mr. Sasmor in any stock options that were not currently vested and to pay
for medical and dental insurance through December 31, 1998. Gerard E. Dorsey is
also employed under a three-year employment agreement, effective May 1, 1995,
and pursuant to which he is paid an annual base salary of $150,000 with an
additional allowance of $7,200 per year and a grant of 100,000 non-qualified
stock options from the 1994 Stock Option Plan. Brian Hoerl is also employed
under a three year employment agreement effective September 3, 1996, pursuant
to which he is paid an annual base salary of $190,000. Each of these employees
receives an automobile allowance and each may also receive annual bonuses at
the sole discretion of the Board of Directors of the Company, based upon
financial and operating performance of the Company. Messrs. Agnello, Sasmor and
Hoerl have executed non-competition and non-solicitation agreements with the
Company covering the two years following termination of their employment
pursuant to which they have agreed not to solicit the customers or employees of
the Company or become employed by or otherwise associated with a competitor of
the Company.
23
<PAGE>
1995 Stock Option Plan
The Company adopted its 1995 Incentive Stock Option Plan ("Plan"), which
was approved by the Company's stockholders at the annual meeting of
stockholders on May 14, 1996. The stockholders ratified an amendment to the
Plan at the annual meeting of stockholders held on June 13, 1997, increasing
the number of shares issuable under the Plan from 600,000 to 1,200,000.
The Board believes that the Plan is desirable to attract and retain
executives and other key employees of outstanding ability. Under the Plan,
options to purchase an aggregate of not more than 1,200,000 shares of the
Company's common stock may be granted.
The Plan is administered by the Board of Directors, which may empower a
committee of Directors to administer the Plan. The Board is generally empowered
to interpret the Plan, prescribe rules and regulations relating thereto,
determine the terms of the option agreements, amend them with the consent of
the optionee, determine the employees to whom options are to be granted, and
determine the number of shares subject to each option and the exercise price
thereof. The per-share exercise price for incentive stock options ("ISO") and
for non-qualified stock options ("NQSO") will not be less than the greater of
$4.00 per share or 100% of the fair market value of a share of the common stock
on the date the option is granted (110% of fair market value on the date of
grant of an ISO if the optionee owns more than 10% of the common stock of the
Company). Upon exercise of an option, the optionee may pay the exercise price
with previously acquired securities of the Company, or at the discretion of the
Board, the Company may loan some or all of the purchase price to the optionee.
Options will be exercisable for a term determined by the Board, which will
not be greater than ten years from the date of grant. Options may be exercised
only while the original grantee has a relationship with the Company which
confers eligibility to be granted options or within three months after
termination of such relationship with the Company, or up to one year after
death or total and permanent disability. In the event of the termination of
such relationship between the original grantee and the Company for cause (as
defined in the Plan), all options granted to that original optionee terminate
immediately. In the event of certain basic changes in the Company, including a
change in control of the Company (as defined in the Plan), in the discretion of
the Committee each option may become fully and immediately exercisable. ISOs
are not transferable other than by will or the laws of descent and
distribution. NQSOs may be transferred to the optionee's spouse or lineal
descendants, subject to certain restrictions. Options may be exercised during
the holder's lifetime only by the holder, his or her guardian or legal
representative.
Options granted pursuant to the Plan may be designated as ISOS, with the
attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the common stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be
approved by the stockholders, and any change in the Plan must be approved by
the stockholders, and any change in the Plan that may adversely affect an
optionee's rights under an option previously granted under the Plan requires
the consent of the optionee. Update for Shareholders Vote.
1996 Directors Plan
The 1996 Directors Plan was adopted by the Board of Directors on January
24, 1996 and approved by the stockholders of the Company at the Annual Meeting
of Stockholders held on May 14, 1996. The Plan provides for the issuance of up
to 250,000 stock options to non-employee directors in the aggregate. The Plan
is administered by a committee appointed by the Board of Directors. The Plan is
effective for a period of ten years from the date it was adopted. The Plan is
not subject to any provisions of the Employee Retirement Income Security Act of
1974 ("ERISA").
186,000 options have been granted pursuant to the 1996 Directors Plan to
date. The ability of a grantee to purchase the common stock under the 1996 Plan
is terminated if his or her service with the Company is terminated, provided
that in certain circumstances the grantee or his estate will have the right to
purchase the common stock after termination of service for a limited period of
time. The right to acquire common stock is not
24
<PAGE>
transferable except in the circumstances of death. In the event that a
reorganization, merger, consolidation, reclassification, recapitalization or
capital adjustment including a stock dividend or other similar change in the
common stock of the Company, equitable adjustment shall be made by the Company
in the number of kind and kind of shares that may be acquired under the 1996
Directors Plan. Common stock that may be acquired under the 1996 Directors Plan
may be acquired by the surrender of other shares of common stock owned by the
employee or the surrender of an unexercised portion of the right to acquire
common stock under the 1996 Directors Plan.
25
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of September 30, 1997 by: (i) each
stockholder known by the Company to be the beneficial owner of five percent or
more of the outstanding common stock, (ii) each director and executive officer
of the Company individually, and (iii) all directors and executive officers as
a group. Except as otherwise indicated in the footnotes below, the Company
believes that each of the beneficial owners of the common stock listed in the
table, based on information furnished by such owner, has sole investment and
voting power with respect to such shares.
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- -------------------- -----------
<S> <C> <C>
Anthony M. Agnello ....................................... 764,000 8.3%
2540 Route 130
Cranbury, NJ 08512
Mark D. Clayton .......................................... 645,000 7.0%
2540 Route 130
Cranbury, NJ 08512
Jeffrey M. Sasmor .......................................... 257,875(l) 2.7%
2540 Route 130
Cranbury, NJ 08512
Brian Hoerl ............................................. 27,500(2) *
2540 Route 130
Cranbury, NJ 08512
Gerard E. Dorsey .......................................... 50,000(3) *
2540 Route 130
Cranbury, NJ 08512
Robert J. Ranalli .......................................... 75,000(4) *
2540 Route 130
Cranbury, NJ 08512
Edward D. Horowitz ....................................... 75,000(4) *
2540 Route 130
Cranbury, NJ 08512
Etienne A. Perold .......................................... 46,300(5) *
2540 Route 130
Cranbury, NJ 08512
Harold W. Paul .......................................... 31,500(6) *
630 Third Ave.
New York, NY 10017
All Officers and Directors as a group (nine people) ...... 1,940,375 21.1%
</TABLE>
- ------------
* Less than one percent.
(1) Includes 111,815 shares subject to presently exercisable options.
(2) Includes 27,500 shares subject to presently exercisable options.
(3) Includes 50,000 shares subject to presently exercisable options.
(4) All shares beneficially owned by Messrs. Ranalli and Horowitz reflect
currently exercisable options issued in exchange for their services as
directors.
(5) Includes 46,300 shares subject to presently exercisable options.
(6) Includes 10,000 shares subject to presently exercisable options.
26
<PAGE>
Certain Relationships and Related Transactions
In 1982, the Company entered into an oral agreement with Messrs. Agnello
and Clayton to pay royalties, in lieu of cash bonuses, on certain products they
developed. For 1993, Messrs. Agnello and Clayton earned royalties of $59,000
and $48,000 respectively, and Mr. Agnello received a royalty payment of $69,000
with respect to royalties earned but not paid in prior years. For 1993, Messrs.
Agnello and Clayton earned royalties of $26,000 and $29,000 respectively. For
the nine months ended September 30, 1994, Messrs. Agnello and Clayton earned
royalties of $12,000 and $9,000, respectively, and were paid $15,000 and
$25,000, respectively. Prior to September 30, 1994, these royalties were
payable on demand without interest. Effective September 30, 1994, the Company
and Messrs. Agnello and Clayton entered into a written royalty agreement which
terminated their oral agreement and their right to receive further royalties
from the sale of such products. Pursuant to this agreement, the Company agreed
to pay to Messrs. Agnello and Clayton the accrued but unpaid royalties which
amounted to approximately $209,000 and $144,000, respectively, in nine equal
monthly installments, without interest, beginning August 1, 1996.
Mr. Perold, a director of the Company, has provided management advisory
services to the Company. Fees incurred for the nine months ended September 30,
1997 were approximately $149,000 and for the years ended December 31, 1996,
1995, and 1994 were approximately $208,000, $125,000, and $13,000. Berger &
Paul, L.L.P., a law firm of which Mr. Paul, a director of the Company, is a
partner, received fees of approximately $52,000 for the nine months ended
September 30, 1997 and of approximately $70,000, $205,000, and $30,000 for the
year ended December 31, 1996, 1995, and 1994, respectively, for legal services
which it performs on behalf of the Company, including $119,000 for services
provided in connection with the Company's initial public offering.
The Company believes that the transactions described above were on terms
no less favorable than could have been obtained from unaffiliated third
parties. The Company has undertaken that all future transactions with its
executive officers, directors and 5% stockholders will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the directors of the Company disinterested in the
transaction.
27
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 22,000,000 shares,
consisting of 20,000,000 shares of Common Stock, $.001 par value per share
("Common Stock"), and 2,000,000 shares of preferred stock, $.001 par value per
share ("Preferred Stock"). As of the date of this Prospectus, 9,229,125 shares
of Common Stock are outstanding and as of September 30, 1997 there were 72
holders of record of the Company's Common Stock, including shares held by
nominees. Upon the completion of this Offering, there will be 9,479,125 shares
of Common Stock outstanding. No shares of Preferred Stock are currently
outstanding.
Common Stock
The holders of shares of Common Stock are entitled to one vote for each
share held of record on any matters to be voted on by stockholders. The
election of directors requires a plurality vote of those shares of Common Stock
represented at any stockholders' meeting. Upon the notice of a stockholder, in
accordance with the Bylaws of the Company, that such stockholder intends to
cumulate his votes, every stockholder of the Company shall have the right to
cumulate his votes. If cumulative voting is so effected, each stockholder will
be entitled to as many votes in such election as shall equal the number of
shares of Common Stock which the stockholder owns, multiplied by the number of
directors to be elected. A stockholder may cast all such votes for a single
director or may distribute them among the number of directors to be voted for,
or for any two or more of them, as the stockholder sees fit. The holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no redemption, preemptive or
other subscription rights, and there are no conversion provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are fully paid
and nonassessable.
Preferred Stock
The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action
by the stockholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Company believes that the availability of
Preferred Stock issuable in series will provide increased flexibility for
structuring possible future financings and acquisitions, if any, and in meeting
other corporate needs. It is not possible to state the actual effect of the
authorization and issuance of any series of Preferred Stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
terms, rights and preferences of a series of Preferred Stock. However, such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock, or impairing the
liquidation rights of such shares. In addition, under various circumstances,
the issuance of Preferred Stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management. Issuance of Preferred Stock could also
adversely effect the market price of the Common Stock. The Company has no
present plan to issue any shares of Preferred Stock.
Warrants
Five non-affiliated individuals own an aggregate of 125,000 warrants
exercisable at $2.72 per share issued in connection with the Company's 1993
private placement. Transamerica Business Credit Corp owns 125,000 warrants
exercisable at $7.50 per share issued in connection with a credit facility
transaction on May, 1997. The common shares underlying these 250,000 warrants
are the subject of this registration.
28
<PAGE>
Indemnification of Officers and Directors
As permitted by the Delaware General Corporation Law ("DGCL"), the
Company's Restated Certificate of Incorporation limits the personal liability
of a director to the Company and its stockholders for monetary damages for
breach of fiduciary duty of care as a director. Liability is not eliminated
for: (i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) unlawful payment of
dividends or stock purchases or redemptions pursuant to Section 174 of the
DGCL; or (iv) any transaction from which the director derived an improper
personal benefit.
The Company's By-laws provide that the directors and executive officers
will be indemnified to the fullest extent permitted by applicable law against
all expenses (including attorneys' fees), judgments, fines and amounts
reasonably paid or incurred by them for settlement in any threatened, pending
or completed action, suit or proceeding, including any derivative action, on
account of their services as a director or officer of the Company or of any
subsidiary of the Company or of any other company or enterprise in which they
are serving at the request of the Company. No indemnification will be provided,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent that indemnification exceeds the indemnification
permitted by applicable law, such provisions may be unenforceable or may be
limited to the extent they are found by a court of competent jurisdiction to be
contrary to public policy.
Delaware Law
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owing
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly-held Delaware corporation for three
years following the date such person became an interested stockholder, unless:
(i) before such person became an interested stockholder, the board of directors
of the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii)
upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested stockholder
owns at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (subject to certain exceptions); or (iii)
following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by affirmative vote
of the holders of 66%. of the outstanding voting stock of the corporation not
owned by the interested stockholder. A "business combination" includes mergers,
stock or asset sales and other transactions resulting in a financial benefit to
the interested stockholder.
The provisions of Section 203 could have the effect of delaying, deferring
or preventing a change in control of the Company.
Transfer Agent, Warrant Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
9,479,125 shares of Common Stock. The outstanding shares of Common Stock
include 1,608,700 shares of "restricted securities" as that term is defined in
Rule 144 under the Securities Act which may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Of the Restricted Shares, all are eligible for sale under Rule 144. The
Company is unable to predict the effect that sales made under Rule 144 or
otherwise may have on the market price of the Common Stock. However, there is
the possibility that substantial amounts of Common Stock may be sold in the
public market and may have an adverse effect on the market prices for the
Company's Common Stock.
29
<PAGE>
In general, Rule 144 permits any person who has beneficially owned shares
of Common Stock for at least one year to sell without registration, within any
three-month period, a number of shares not exceeding the greater of one percent
of the then outstanding shares of Common Stock or the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
the Company. After they have been paid for and held for more than two years,
restricted shares held by persons who are not affiliates of the Company may be
sold without limitation.
30
<PAGE>
SELLING STOCKHOLDERS
The table below sets forth the number of warrants to purchase common stock
owned by each person who is a Selling Stockholder in this Prospectus. None of
those persons has had any relationship with the Company during the past three
years and each is offering all of the Common Stock underlying the warrants that
he owns:
<TABLE>
<CAPTION>
Name Number of Warrants Exercise Price
----- -------------------- ---------------
<S> <C> <C>
David Lindner ..................... 30,000 $2.72
Anthony Kirincic .................. 30,000 $2.72
Robert Paduano ..................... 9,000 $2.72
Susan Paduano ..................... 6,000 $2.72
Ronald Birnbaum ..................... 25,000 $2.72
Seymour Cohen ..................... 25,000 $2.72
Transamerica Business Credit Corp. 125,000 $7.50
</TABLE>
PLAN OF DISTRIBUTION
Shares of Common Stock may be sold hereunder by the Selling Stockholders
who acquire such shares upon the exercise of the Outstanding Warrants or who
hold common stock issued as conversion shares or dividend shares.
The distribution of the Common Stock included in this Prospectus is being
made by the Selling Stockholders directly. There is no commitment by any person
to purchase any shares offered by the Selling Stockholders. The Company, its
officers, directors, affiliates and the Selling Stockholders are obligated to
take such steps as may be necessary to ensure that the offer and sale by such
parties of the 250,000 Common Stock covered by this Prospectus (the
"Distribution") shall comply with the requirements of the federal securities
laws, including Rule l0(b)-6 (the "Rule") and other applicable antimanipulation
provisions of the Securities and Exchange Act of 1934 ("Exchange Act").
In general, Rule l0(b)-6 under the Exchange Act prohibits any person
connected with the Distribution from directly or indirectly bidding for, or
purchasing for any account in which he has a beneficial interest, any Common
Stock or any right to purchase Common stock, or attempting to induce any person
to purchase Common Stock or rights to purchase Common Stock, until after he has
completed his participation in the Distribution.
The Company has obtained joint and several agreements from its directors,
officers and affiliates, not to purchase any Common Stock or securities of the
Company convertible into Common Stock during the Distribution Period, in
violation of the Rules and Regulations promulgated under the Exchange Act
including, but not limited to, Rule 10(b)-6. These affiliated stockholders are
jointly and severally subject to a nine business day waiting ("cooling-off")
period prior to their commencement of offers or sales of their securities. They
cannot make any bids or purchases during this period and while the distribution
herein continues. This rule is equally applicable to nonaffiliated selling
stockholders, engaged in the distribution as well as other Rule l0b-6
restrictions applicable to selling stockholders.
Since the Selling Stockholders will be subject to the anti-manipulation
provisions of Rule l0(b)-6, the Company has sent written notice to all of them
by certified mail at least two (2) business days prior to the effective
prospectus date explaining their obligations under the Rule which begins two
days prior to the commencement of any distribution and continuing throughout
the period until their offers and sales terminate.
Unless granted an exemption by the Securities and Exchange Commission from
its Rule l0(b)-6, any soliciting broker-dealers will be prohibited from
engaging in any market making activities in the issuer's securities for the
period from two business days prior to any solicitation activity or the
termination of any right that the underwriter and soliciting broker-dealers may
have to receive a fee for the exercise of warrants following such
solicitation. As a result, soliciting broker-dealers may be unable to continue
to provide a market for the issuer's securities during certain periods while
the warrants are exercisable.
Ariel is bearing all costs relating to the registration of the common
shares offered in this Prospectus. Any commissions, discounts or other fees
payable to broker-dealer in connection with any sale of the common stock will
be borne by the Selling Stockholder selling such shares.
31
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by Berger & Paul, LLP, New York. Harold Paul, a member of the firm
owns 21,500 common shares and 10,000 common stock options.
EXPERTS
The balance sheets as of December 31, 1996 and 1995 and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report, which includes
an explanatory paragraph about the Company's ability to continue as a going
concern, of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain portions having
been omitted from this Prospectus in accordance with the rules and regulations
of the Commission. For further information with respect to the Company, the
securities offered by this Prospectus and such omitted information, reference
is made to the Registration Statement, including any and all exhibits and
amendments thereto. Statements contained in this Prospectus concerning the
provisions of any document filed as an exhibit are of necessity brief
descriptions thereof and are not necessarily complete, and in each instance
reference is made to the copy of the document filed as an exhibit to the
Registration Statement, each such statement being qualified in its entirety by
this reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, the Company
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New
York 10048. Copies of such materials, including the Registration Statement, can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Company's Common Stock and Warrants are listed on the Boston Stock Exchange.
Reports and other information regarding the Company can be inspected at such
exchange.
32
<PAGE>
GLOSSARY
Analog Signal-Continuously varying electrical representation of real world
information. The term signal encompasses, but is not limited to, speech, music,
images, video, biological signals, seismic signals, radiation, noise and
vibration.
Compression-A technique for reducing the bandwidth necessary to carry
information signals. By reducing the overall number of bits needed to transmit
information, compression allows more signals to use the same channel.
CTI-Computer Telephony Integration-CTI products add functionality which
allows standard computers to connect to telephone lines, initiate, receive,
transmit, store and otherwise manipulate voice and data telephone calls. CTI
system integrators combine computers with specialized DSP boards, telephone
line interface boards and application software. These systems are sold to end
users as voice mail systems, fax servers, modem services, automated attendants,
interactive voice response systems, etc.
DAW-Digital Audio Workstation.
Digital-The representation of information as discrete values, for example,
a stream of digits in the form of l's and O's. Modern electronic equipment uses
digital rather than analog techniques so that computer technology may be
employed.
DON Module-A plug-in module developed by the Company carrying multiple DSP
chips and memory. The DON Module is aimed at applications which require more
processing power than is available from a single DSP chip.
DSP-Digital Signal Processing. A method of altering, enhancing or
filtering continuous (analog) signals through mathematical manipulation of a
discrete-time representation of these signals.
DSP Chip-A specialized microprocessor that performs DSR
I/O-Input/Output
ISA Bus-Expansion bus found in the majority of PC-compatible computers.
Modem-A modulator/demodulator circuit pair that provides a means of
sending digital information over analog links such as the public telephone
network.
Multimedia-A broad term which refers to the ability for a Personal
Computer or Workstation to process signals (i.e. music, speech and video) in
addition to data. Multimedia products range from simple sound boards to
telephony products (voice mail, voice over modem, etc.) to teleconferencing.
<PAGE>
OEM-Original Equipment Manufacturer. A manufacturer which may employ a
Company board by installing the board into a computer, adding software and
selling the system as an end product.
Open-Non-proprietary. An open system is defined by a published standard.
This allows any manufacturer to design products that comply with that standard.
The value of an open system is the increased ease of assembling end user
systems by offering a range of modules which easily fit together.
Parallel Processing-A method of executing computer tasks in parallel by
assigning a different part of the problem to each of several processors.
Parallel processing is required when a task which must be completed in a
specified amount of time is too complicated for a single processor. Parallel
processing may also be employed to speed up non-real time tasks.
PCI Bus-An improved, higher speed expansion bus considered by many in the
computer industry to be the successor to the ISA bus. Unlike the ISA bus, which
was only present in PC-compatible computers, the PCI is offered on various
non-PC compatible computers including those from Apple, Hewlett Packard and
others.
Porting-The process of modifying software which operates on one type of
hardware or operating system so that it operates on another hardware or
operating system.
33
<PAGE>
Real Time Process-A process where the computing associated with each
sample can be completed before the next sample is received.
SCSA-Open interface standard for CTI developed by Dialogic Corp.
SHARC-The Super Harvard Architecture DSP chip manufactured by Analog
Devices.
Signal-Electrical representation of information. The information may be in
analog or digital form.
V32-A modem protocol standard which supports data transmission at rates up
to 19.2 kilobits.
VCOS-Visible Cache Operating System. An operating system developed by AT&T
Corp. for PC multimedia applications including audio and telephony.
VMEbits-A leading industrial computer bus introduced in 1981. It is widely
used in commercial and defense computer systems.
34
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Report of Independent Accountants ................................................... F-2
Balance sheets as of December 31, 1996 and 1995 ....................................... F-3
Statements of operations for the years ended December 31, 1996, 1995 and 1994 ......... F-4
Statements of stockholders' equity for the years ended December 31, 1996, 1995 and 1994 F-5
Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 ......... F-6
Notes to financial statements. ...................................................... F-7 -17
Balance sheets (unaudited) as of September 30, 1997 and December 31, 1996 ............ F-18
Statements of operations (unaudited) for the three months and nine months ended
September 30, 1997 and 1996 ......................................................... F-19
Statements of cash flows (unaudited) for the nine months ended September 30,
1997 and 1996 ........................................................................ F-20
Notes to financial statements ......................................................... F-21 - 22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ARIEL CORPORATION:
We have audited the accompanying balance sheets of ARIEL CORPORATION at
December 31, 1996 and 1995, and the related statements of operations,
stockholder's equity and cash flows for the years ended December 31, 1996, 1995
and 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ariel Corporation as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Subsequent to the date of issuance of our original report, certain
uncertainties have arisen as described in the second paragraph of Note 1 to the
Company's financial statements included herein. Such subsequent uncertainties
with respect to the availability of funds to sustain the Company's activities
indicate at November 12, 1997 that the Company may be unable to continue as a
going concern through December 31, 1998.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
March 7, 1997, except for
the second paragraph of Note 1,
for which the date is November 12, 1997
F-2
<PAGE>
ARIEL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 4,626,583 $13,979,009
Marketable securities ....................................... 5,999,377
Accounts receivable, net of allowance for doubtful account of
$212,678 in 1996 and $168,039 in 1995........................ 3,389,565 1,559,958
Inventories, net .......................................... 3,528,252 2,260,759
Prepaid expenses ............................................. 156,005 103,822
------------- ------------
Total current assets .................................... 17,699,782 17,903,548
Equipment ...................................................... 2,036,897 567,941
Other assets ................................................... 366,385 460,945
------------- ------------
Total assets ............................................. $ 20,103,064 $18,932,434
============= ============
</TABLE>
LIABILITIES and STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities
Accounts payable ................................................... $ 1,840,986 $ 486,291
Accrued expenses ................................................... 1,826,591 1,059,860
Notes payable, related parties .................................... 154,021 196,295
Royalties payable ................................................... 82,571 76,508
------------- ------------
Total current liabilities ....................................... 3,904,169 1,818,954
Notes payable, related parties, net of discount of $32,621 in 1995 ... -- 124,376
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized -- 2,000,000 shares
Issued and outstanding -- none
Common stock, $.001 par value:
Authorized -- 20,000,000 shares
Issued and outstanding -- 8,949,975 shares in 1996 and
6,798,625 shares in 1995 ....................................... 8,950 6,799
Additional paid-in capital .......................................... 29,321,748 21,133,832
Unearned compensation expense related to stock options ............ (178,819) --
Accumulated deficit ................................................ (12,952,984) (4,151,527)
------------- ------------
Total stockholders' equity .................................... 16,198,895 16,989,104
------------- ------------
Total liabilities and stockholders' equity ..................... $ 20,103,064 $ 18,932,434
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------
1996 1995 1994
---------------- --------------- ---------------
<S> <C> <C> <C>
Sales .................................... $ 13,030,637 $ 9,515,433 $ 6,865,249
Cost of goods sold ..................... 6,753,029 4,615,349 3,295,318
------------ ------------ ------------
Gross profit ........................... 6,277,608 4,900,084 3,569,931
------------ ------------ ------------
Selling and marketing expenses ......... 4,341,151 2,922,826 1,937,227
General and administrative expenses ...... 4,621,630 2,914,835 2,012,490
Research and development expenses ......... 6,860,665 2,482,561 1,111,394
------------ ------------ ------------
Total operating expenses ............... 15,823,446 8,320,222 5,061,111
------------ ------------ ------------
Loss from operations .................. (9,545,838) (3,420,138) (1,491,180)
Interest income ........................ 702,665 184,420 14,885
Interest expense ........................ (36,552) (34,743) (10,309)
Other income .............................. 78,268 47,060 30,131
------------ ------------ ------------
Loss before income tax benefit ...... (8,801,457) (3,223,401) (1,456,473)
Income tax benefit ........................ 0 0 57,401
------------ ------------ ------------
Net loss .............................. $ (8,801,457) $ (3,223,401) $ (1,399,072)
============ ============ ============
Weighted average number of common shares
outstanding ........................... 7,979,249 4,739,083 2,993,011
============ ============ ============
Net loss per share ........................ $ (1.10) $ (0.68) $ (0.47)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ARIEL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-In
Shares Amount Capital
----------- -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993 ... 2,950,000 $2,950 $2,038,020
Issuance of common stock ...... 40,625 41 40,584
Issuance of common stock ...... 43,000 43 68,757
Additional paid-in capital in
connection with discount of
royalty payable ............... -- -- 69,275
Cost incurred in connection with
issuance of common stock ...... -- -- --
1994 Net Loss .................. -- -- --
---------- ------- -----------
Balance at December 31, 1994 ... 3,033,625 3,034 2,216,636
Issuance of 1,725,000 units, each
unit consisting of one share of
common stock and one
redeemable common stock
purchase warrant ............... 1,725,000 1,725 5,381,577
Issuance of 2,040,000 shares of
common stock .................. 2,040,000 2,040 13,535,619
1995 Net Loss .................. -- -- --
---------- ------- -----------
Balance at December 31, 1995 ... 6,798,625 6,799 21,133,832
Issuance of 1,872,630 shares of
common stock in connection with
the exercise of redeemable
common stock purchase warrants 1,872,630 1,873 6,552,628
Issuance of common stock in
connection with exercise of
150,000 underwriter purchase
options ........................ 150,000 150 767,850
Issuance of common stock in
connection with exercise of
128,720 common stock options ... 128,720 129 515,958
Costs incurred in connection with
the issuance of common stock ... -- -- (31,524)
Unearned compensation related to
stock options .................. -- -- 383,004
Amortization of unearned
compensation .................. -- -- --
1996 Net Loss .................. -- -- --
---------- ------- ------------
Balance at December 31, 1996 ... 8,949,975 $8,950 $29,321,748
========== ======= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned Retained
Deferred Compensation Earnings Total
Financing Related to (Accumulated Stockholders
Costs Stock Options Deficit) Equity
------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ... -- -- $ 470,946 $ 2,511,916
Issuance of common stock ...... -- -- -- 40,625
Issuance of common stock ...... $ (68,800) -- -- --
Additional paid-in capital in
connection with discount of
royalty payable ............... -- -- -- 69,275
Cost incurred in connection with
issuance of common stock ...... (206,831) -- -- (206,831)
1994 Net Loss .................. -- -- (1,399,072) (1,399,072)
----------- ----------- ------------- -------------
Balance at December 31, 1994 ... (275,631) -- (928,126) 1,015,913
Issuance of 1,725,000 units, each
unit consisting of one share of
common stock and one
redeemable common stock
purchase warrant ............... 275,631 -- -- 5,658,933
Issuance of 2,040,000 shares of
common stock .................. -- -- 13,537,659
1995 Net Loss .................. -- -- (3,223,401) (3,223,401)
----------- ----------- ------------- -------------
Balance at December 31, 1995 ... -- -- (4,151,527) 16,989,104
Issuance of 1,872,630 shares of
common stock in connection with
the exercise of redeemable
common stock purchase warrants -- -- -- 6,554,501
Issuance of common stock in
connection with exercise of
150,000 underwriter purchase
options ........................ -- -- -- 768,000
Issuance of common stock in
connection with exercise of
128,720 common stock options ... -- -- -- 516,087
Costs incurred in connection with
the issuance of common stock ... -- -- -- (31,524)
Unearned compensation related to
stock options .................. -- (383,004) -- --
Amortization of unearned
compensation .................. -- 204,185 -- 204,185
1996 Net Loss .................. -- -- (8,801,457) (8,801,457)
----------- ----------- ------------- -------------
Balance at December 31, 1996 ... $ -- $ (178,819) $ (12,952,984) $ 16,198,895
=========== =========== ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1996 1995 1994
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (8,801,457) $ (3,223,401) $ (1,399,072)
Adjustments to reconcile net loss to net cash used in oper-
ating activities:
Depreciation and amortization ........................ 624,552 280,919 161,684
Amortization of discount on royalties payable ......... 29,623 29,675 6,979
Amortization of discounts on investments ............ (68,833) -- --
Deferred income taxes ................................. -- -- 122,599
Provision for doubtful accounts ..................... 45,000 68,285 44,957
Provision for inventory obsolescence .................. 45,000 90,000 22,500
Non-cash compensation expense ........................ 204,185 -- 40,625
(Increase) decrease in assets:
Accounts receivable ................................. (1,874,607) (744,886) (252,145)
Inventories .......................................... (1,312,492) (1,197,771) (121,918)
Other assets .......................................... 42,377 (344,863) (20,687)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ............... 2,109,323 31,013 640,357
Royalties payable .................................... 6,063 (82,811) 25,054
Notes payable ....................................... (196,273) -- --
------------- ------------ ------------
Net cash used in operating activities ............... (9,147,539) (5,093,840) (729,067)
------------- ------------ ------------
Cash flows used in investing activities:
Purchases of investments ................................. (13,394,624) -- --
Proceeds from the sale and maturity of investments ...... 7,464,080 -- --
Purchase of equipment ................................. (2,081,407) (436,932) (225,168)
Note receivable, related party ........................ -- -- 50,000
------------- ------------ ------------
Net cash used in investing activities ............... (8,011,951) (436,932) (175,168)
------------- ------------ ------------
Cash flows provided by (used in) financing activities:
Proceeds from sale of common stock, net of expenses . -- 19,196,592 (158,426)
Proceeds from exercise of redeemable common stock
purchase warrants .................................... 6,554,501 -- --
Proceeds from exercise of underwriter purchase options 768,000 -- --
Proceeds from exercise of common stock options ......... 516,087 -- --
Deferred financing costs .............................. (31,524) -- --
------------- ------------ ------------
Net cash provided by (used in) financing activities . 7,807,064 19,196,592 (158,426)
------------- ------------ ------------
Net increase (decrease) in cash ........................ (9,352,426) 13,665,820 (1,062,661)
Cash and cash equivalents, beginning of year ............ 13,979,009 313,189 1,375,850
------------- ------------ ------------
Cash and cash equivalents, end of period ............... $ 4,626,583 $ 13,979,009 $ 313,189
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
ARIEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization:
Ariel Corporation (the "Company") is a digital signal processing ("DSP")
technology company. DSP is an enabling technology in many rapidly growing
technology markets. Ariel utilizes its DSP expertise to create products for the
OEM and telecommunications industry.
As of September 30, 1997, the Company had working capital of $6,686,867,
including cash and cash equivalents of $5,057,362. The financial statements
have been prepared on a going-concern basis, which contemplates realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company expects to incur costs and expenses in excess of expected revenues
during the ensuing six months as the Company continues to execute its business
strategy in the Remote Access market. There is no assurance that the Company
will generate sufficient cash flow from product sales to liquidate liabilities
as they become due. Accordingly, the Company may require additional funds to
meet planned obligations through December 31, 1998 and will seek to raise
such amounts through a variety of options, including equity financing, proceeds
from the sale of the Horizon product and team, borrowings under the existing
Revolver, and the expected future cash flows from operations. In the event the
Company is unable to liquidate its liabilities, planned operations will need to
be scaled back. Continuance of the Company as a going concern is dependent upon
the Company's ability to generate capital and its attainment of profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
2. Summary of Significant Accounting Policies:
Revenue Recognition:
Revenue is derived from the sale of hardware and software products (the
"products") for scientific, military, industrial and commercial use. The
Company recognizes the sale of a product at the time the product is shipped to
the customer and when both the collection of the resulting receivable is
probable and no significant vendor and/or post-contract customer support
obligations remain. Subsequent to the sale of a product, the Company has agreed
to provide insignificant vendor and/or post-customer support at no cost to the
customer. The cost of such additional support is accrued for at the time of the
sale; however, such amount is not material.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less, to be cash equivalents.
Investments:
The Company's current investment policy is to invest available cash
balances in high quality debt securities. The cost of securities sold is based
on the specific identification method.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash, cash equivalents and
trade receivables. The Company places its cash and cash equivalents with
commercial banks. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies. Generally, the Company does not require collateral to support
customer receivables.
Inventories:
Inventories are stated at lower of cost or market using the first-in,
first-out ("FIFO") method. The Company computes the lower of cost or market in
accordance with the specific identification method based upon an estimate of
future customer product orders.
F-7
<PAGE>
The markets for the Company's products are characterized by rapidly
changing technology and the consequential obsolescence of relatively new
products. The Company has recorded certain estimated reserves against
inventories related to such technological obsolescence.
Equipment:
Equipment consists principally of computer equipment and software, office
equipment and furniture and fixtures and is stated at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets, which are generally three to five years. Expenditures for maintenance
and repairs, which do not extend the economic useful life of the related
assets, are charged to operations as incurred. Gains or losses on disposal of
equipment are reflected in the statements of operations.
Estimates Used in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 periods. Actual results could differ from those estimates.
Software Development Costs:
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased or Marketed" ("SFAS 86"). SFAS 86
requires that certain software product development costs, incurred after
technological feasibility has been established, be capitalized and amortized,
commencing upon the general release of the software product to the Company's
customers, over the economic life of the software product. Costs incurred after
technological feasibility has been established are not material.
Per Share Data:
The per share data appearing in the statements of operations for the years
ended December 31, 1996, 1995 and 1994 have been prepared in accordance with
the Accounting Principles Board Opinion No. 15. Such amount has been computed
based on the loss for the period divided by the weighted average number of
shares of common stock outstanding. The weighted average number of shares
outstanding excludes the number of common shares issuable upon the exercise of
outstanding stock options and warrants since such inclusion would be anti-
The per share data for the year ended December 31, 1994, was computed in
accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 64 ("SAB 64"), which requires that the weighted average number of
shares of common stock outstanding during the year be increased for certain
shares, or stock options, issued within one year or in contemplation of the
Company's initial public offering, and that such shares be treated as if
outstanding for all periods prior to the effective date of the initial public
offering. The weighted average number of shares outstanding was 3,165,383,
resulting in a net loss per share of $0.44.
Income Taxes:
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax return. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities ("temporary
differences") using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Advertising / Marketing:
Advertising and marketing costs are expensed as incurred and amounted to
$943,050, $483,757 and $487,192 for the years ended December 31, 1996, 1995,
and 1994, respectively.
F-8
<PAGE>
Supplemental cash flow information:
For the years ended December 31,
--------------------------------
1996 1995 1994
--------- -------- -------
Interest paid ......... $65,657 $5,068 $3,330
Income taxes paid ...... $ -0- $ -0- $ -0-
Non-cash investing and financing activities:
Included in accounts payable and accrued expenses at December 31, 1996,
1995 and 1994 were $27,688, $15,587 and $44,802 of equipment purchases,
respectively.
Also see Notes 9 and 10 for additional non-cash transactions in connection
with the issuance of shares of common stock in consideration for services
rendered and the discount related to royalties payable to related parties.
Adoption of Statements of Financial Accounting Standards:
The Company adopted the provisions of 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 1996. SFAS 121 requires
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 adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") in 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. The Company continues to account for
stock options under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25").
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128. "Earnings per Share" ("SFAS 128"), which simplifies existing
computational guidelines, revises disclosure requirements and increases the
comparability of earnings per share data on an international basis. The Company
is currently evaluating the impact of the new statement. This statement is
effective for financial statements for periods ending after December 15, 1997
and requires restatement of all prior-period earnings per share data presented.
Reclassifications
Certain amounts have been reclassified in order to conform to the current
year's presentation.
3. Investments:
The Company's current investment balances are classified as "available
for-sale," in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." For
the year ended December 31, 1996, securities were sold for proceeds of
approximately $7.5 million and a net gain which was insignificant. Investment
balances at December 31, 1996 were entirely comprised of U.S. Government Agency
securities and at year end carrying value approximates fair value.
4. Inventories, net of allowance:
Inventories, net of allowance consists of the following:
December 31,
--------------------------
1996 1995
---------- ----------
Component materials ...... $1,313,092 1,343,453
Work-in-progress ......... 620,367 483,217
Finished goods ......... 1,594,793 434,089
---------- ----------
$3,528,252 $2,260,759
========== ==========
F-9
<PAGE>
5. Equipment:
Equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
--------------- -------------
<S> <C> <C>
Computer and other equipment ..................... $ 2,149,590 1,018,541
Computer software ................................. 516,632 296,288
Office equipment and furniture and fixtures ...... 690,478 171,259
Leasehold improvements ........................... 222,896 -0-
------------ ----------
3,579,596 1,486,088
Less, accumulated depreciation and amortiza-
tion (1,542,699) (918,147)
------------ ----------
$ 2,036,897 $ 567,941
============ ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1996, 1995, and 1994 was $624,552, $280,919, and $161,684, respectively.
6. Accrued Expenses:
Accrued expenses consists of the following:
December 31,
------------------------
1996 1995
------------ -----------
Salaries and related benefits ...... $ 799,415 $ 460,205
Professional fees .................. 121,977 92,312
Commissions ........................ 137,747 95,805
Other .............................. 767,452 411,538
----------- -----------
$1,826,591 $1,059,860
=========== ===========
7. Income Taxes:
The Company's 1996, 1995 and 1994 income tax benefit consists of the
following:
For the years ended December 31,
--------------------------------
1996 1995 1994
------ ------ --------------
Current:
Federal ...... $ -- $ -- $ (180,000)
State ......... $ -- $ -- --
----- ----- ----------
$ 0 $ 0 $ (180,000)
----- ----- ----------
Deferred:
Federal ...... $ -- $ -- $ 122,599
State ...... -- -- --
----- ----- ----------
-- -- 122,599
----- ----- ----------
$ 0 $ 0 $ (57,401)
===== ===== ==========
F-10
<PAGE>
The differences between the United States Federal statutory tax rate and
the Company's effective tax rate for 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
United States Federal statutory tax rate .................. (34)% (34)% (34)%
Increases resulting from state income taxes, net of federal
benefit ................................................ (7)% (5)% (6)%
Accounting losses for which deferred tax benefit cannot be
currently recognized .................................... 39% 35% 32%
Non-deductible expenses ................................. 2% 4% 4%
----- ----- -----
Effective tax rate ....................................... --% --% (4)%
===== ===== =====
</TABLE>
The tax effect of temporary differences and net operating loss
carryforwards which make up the significant components of the Company's net
deferred tax asset and liability for financial reporting purposes at December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable .................. $ 72,311 $ 57,133
Inventory .............................. 50,148 86,791
Accrued expenses ..................... 76,063 79,201
Net operating loss carry forward ...... 3,815,374 1,117,604
State taxes ........................... 1,238,429 269,929
Tax credits ........................... 153,375 14,089
Depreciation ........................... 7,753 --
Deferred tax liability:
Equipment ........................... -- (3,977)
Valuation allowance ..................... (5,413,453) (1,620,770)
------------ ------------
Net ................................. $ 0 $ 0
============ ============
</TABLE>
As of December 31, 1996 and 1995, the Company has available, for income
tax reporting purposes, unused Federal and state net operating loss
carry-forwards of approximately $12,460,000 and $13,204,000 respectively. Such
amounts expire through the years 2011 and 2003, respectively. The timing and
manner in which the net operating loss carry-forwards may be utilized to reduce
future taxable income, if any, will be limited by Internal Revenue Code Section
382.
8. Employee Benefit Plans:
Effective January 1993, the Company adopted a defined contribution savings
plan. The terms of the plan provide for eligible employees ("participants") who
have met certain age and service requirements to participate by electing to
contribute up to 12% of their gross salary to the plan, as defined, with the
Company matching 50% of a participant's contribution up to a maximum of 3% of
gross salary, as defined. Company contributions vest after seven years of
employment. The employees' contributions are immediately vested. The Company's
contribution to the savings plan for the years ended December 31, 1996, 1995
and 1994 was $110,592, $64,057 and $38,122, respectively.
The Company also maintains a profit sharing plan for the benefit of its
employees. Contributions are determined at the discretion of the Company up to
a limit of 15% of the total compensation of eligible employees, as defined. No
contributions were made for 1996, 1995 or 1994.
F-11
<PAGE>
9. Commitments and Contingencies:
The Company purchases certain components from sole source suppliers upon
which the Company has developed specific products. The Company does not have
long-term agreements with any of these suppliers. Although the Company has not
experienced any material difficulties in obtaining these components, any
reduction or interruption in supply or manufacturing from these third-party
contractors would adversely affect its ability to continue to deliver its
products.
The Company leases office space for its corporate headquarters under an
operating lease which expires in January 2001. The lease provides for annual
minimum lease payments during the first year of $384,000, increasing annually
thereafter by $7,500. The lease also provides for the Company to pay a portion
of common area costs as defined. The Company has two five year options to renew
the lease at terms as defined based upon fair market value. In addition,
$125,000 is held in escrow to be applied to future rental payments. Such amount
is classified as a long-term prepayment. The Company also paid a $200,000
security deposit relating to this lease. Additionally, the Company has leased
approximately 11,740 square feet in Piscataway, New Jersey for engineering and
support staff related to its CSG group. This lease expires in December 2001.
Additionally, the Company has a lease on office space in San Diego, California
which expires December 31, 1999. Future minimum lease payments under all leases
at December 31, 1996 are as follows:
1997 $ 610,327
1998 559,759
1999 556,626
2000 503,165
2001 173,165
-----------
$2,403,042
===========
Total rent expense for the years ended December 31, 1996, 1995 and 1994
was $537,329, $247,628, and $194,566, respectively.
10. Stockholder's Equity:
During 1993 and 1994, the stockholders of the Company approved amendments
to the Company's certificate of incorporation. The amendments included a 10,000
for 1 stock split and an increase in the number of authorized shares to 22
million, of which 2 million shares are designated as preferred stock, par value
$.001, and 20 million shares are designated as common stock, par value $.001.
The preferred stock may be issued in series with rights, preferences and terms
as determined by the Board of Directors. These amendments have been
retroactively reflected in the accompanying financial statements.
In July 1993, the Company sold 880,000 shares of common stock, to
unrelated investors, at $2.27 per share and received net proceeds of
approximately $1,969,000 ("private placement"). In connection with the private
placement, three executive officers of the Placement Agent and two of its
employees received an aggregate of 125,000 common stock purchase warrants which
entitle the holders to purchase 125,000 shares of the Company's common stock at
an exercise price of $2.72 per share. As of December 31, 1996, the warrants are
fully exercisable and expire in July 1998.
In September 1994, the Company issued 43,000 shares of common stock to
legal counsel as partial compensation related to services rendered in
connection with the Company's sale of its common stock and redeemable common
stock purchase warrants in an initial public offering. The value of the shares
issued totaled $68,800, and such amount was accounted for as a cost of the
initial public offering.
During January 1995, the Company sold 1,725,000 Units in an initial public
offering. Proceeds to the Company totaled approximately $6,900,000 before
expenses. Each Unit consisted of one share of common stock and one redeemable
common stock purchase warrant ("Warrant"). On January 1, 1996, 1,725,000
publicly traded warrants were outstanding. Effective January 24, 1996, each
Warrant entitled the holder to purchase one share of the Company's common stock
at a per share price of $3.50. Each Warrant was eligible for exercise and could
be called by the Company at a price per warrant of $0.01 under certain
circumstances. On May 22, 1996, the Company notified all registered holders of
Warrants that it had elected to redeem on or after June 28, 1996 all
F-12
<PAGE>
warrants outstanding on the redemption date. During 1996, the Company received
approximately $6,555,000 with respect to the exercise of such warrants. In
connection with the sale of the Units noted above, the Company entered into an
underwriting agreement which, among other things, provided the underwriter with
the right to acquire, for $75, a Unit Purchase Option ("UPO"). The terms of the
UPO permit the underwriter to purchase, for an aggregate consideration of
$768,000, 150,000 Underwriters Units. Each Underwriters Unit is identical to
the Units noted above.
In December 1995, the Company sold 2,040,000 shares of common stock at
$7.50 in a secondary stock offering. Proceeds to the Company totaled
approximately $15,300,000 before expenses.
11. Related Party Transactions:
Royalties Payable
The Company's DSP products utilize certain proprietary technology
developed by three stockholders of the Company. In accordance with an informal
agreement, these stockholders received royalties based on the Company's net
sales. Effective September 30, 1994, two of these stockholders ("Stockholders")
entered into a written royalty agreement which terminated their informal
agreements and their right to receive further royalties from the Company. The
Company also agreed to pay to the Stockholders the accrued and unpaid royalties
payable at September 30, 1994, amounting to $353,292, in nine equal monthly
installments, without interest thereon, commencing August 1, 1996. At September
30, 1994, the Company discounted this obligation at an effective interest rate
of 9.75% and has reflected the resulting discount of $69,275 as additional
paid-in capital. During the year ended December 31, 1996, 1995 and 1994, the
Company recognized as interest expense $29,623, $29,675 and $6,979,
respectively. Such amount represented the amortization of the discount.
Legal
The Company's outside legal counsel owns shares of the Company's common
stock and is a member of the Company's Board of Directors. Fees paid to this
counsel for the years ended December 31, 1996, 1995 and 1994 were approximately
$70,000, $205,000 and $30,000, respectively, including $119,000 in 1995 for
services provided in connection with the Company's initial public offering.
Management Advisory Services
During 1995, a member of the Board of Directors provided management
advisory services to the Company. Fees incurred for the years ended December
31, 1996, 1995 and 1994 were approximately $208,000, $125,000, and $13,000
respectively.
12. Sales:
Sales by geographic area for the years ended December 31, 1996, 1995 and
1994 are as follows:
1996 1995 1994
------------- ------------- -----------
United States ...... $11,476,056 $ 7,578,844 $5,608,080
Export Sales:
Europe ............ 705,230 928,986 566,253
Asia ............ 302,234 632,611 376,019
Other ............ 547,117 374,992 314,897
------------ ------------ -----------
$13,030,637 $ 9,515,433 $6,865,249
============ ============ ===========
During each of the years ended December 31, 1996, 1995 and 1994, one customer
purchased one DSP OEM product that accounted for approximately 32%, 14% and 13%
respectively, of the Company's sales. There is no long-term agreement with
respect to the 32% customer in 1996. Such customer will receive approximately
$2.5 million in product during the first quarter of 1997, representing all open
purchase orders outstanding for such customer at December 31, 1996.
F-13
<PAGE>
13. Stock Option and Restricted Stock Awards:
The 1992 Stock Option and Restricted Stock Plan:
During 1992, the Board of Directors (the "Board") approved and
stockholders of the Company ratified the adoption of the 1992 Stock Option and
Restricted Stock Plan (the "1992 Plan"). The 1992 Plan provided for a maximum
of 600,000 shares of the Company's common stock to be issued to employees,
directors and consultants, as defined in connection with stock option grants
("Options") or restricted stock awards ("Awards").
In April 1994, the Company issued 40,625 Awards, from the 1992 Plan, to
certain employees. The restrictions on these shares of common stock may be
removed as the employees meet a two-year vesting period or, in the event the
employee is terminated, shares of restricted stock which have not vested will
be returned to the Company. In consideration for these shares, the Company
received services and recognized a non-cash compensation charge of
approximately $41,000 in connection with the services rendered.
During 1994, the Company granted, from the 1992 Plan a total of 267,875
Options which entitle the holders to acquire an equal number of shares of the
Company's common stock at an exercise price per share of $2.27 or $2.45. The
Options vest over a four-year period, and expire in 10 years.
Effective October 31, 1994, the Board terminated the 1992 Plan and,
accordingly, no additional Options or Awards will be issued from the 1992 Plan.
As of December 31, 1996, 220,725 options remain outstanding.
The 1994 Stock Option Plan:
During 1994, the Board approved and stockholders of the Company ratified
the adoption of the 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan
provides for a maximum of 500,000 shares of the Company's common stock to be
issued to employees, directors ("employees") and consultants, as defined, in
connection with stock option grants ("Stock Options"). Stock Options will be
granted by the Board or a committee appointed by the Board (the "Committee").
Each Stock Option will entitle the holder to acquire an equal number of shares
of common stock at an exercise price equal to the fair market value of the
common stock on the date of grant as determined by the Committee (110% of the
fair market value for an employee who owns 10% or more of the Company as
defined). The Committee will determine the Stock Option vesting period and
expiration date not to exceed ten years from the date the Stock Option was
granted. The 1994 Plan contains a provision whereby an employee, at the
discretion of the Committee, may receive a loan from the Company in order to
exercise their Stock Options. The 1994 Plan also provides for the Committee, at
its discretion, to accelerate the vesting of all outstanding Stock Options so
that they become fully and immediately exercisable. During October 1994, the
Company granted, from the 1994 Plan, 150,000 Stock Options to three members of
the Company's Advisory Board. Each Stock Option entitles the holder to acquire
one share of the Company's common stock at exercise prices, per share, of $2.45
for 75,000 Stock Options and $6.00 for the remaining 75,000. All Stock Options
are immediately exercisable and expire three years from the date of grant. In
connection with the Company's initial public offering, the underwriting
agreement entered into in connection therewith prohibits the Company from
granting future Stock Options at an exercise price below $4.00.
All outstanding options vest over periods ranging from immediate to four
years and expire in ten years. At December 31, 1996, 388,900 options remain
outstanding.
The 1995 Stock Option Plan:
During June 1995, the Board approved, subject to stockholder approval, the
adoption of the 1995 Stock Option Plan (the "1995 Plan"). The stockholders of
the Company ratified the plan on May 13, 1996. The 1995 Plan provides for a
maximum of 600,000 shares of the Company's common stock to be issued to
employees and consultants, as defined, in connection with stock option grants.
The provisions of the 1995 Plan are similar to the 1994 Plan. At various times
during 1996, the Company granted a total of 584,450 options which entitles the
holder to acquire an equal number of shares of the Company's common stock at
exercise prices ranging from $6.50 to $13.00. The options vest over periods
ranging from immediate up to four years and expire in ten years. At December
31, 1996 596,450 options remain outstanding.
F-14
<PAGE>
Non-Plan Options:
During 1996, the Company granted 190,000 stock options to certain
employees and outside consultants. Such options were issued outside the 1995
Plan and entitle the holders thereof to acquire an equal number of shares of
the Company's common stock at exercise prices ranging from $6.50 to $11.625.
Such options vest over periods ranging from immediate to four years and expire
in ten years. At December 31, 1996, a total of 790,000 non-plan options remain
outstanding.
The 1996 Directors Plan
The 1996 Directors Plan was adopted by the Board of Directors on January
24, 1996 and approved by the stockholders of the Company at the Annual Meeting
of Stockholders held May 14, 1996. The Plan provides for the issuance of up to
250,000 stock options to non-employee directors in the aggregate. The Plan is
administered by a committee appointed by the Board of Directors. The Plan is
effective for a period of ten years from the date it was adopted. The Plan is
not subject to any provisions of the Employee Retirement Income Security Act of
1974 ("ERISA").
During 1996, 36,000 options were granted at an exercise price of $9.50 to
one director pursuant to the 1996 Directors Plan. Such options vest as follows:
12,000 immediately, 12,000 May 14, 1997, and 12,000 May 14, 1998. The ability
of a grantee to purchase the common stock under the 1996 Plan is terminated if
his or her service with the Company is terminated, provided that in certain
circumstances the grantee or his estate will have the right to purchase the
common stock after termination of service for a limited period of time. The
right to acquire common stock is not transferable except in the circumstances
of death. In the event that a reorganization, merger, consolidation,
reclassification, recapitalization or capital adjustment including a stock
dividend or other similar change in the common stock of the Company, equitable
adjustment shall be made by the Company in the number of kind and kind of
shares that may be acquired under the 1996 Directors Plan. Common stock that
may be acquired under the 1996 Directors Plan may be acquired by the surrender
of other shares of common stock owned by the employee or the surrender of an
unexercised portion of the right to acquire common stock under the 1996
Directors Plan.
The Company applies APB 25, and related interpretations for stock options
issued to employees in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for the Company's stock-based
compensation plans other than for stock options granted to outside consultants
in 1996. During 1996, the Company recorded a total of approximately $383,000 of
unearned compensation related to options granted to consultants. This amount is
being amortized over the respective vesting periods, resulting in a $204,185
charge to operations for the year ended December 31, 1996. The exercise price
for all stock options issued to employees and non-employees during 1996 and
1995 was equal to the market price of the Company's stock at the date of grant.
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under SFAS 123, the
Company's net loss and loss per share would have been increased, as shown in
the table below. The weighted average fair value of stock options granted to
employees used in determining the pro forma amounts is estimated using the
Black-Scholes option-pricing model for the pro forma amounts with the following
weighted average assumptions:
December 31,
------------------------
1996 1995
----------- ----------
Risk-free interest rate ...... 6.38% 5.81%
Expected life ............... 4.3 years 3.0 years
Expected volatility ......... 60% 60%
Expected dividends ......... None None
F-15
<PAGE>
Net loss and net loss per share as reported, and on a pro forma basis as
if compensation cost had been determined on the basis of fair value pursuant to
SFAS 123 is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
------------- ------------------
<S> <C> <C>
Net loss as reported ............... $ 8,801,457 $3,223,401
Pro forma net loss ............... $10,213,016 $4,088,960
Loss per share as reported ......... $ (1.10) $ (.68)
Pro forma net loss per share ...... $ (1.28) $ (.86)
</TABLE>
Pro forma amounts reflect options granted after 1994 and are not likely to
be representative of amounts in future years, as additional options are awarded
and vested.
There are no compensation costs recognized in income for stock based
employee compensation awards for 1995 and 1996. There were no modifications of
any outstanding awards.
For the three years ended December 31, 1996, option activity for the plans
was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise price Options Fair Value
---------------- ------------ -----------
<S> <C> <C> <C>
Stock options outstanding at December 31, 1993 ...... -- --
Stock options granted .............................. $ 3.07 417,875
Stock options forfeited .............................. -- --
Stock options outstanding at December 31, 1994 ...... 3.07 417,875
Exercisable at December 31, 1994 ..................... 4.23 150,000
Stock options granted .............................. 4.86 958,300 $2.09
Stock options forfeited .............................. 2.27 (1,000)
Stock options outstanding at December 31, 1995 ...... 4.32 1,375,175
Exercisable at December 31, 1995 ..................... 4.10 422,397
Stock options granted .............................. 8.24 815,450 $3.96
Stock options forfeited .............................. 4.02 (26,775)
Stock options exercised .............................. 4.05 (131,775)
Stock options outstanding at December 31, 1996 ...... 5.91 2,032,075
Exercisable at December 31, 1996 ..................... $ 4.12 596,763
December 31, 1996 available for grant ............... 576,150
</TABLE>
F-16
<PAGE>
The following table summarizes information about the outstanding and
exercisable stock options at December 31, 1996:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
----------------------------------------------------- -------------------------------
Weighted
Weighted Average Weighted
Range of Shares Average Remaining Shares Average
Exercise Prices at 12/31/96 Exercise Price Contractual Life at 12/31/96 Exercise Price
- ----------------------- ------------- ---------------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
$2.27 to $2.45......... 295,525 $ 2.42 7.6 years 185,863 $2.43
$4.00 to $6.50......... 908,950 $ 4.86 9.2 years 369,500 $4.65
$7.00 to $10.00 ...... 700,100 $ 7.85 9.2 years 41,400 $7.00
$10.50 to $13.00 ...... 127,500 $10.86 9.5 years -- $ --
---------- --------
2,032,075 596,763
---------- --------
</TABLE>
F-17
<PAGE>
ARIEL CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 5,057,362 $ 4,626,583
Marketable securities ........................ -- 5,999,377
Accounts receivable, net of allowance
for doubtful accounts of $178,416 at
September 30, 1997 and $212,678
at December 31, 1996 ........................ 1,432,956 3,199,542
Other receivables .............................. 84,671 190,023
Inventories .................................... 3,696,574 3,528,252
Prepaid expenses .............................. 425,411 156,005
------------- -------------
Total current assets ........................ 10,696,974 17,699,782
Equipment, net of accmulated depreciation
and amortization .............................. 2,495,400 2,036,897
Other assets .................................... 804,673 366,385
------------- -------------
Total assets ................................. $ 13,997,047 $ 20,103,064
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 822,088 $ 1,840,986
Accrued expenses .............................. 1,755,261 1,826,591
Notes payable - current portion of
long-term debt .............................. 600,000 --
Notes payable, related parties ............... -- 154,021
Royalties payable .............................. 67,327 82,571
Deferred revenues .............................. 765,431 --
------------- -------------
Total current liabilities .................. 4,010,107 3,904,169
Notes payable - long term ........................ 2,400,000 --
Stockholders' equity
Preferred stock, $.001 par value:
Authorized - 2,000,000 shares issued and
outstanding - none ........................
Common stock, $.001 par value:
Authorized - 20,000,000 shares issued and
outstanding - 9,229,125 at September 30, 1997
and 8,949,975 at December 31, 1996 ......... 9,229 8,950
Additional paid-in capital ..................... 30,701,382 29,321,748
Unearned compensation ........................ (44,702) (178,819)
Accumulated deficit ........................... (23,078,969) (12,952,984)
------------- -------------
Total stockholders' equity .................. 7,586,940 16,198,895
------------- -------------
Total liabilities & stockholders' equity ...... $ 13,997,047 $ 20,103,064
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales .............................. $ 3,044,843 $ 3,760,367 10,104,405 $ 8,943,415
Cost of goods sold .................. 1,635,391 1,886,051 5,576,133 4,583,584
------------ ------------ ------------- ------------
Gross profit ..................... 1,409,452 1,874,316 4,528,272 4,359,831
Expenses:
Sales and marketing ............... 1,157,894 1,024,198 3,583,142 2,972,661
General and administrative ......... 1,080,047 1,045,844 3,210,846 3,158,795
Research and development ......... 2,714,236 1,806,204 7,760,244 4,280,640
Restructuring charge ............ 379,454 0 379,454 0
------------ ------------ ------------- ------------
Total operating expenses ...... 5,331,631 3,876,246 14,933,686 10,412,096
------------ ------------ ------------- ------------
Loss from operations ............ (3,922,179) (2,001,930) (10,405,414) (6,052,265)
Interest income ..................... 67,140 205,919 278,564 519,587
Interest expense ..................... (118,976) (9,773) (147,709) (28,840)
Other income ........................ 2,293 40,642 148,567 59,858
------------ ------------ ------------- ------------
Loss before income taxes ...... (3,971,722) (1,765,142) (10,125,992) (5,501,660)
Income taxes .................. 0 0 0 0
------------ ------------ ------------- ------------
Net loss ..................... ($ 3,971,722) ($ 1,765,142) ($ 10,125,992) ($ 5,501,660)
============ ============ ============= ============
Weighted average number of
common shares outstanding ......... 9,179,201 8,813,487 9,139,023 7,660,248
============ ============ ============= ============
Net loss per common share ............ ($ 0.43) ($ 0.20) ($ 1.11) ($ 0.72)
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (10,125,992) $ (5,501,660)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 839,247 392,457
Amortization of discount on royalties payable ............... 2,998 24,026
Loss on sale of marketable securities ........................ 12,812 --
Provision for doubtful accounts .............................. 30,000 30,000
Provision for inventory obsolescence ........................ 85,000 30,000
Non-cash compensation expense .............................. 134,117 --
(Increase) decrease in assets:
Accounts receivable and other receivables .................. 1,841,938 (1,260,918)
Inventories ................................................ (263,322) (772,377)
Other assets ................................................ (406,342) (24,315)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ........................ (1,090,228) 740,011
Royalties payable .......................................... (15,244) 4,234
Unearned revenue ............................................. 765,431 --
Notes payable, related parties .............................. (154,021) (78,509)
------------- ------------
Net cash used in operating activities ..................... (8,343,606) (6,417,051)
------------- ------------
Cash flows from investing activities:
Proceeds from the sale and maturity of investments ......... 5,993,634 --
Purchase of equipment ....................................... (1,297,750) (1,307,159)
------------- ------------
Net cash provided by (used in) investing activities ...... 4,695,884 (1,307,159)
------------- ------------
Cash flows from financing activities:
Proceeds from debt financing ................................. 3,000,000 --
Proceeds from exercise of warrants and common stock options,
net of expenses .......................................... 1,078,501 6,824,965
Proceeds from exercise of underwriters purchase option ...... -- 768,000
------------- ------------
Net cash provided by financing activities .................. 4,078,501 7,592,965
------------- ------------
Net increase (decrease) in cash .............................. 430,779 (131,245)
Cash and cash equivalents, beginning of year ............... 4,626,583 13,979,009
------------- ------------
Cash and cash equivalents, end of period ..................... $ 5,057,362 $ 13,847,764
============= ============
</TABLE>
Supplemental Cash Flow Information:
Other assets includes an increase of $316,445 representing the value of 83,333
warrants issued as part of the fees associated with the acquisition
of a credit facility.
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
Ariel Corporation
Notes to Financial Statements
(Unaudited)
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 conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1996. The year end balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
As of September 30, 1997, the Company had working capital of $6,686,867,
including cash and cash equivalents of $5,057,362. The financial statements
have been prepared on a going-concern basis, which contemplates realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company expects to incur costs and expenses in excess of expected revenues
during the ensuing six months as the Company continues to execute its business
strategy in the Remote Access market. There is no assurance that the Company
will generate sufficient cash flow from product sales to liquidate liabilities
as they become due. Accordingly, the Company may require additional funds to
meet planned obligations through December 31, 1998 and will seek to raise
such amounts through a variety of options, including equity financing, proceeds
from the sale of the Horizon product and team, borrowings under the existing
Revolver, and the expected future cash flows from operations. In the event the
Company is unable to liqudiate its liabilities, planned operations will need to
be scaled back. Continuance of the Company as a going concern is dependent upon
the Company's ability to generate capital and its attainment of profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
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 September 30, 1997 and the results of operations
for the three and nine months ended September 30, 1997 and 1996. The results
for interim periods are not necessarily indicative of results for the full
year.
2. Inventories, not of allowance:
Inventories, net of allowance, consists of the following:
September 30, December 31,
1997 1996
--------------- -------------
Component Materials ...... $ 2,012,185 $1,313,092
Work-in process ............ 677,680 620,367
Finished Goods ............ 1,006,709 1,594,793
------------ -----------
$ 3,696,574 $3,528,252
============ ===========
3. Credit Facility
On June 12, 1997, the Company completed a $10 million credit facility with
the Technology Finance Division of Transamerica Business Credit Corporation
with the following terms and provisions:
$6 million, five year term loan:
o Payments of principal and interest are due in arrears in twenty
consecutive quarterly installments, payable on the first day of each
calendar quarter commencing October 1, 1997.
F-21
<PAGE>
o Interest rate is based on the weekly average yield on five-year U.S.
Treasury Securities plus 5.75 percent, fixed for five years as of the date
of advance.
o $3 million is outstanding at September 30, 1997. Interest rate in effect
at September 30, 1997 was 11.66%.
o $3 million available upon attainment of any one of certain milestones,
such as profitability, minimum net proceeds of $7 million from the sale of
common stock, or achievement of a significant strategic partner
relationship. As of September 30, 1997, this facility has not been
utilized.
$4 million, three-year revolving credit-facility, which can be extended for two
additional one-year periods:
o This revolving credit facility can be increased to $7 million in the
event that the Company achieves one of the milestones referred to under
the term loan, but elects not to draw the second advance under the term
loan.
o Interest rate is based on the prime rate plus 2.50 percent as of the
date the revolver is utilized.
o Available line of credit based on a formula of eligible accounts
receivable and inventory.
o As of September 30, 1997, this facility has not been utilized.
Under terms of the credit agreement, the Company must maintain agreed upon
levels of financial performance as measured against specific financial
covenants. They are as follows:
o Cash on hand -- The Company must at all times maintain cash or cash
equivalents on hand of not less than $3,000,000 during the fiscal year
ending December 31, 1997, $4,000,000 during the fiscal year ending
December 31, 1998, and $4,500,000 during the fiscal year ending December
31, 1999. The Company is in compliance as of September 30, 1997.
o Accounts Receivable Collection Period -- The Company must maintain an
accounts receivable collection period of not greater than 60 days for any
fiscal quarter during the fiscal year ending December 31, 1997 and 55 days
for any fiscal quarter thereafter. The Company is in compliance as of
September 30, 1997.
o The Tangible Net Worth on the last day of each fiscal year specified
shall not be less than $10 million at December 31, 1997; $15 million at
December 31, 1998; $20 million at December 31, 1999 and $30 million at
December 31, 2000 and each fiscal year thereafter.
o Gross Profit Margin/Operating Profit (Loss) Percentage/Net Income (Loss)
Before Taxes Percentage -- The Gross Profit Margin, Operating Profit (Loss)
Percentage and the Net Income (Loss) Before Taxes Percentage must meet
specified thresholds for the fiscal year ended December 31, 1997 and each
fiscal year thereafter as specified in the credit agreement.
In addition, the credit agreement includes a material adverse effect
clause, whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions (financial or otherwise) are deemed to have a material
adverse effect on the Company or its ability to meet its obligations.
In anticipation of possible noncompliance of certain financial covenants at
December 31, 1997, Transamerica has given the Company an unconditional waiver
with respect to each of these financial covenants for the fiscal year ending
December 31, 1997, with the exception of the accounts receivable collection
period for which the Company is and expects to be in compliance. Additionally,
Transamerica has agreed to waive the minimum cash on hand covenant through
December 31, 1998, which allows the Company to use all of its cash, as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September 30, 1997 and its forcasted balance sheets and statements of operations
and cash flows dated October 16, 1997 for the fourth quarter of 1997 and
calendar years 1998 and 1999, and does not deem such information contained in
such documents as a material adverse event. Management believes such forecasted
balance sheets and statements of operations and cash flows are reasonable and
the likelihood of the occurrence of a material adverse event is remote.
F-22
<PAGE>
================================================================================
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or by the Underwriters. This Prospectus does not
constitute an offer to sell or solicitation of an offer to buy any security
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by any person in any
jurisdiction in which such offer or solicitation is not authorized or is
unlawful. The delivery of this Prospectus shall not, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
---------
Prospectus Summary .................. 3
Risk Factors ........................ 4
Use of Proceeds ..................... 8
Capitalization ........................ 8
Price Range of Common Stock and Dividend
Policy ........................... 9
Business .............................. 10
Selected Financial Data ............... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................ 15
Management ........................... 21
Certain Relationships and Related
Transactions ..................... 27
Description of Securities ............ 28
Shares Eligible for Future Sale ...... 29
Selling Stockholders .................. 31
Plan of Distribution .................. 31
Legal Matters ........................ 32
Experts .............................. 32
Available Information ............... 32
Glossary .............................. 33
Index to Financial Statements ......... F-1
================================================================================
<PAGE>
================================================================================
2,000,000 Shares
ARIEL
COMMON STOCK
----------
PROSPECTUS
----------
LOGO
November 14, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director. The Certificate of Incorporation and By-laws of
the Registrant provide for indemnification of its officers and directors as
authorized by such section.
The Registrant also has a policy insuring the Registrant and directors and
officers of the Registrant against certain liabilities.
Item 25. Other Expenses of Issuance and Distribution.
Item
----
Securities and Exchange Commission filing fee ...... $ 387.08
Printing and engraving costs ........................ 4,000.00
Legal fees and expenses ........................... 30,000.00
Accounting fees and expenses ........................ 15,000.00
Miscellaneous ....................................... 612.92
-----------
Total .......................................... $50,000.00
Item 27.
EXHIBITS
Exhibit
No. Description
- -------- -----------
5. Opinion re Legality
10 (a) Warrant Certificate for David Lindner
10 (b) Warrant Certificate for Anthony Kirincic
10 (c) Warrant Certificate for Seymour Cohen
10 (d) Warrant Certificate for Ronald Birnbaum
10 (e) Warrant Certificate for Robert Paduano
10 (f) Warrant Certificate for Susan Paduano
10 (g) Warrant Certificate for Transamerica Business Credit Corp.
23 (a) Consent of Coopers & Lybrand L.L.P.
23 (b) Consent of Berger & Paul L.L.P. (included as part of Ex. 5)
- ------------
The Registrant incorporates by reference any and all material exhibits filed
with prior registration statements pursuant to File #33-87286 and File
#33-99184.
Item 28. Undertaking
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement and
II-1
<PAGE>
(iii) include any additional or changed material information with
respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of Form S-1 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Cranbury, New Jersey on November 14, 1997.
Ariel Corporation
By: /s/ Anthony M. Agnello
------------------------
Anthony M. Agnello,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Anthony M. Agnello Chief Executive Officer and Chairman November 14, 1997
- ------------------------- of the Board
Anthony M. Agnello
/s/ Gerard E. Dorsey Principal Accounting Officer and Chief November 14, 1997
- ------------------------- Financial Officer
Gerard E. Dorsey
/s/ Harold W. Paul Acting Secretary and Director November 14, 1997
- -------------------------
Harold W. Paul
/s/ Jeffrey M. Sasmor Director November 14, 1997
- -------------------------
Jeffrey M. Sasmor
/s/ Robert J. Ranalli Director November 14, 1997
- -------------------------
Robert J. Ranalli
/s/ Edward D. Horowitz Director November 14, 1997
- -------------------------
Edward D. Horowitz
/s/ Etienne A. Perold Director November 14, 1997
- -------------------------
Etienne A. Perold
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- -------- ------------
5. Opinion re Legality
10 (a) Warrant Certificate for David Lindner
10 (b) Warrant Certificate for Anthony Kirincic
10 (c) Warrant Certificate for Seymour Cohen
10 (d) Warrant Certificate for Ronald Birnbaum
10 (e) Warrant Certificate for Robert Paduano
10 (f) Warrant Certificate for Susan Paduano
10 (g) Warrant Certificate for Transamerica Business Credit Corp.
23 (a) Consent of Coopers & Lybrand L.L.P.
23 (b) Consent of Berger & Paul L.L.P. (included as part of Ex. 5)
- ------------
The Registrant incorporates by reference any and all material exhibits filed
with prior registration statements pursuant to File #33-87286 and File #
33-99184.
<PAGE>
October 30, 1997
Ariel Corporation
2540 Route 130
Cranbury, New Jersey 08512
Dear Sirs:
Reference is made to the Registration Statement on Form S-1
("Registration Statement") filed by Ariel Corporation ("Company") under the
Securities Act of 1933, as amended ("Act"), with respect to an aggregate of
250,000 shares of common stock, par value $.001 per share ("Common Stock") to be
offered by certain selling stock holders (the "Selling Stockholders").
We have examined such documents and considered such legal matters as we
have deemed necessary and relevant as the basis for the opinion set forth below.
With respect to such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as reproduced
or certified copies, and the authenticity of the originals of those latter
documents. As to questions of fact material to this opinion, we have, to the
extent deemed appropriate, relied upon certain representations of certain
officers and employees of the Company.
Based upon the foregoing, it is our opinion that the Common Stock to be
issued by the Company upon the exercise of warrants will be legally issued,
fully paid and non-assessable.
<PAGE>
Ariel Corporation
October 30, 1997
Page Two
In giving this opinion, we have assumed that all certificates for the
Company's shares of Common Stock, prior to their issuance will be duly executed
on behalf of the Company by the Company's transfer and/or warrant agent and
registered by the Company's registrar, if necessary, and will conform, except as
to denominations, to specimens which we have examined.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, to the use of our name as your counsel, and to all
references made to us in the Registration Statement and in the Prospectus
forming a part thereof.
Very truly yours,
/s/ Berger & Paul, LLP
---------------------------------
Berger & Paul, LLP
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
30,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, David Lindner or registered assigns (the "Warrant Holder") is
the owner of the number of warrants ("Warrants") specified above, each of which
entitles the holder thereof to purchase, at any time on or before the
Expiration Date, as hereinafter defined, one fully paid and non-assessable share
of Common Stock, (as defined herein), par value $.001 per share, of Ariel
Corporation (the "company"), a Delaware corporation, at a purchase price of
$2.72 per share in lawful money of the United States of America in cash or by
check or a combination of cash and check, subject to adjustment as hereinafter
provided.
1. WARRANT; EXERCISE PRICE,
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2.EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
cancel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m., New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions), and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Warrant Holder are limited to those expressed
in the Warrant Certificate and are not enforceable against the Company except to
the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date f or such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the air market Value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in "the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(l) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the f acts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2 , and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall offer to the holders of
Common Stock f or subscription or purchase by them any shares of any class or
any other rights; or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
____________________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
30,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, Anthony Kirincic or registered assigns (the "Warrant Holder") is
the owner of the number of warrants ("Warrants") specified above, each of which
entitles the holder thereof to purchase, at any time on or before the Expiration
Date, as hereinafter defined, one fully paid and non-assessable share of Common
Stock, (as defined herein), par value $.00l per share, of Ariel Corporation (the
"company"), a Delaware corporation, at a purchase price of $2.72 per share in
lawful money of the United States of America in cash or by check or a
combination of cash and check, subject to adjustment as hereinafter provided.
1. WARRANT; EXERCISE PRICE.
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2.EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
cancel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m, New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions), and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof_____________, be entitled to any rights of a stockholder in the Company,
either at law or equity, and the rights of the Warrant Holder are limited to
those expressed in the Warrant Certificate and are not enforceable against the
Company except to the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market Value thereof as
determined in good faith by the Board of Directors of the Company (irrespective
of the accounting treatment thereof), whose determination shall be conclusive;
and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in "the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(1) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of any class or
any other rights; or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
______________________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
25,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, Seymour Cohen or registered assigns (the "Warrant Holder") is
the owner of the number of warrants ("Warrants") specified above, each of which
entitles the holder thereof to purchase, at any time on or before the Expiration
Date, as hereinafter defined, one fully paid and non-assessable share of Common
Stock, (as defined herein), par value $.001 per share, of Ariel Corporation (the
"company"), a Delaware corporation, at a purchase price of $2.72 per share in
lawful money of the United States of America in cash or by check or a
combination of cash and check, subject to adjustment as hereinafter provided.
1. WARRANT; EXERCISE PRICE.
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2. EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
canuel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m, New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. . A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions) ,and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Warrant Holder are limited to those expressed
in the Warrant Certificate and are not enforceable against the Company except to
the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the air market Value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in"the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(1) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall of ter to the holders of
Common Stock for subscription or purchase by them any shares of any class or
any other rights; or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization ad other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, f or a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
_______________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
25,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, Ronald Birnbaum or registered assigns (the "Warrant Holder") is
the owner of the number of warrants ("Warrants") specified above, each of which
entitles the holder thereof to purchase, at any time on or before the Expiration
Date, as hereinafter defined, one fully paid and non-assessable share of Common
Stock, (as defined herein), par value $.001 per share, of Ariel Corporation (the
"company"), a Delaware corporation, at a purchase price of $2.72 per share in
lawful money of the United States of America in cash or by check or a
combination of cash and check, subject to adjustment as hereinafter provided.
1. WARRANT: EXERCISE PRICE.
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2.EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
canuel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m, New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions), and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Warrant Holder are limited to those expressed
in the Warrant Certificate and are not enforceable against the Company except to
the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions ref erred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the air market Value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in"the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(l) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall of ter to the holders of
Common Stock f or subscription or purchase by them any shares of any class or
any other rights; or (iii) if any capital reorganization of the Company,,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization ad other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
______________________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
9,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, Robert A. Paduano or registered assigns (the "Warrant Holder")
is the owner of the number of warrants ("Warrants") specified above, each of
which entitles the holder thereof to purchase, at any time on or before the
Expiration Date, as hereinafter defined, one fully paid and non-assessable
share of Common Stock, (as defined herein), par value $.001 per share, of
Ariel Corporation (the "Company"), a Delaware corporation, at a purchase price
of $2.72 per share in lawful money of the United States of America in cash or by
check or a combination of cash and check, subject to adjustment as hereinafter
provided.
1. WARRANT: EXERCISE PRICE.
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2. EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
cancel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m., New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions), and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof __________, be entitled to any rights of a stockholder in the Company,
either at law or equity, and the rights of the Warrant Holder are limited to
those expressed in the Warrant Certificate and are not enforceable against the
Company except to the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date f or such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the air market Value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in "the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(1) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of any class or
any other rights; or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
_______________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
6,000 Warrants
Void after 5:00 p.m., New York time on July 30, 1998.
WARRANT TO PURCHASE COMMON STOCK
OF
ARIEL CORPORATION
This warrant certificate ("Warrant Certificate") certifies that, for
value received, Susan M. Paduano or registered assigns (the "Warrant Holder") is
the owner of the number of warrants ("Warrants") specified above, each of which
entitles the holder thereof to purchase, at any time on or before the Expiration
Date, as hereinafter defined, one fully paid and non-assessable share of Common
Stock, (as defined herein), par value $.001 per share, of Ariel Corporation
(the "Company"), a Delaware corporation, at a purchase price of $2.72 per share
in lawful money of the United States of America in cash or by check or a
combination of cash and check, subject to adjustment as hereinafter provided.
1. WARRANT: EXERCISE PRICE.
1.1 Each Warrant shall entitle the Warrant Holder the right to purchase
one share of Common Stock of the Company (individually, a "Warrant Share"
severally, the "Warrant Shares").
1.2 Subject to the condition precedent described in Section 1.3 hereof,
the purchase price payable upon exercise of each Warrant ("Exercise Price")
shall be $2.72, subject to adjustment as hereinafter provided. The Exercise
Price and number of Warrants evidenced by each Warrant Certificate are subject
to adjustment as provided in Article 7.
<PAGE>
2. EXERCISE OF WARRANT: EXPIRATION DATE.
2.1 This Warrant Certificate is exercisable in whole or from time to
time in part, at the option of the Warrant Holder, at any time one year after
the date of issuance and on or before the Expiration Date, upon surrender of
this Warrant Certificate to the Company together with a duly completed form of
exercise and payment of the Exercise Price. In the case of exercise of less than
all the Warrants represented by this Warrant Certificate, the Company shall
cancel the Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate for the balance of such Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m., New York time on
July 30, 1998, or if such date shall in the State of New York be a holiday or a
day on which banks are authorized to close, then 5:00 p.m., New York time the
next following day which in the State of New York is not a holiday or a day on
which banks are authorized to close or in the event of any merger,
consolidation, or sale of substantially all the assets of the company as, an
entirety, resulting in any distribution to the Company's stockholders, prior to
the Expiration Date, the Warrant Holder shall have the right to exercise this
Warrant commencing at such time through the Expiration Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto.
3. REGISTRATION AND TRANSFER ON COMPANY BOOKS.
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees) and the
surrendered Warrant Certificate shall be canceled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
<PAGE>
4. RESERVATION OF SHARES. The Company covenants that it will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall be duly and validly issued and fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issue thereof, and that upon issuance such shares shall be listed on each
national securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
5. EXCHANGE, TRANSFER, ASSIGNMENT OF LOSS OR MUTILATION OF WARRANT
CERTIFICATE. This Warrant Certificate is exchangeable, without expense, at the
option of the Warrant Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. This
Warrant Certificate is not transferable other than by will or pursuant to the
laws of descent and distributions), and may not be assigned or hypothecated, for
a period of one year from July 30, 1993. Upon surrender of this Warrant
Certificate to the Company at its principal office or at the office of its
transfer agent, if any, with the Assignment Form annexed hereto duly executed
and funds sufficient to pay any transfer tax, the Company shall, without charge,
execute and deliver a new Warrant Certificate in the name of the assignee named
in such instrument of assignment and this Warrant Certificate shall be promptly
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Warrant Holder hereof. The term "Warrant
Certificate" as used herein includes any Warrant Certificates into which this
Warrant Certificate may be divided or exchanged. Upon receipt by the Company of
reasonable evidence of the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Company, or, in the
case of mutilation, upon surrender and cancellation of the mutilated Warrant
Certificate, the Company shall execute and deliver in lieu thereof a new Warrant
Certificate of like tenor and date representing an equal number of Warrants.
6. RIGHTS OF THE HOLDER. The Warrant Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or equity, and the rights of the Warrant Holder are limited to those expressed
in the Warrant Certificate and are not enforceable against the Company except to
the extent set forth herein.
7. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES DELIVERABLE. The
Exercise Price and the number of shares of Common Stock purchasable pursuant to
each Warrant shall be subject to adjustment from time to time as hereinafter set
forth in this Section 7:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution an its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date f or such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than $2.27 per share on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such issuance by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such tights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the total number of shares of Common Stock outstanding multiplied by $2.27, less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by $2.27. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be made
whenever such distribution is made and shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
<PAGE>
(d) In case the Company shall issue shares of its Common Stock
excluding shares issued (i) in any of the transactions described in Subsection
(a) above, (ii) upon exercise of options granted to the Company's employees
under a plan or plans adopted by the Company's Board of Directors and approved
by its stockholders, if such shares would otherwise be included in this
Subsection (d), and (iii) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or issued in a bona fide
public offering pursuant to a firm commitment underwriting, but only if no
adjustment is required pursuant to any other specific subsection of this Section
7 (without regard to subsection (i) below) with respect to the transaction
giving rise to such rights for a consideration per share (the "Offering Price")
less than $2.27 per share on the date the Company fixes the offering price of
such additional shares, the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received, (determined
as provided in Subsection (g) below) for the issuance of such additional shares
would purchase at $2.27 per share of Common Stock, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after the
issuance of such additional shares. Such adjustment shall be made successively
whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its common Stock (excluding securities issued in
transactions described in Subsections (b) and (c) above) for a consideration per
share of Common Stock (the "Convertible Price") initially deliverable upon
conversion or exchange of such securities (determined as provided in Subsection
(g) below) less than current market price per share or fair market value per
share, as the case may be (as defined in Subsection (h) below) in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such securities
and the number of shares of Common Stock which the aggregate consideration
received (determined as provided in Subsection (g) below) for such securities
would purchase at the then current market price per share or fair market value
per share as the case may be per share of Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above,
the number of shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
<PAGE>
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions, discounts or
other expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the air market Value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in clauses (A) and (B) of this Subsection (g).
(h) For the purposes of any computation under Subsection (e)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for 10 consecutive business
days before such date. The closing price for each day shall be the last
available sale price regular way or, in case no such reported sale takes place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Border of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least two
cents ($.02) in such price; provided, however, that any adjustments which by
reason of this Subsection are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 7 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything in
this Section 7 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in "the Exercise Price, in
addition to those required by this Section 71 as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants).
<PAGE>
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Warrant Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares issuable upon exercise of
each Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Warrant Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. In the event the Company
does not provide the Warrant Holder with such notice and information within 10
days of a request by the Warrant Holder, then notwithstanding the provisions of
this Section 7, the Exercise Price shall be immediately adjusted to equal the
lowest offering Price, Subscription Price or Conversion Price, as applicable,
since the date of this warrant, and the number of shares issuable upon exercise
of this Warrant shall be adjusted accordingly. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Section 7, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Warrant Holder of this
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common stock contained in Subsections (a) to (h),
inclusive above.
(l) Irrespective of any adjustment in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
8. FRACTIONAL SHARES. No fractional shares shall be issued upon the
exercise fraction of a share called for upon any exercise hereof, the
Company shall pay to the Warrant Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this Warrant;
or
<PAGE>
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
9. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Section 7, the Company shall forthwith file in
the custody of its Secretary or Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price as herein provided setting forth in reasonable detail
the facts requiring such adjustment, including a statement of the number of
additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the holder or any holder of a Warrant executed and delivered
pursuant to Section 2, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail of such certificate to the Warrant
Holder or any such holder.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any (distribution
upon the Common Stock; or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any shares of any class or any
other rights; or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all its property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding up of the
Company shall be effected, then in any such case, the Company shall cause to be
mailed by certified mail to the Warrant Holder, at least fifteen days prior to
the date specified in (x) or (y) below, as the case may be, a notice containing
a brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any, is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Warrant Holder shall have the right thereafter by exercising this Warrant at any
time prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other
<PAGE>
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section 11 shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common, Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of Subsection (a) of
section 7 hereof.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of the
Company and/or extend the date of the expiration of the Warrants.
13. REGISTRATION UNDER THE SECURITIES ACT OF 1993. The Company shall
advise the Holder of this Warrant or of the Warrant Shares or any then holder of
Warrants or Warrant Shares (such persons being collectively referred to herein
as "holders") by written notice at least four weeks prior to the filing of any
registration statement or post-effective amendment thereto under the Securities
Act of 1933 (the "Act") covering securities of the Company and will for a period
of four years to register such Warrants and/or the Warrant Shares for sale
pursuant to such public offering and commencing one year from the date hereof,
upon the request of any such holder, include in any such registration statement
such information as may be required to permit a public offering of the Warrants
or the Warrant Shares. The Company shall supply prospectuses and other documents
as the Holder may request in order to facilitate the public sale or other
disposition of the warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder designates and do any
and all other acts and things which may be necessary or desirable to enable such
Holders to consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth in
Subsection (d) of this Section 13. Such holders shall furnish information and
indemnification as set forth in Subsection (d) of this Section 13, except that
the maximum amount which may be recovered from the Holder shall be limited to
the amount of proceeds received by the Holder from the sale of the Warrants or
Warrant Shares. The giving of notice pursuant to this Subsection 13 (a) by the
Company of its intention to file a registration statement shall in no way
obligate the company to file any such registration statement, and
notwithstanding the filing of such registration statement, the Company may, at
any time prior to the effective date thereof, determine to withdraw the
registration statement from the Securities and Exchange Commission, without
liability of the Company to any holders.
<PAGE>
(c) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants and/or
Warrant Shares subject to this Warrant may be included in any such registration.
Any holder whose Warrants and/or Warrant Shares are included in any such
registration statement pursuant to this section 13 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes of underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(d) The Company shall indemnify and hold harmless each such
holder and each underwriter, within the meaning of the Act, who may purchase
from or sell for any such holder any Warrants and/or Warrants Shares from and
against any and all losses, claims, damages and liabilities causes by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus included therein required
to be filed or furnished by reason of this Section 13 or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished or required to be furnished in writing to the
Company by such holder or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Company
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter or shareholder shall at the same time indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of such
Act, from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in any registration statement of any prospectus required to be filed or
furnished by reason of this Section 13 or caused by any omission to state
therein a material fact required to the stated therein or necessary to make the
statements therein not misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement or
omission based upon information furnished in writing to the company by any such
underwriter or shareholder expressly for use therein.
The Company's agreements with respect to Warrants or Warrants
Shares in this Section 13 continue in effect regardless of the exercise and
surrender of this Warrant.
[SEAL]
By:___________________________________________
Dated: President
Attest:
__________________________________________
Secretary
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
No.
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
Ariel Corporation (the "Company")
DATE OF INITIAL ISSUANCE: June _, 1997
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Tenn of this
Warrant, Eighty-Three Thousand Three Hundred Thirty-Three (83,333) shares of
common stock, $.001 par value, of the Company (the "Common Stock"), at the
Warrant Price, payable as provided herein. The exercise of this Warrant shall be
subject to the provisions, limitations and restrictions herein contained, and
may be exercised in whole or in part.
SECTION 1. Definitions.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
Common Stock - shall mean and include the Company's authorized Common
Stock, $.001 par value, as constituted at the date hereof.
Exchange Act - shall mean the Securities Exchange Act of 1934, as
amended.
Securities Act - the Securities Act of 1933, as amended.
Term of this Warrant - shall mean the period beginning on the date of
initial issuance hereof and ending on June 30, 2004.
Warrant Price - $7.50 per share, subject to adjustment in accordance
with Section 5 hereof.
Warrants - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated May 28, 1997 executed by the
Company and Transamerica Business Credit Corporation (the "Commitment
Letter") to the original holder of this Warrant, or any transferees
from such original holder or this Holder.
<PAGE>
Warrant Shares - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. Exercise of Warrant.
2.1. Procedure for Exercise of Warrant. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Tenn of this Warrant: (i)
the Notice of Exercise in the form attached hereto,(ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as herein above permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
-------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and
<PAGE>
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are open.
2.2. Transfer Restriction Legend. Each certificate for Warrant
Shares shall bear the following legend (and any additional legend required by
(i) any applicable state securities laws and (ii) any securities exchange upon
which such Warrant Shares may, at the time of such exercise, be listed) on the
face thereof unless at the time of exercise such Warrant Shares shall be
registered under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. Covenants as to Common Stock. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and non-assessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The Company further covenants and agrees that if any shares of capital stock to
be reserved for the purpose of the issuance of shares upon the exercise of this
Warrant require registration with or approval of any governmental authority
under any federal or state law before such shares may be validly issued or
delivered upon exercise, then the Company will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be. If and so long as the Common Stock issuable upon the exercise
of this Warrant is listed on any national securities exchange, the Company will,
if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such Common Stock
issuable upon exercise of this Warrant.
SECTION 4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
<PAGE>
SECTION 5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Tenn of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of
<PAGE>
the Common Stock are not reported by Nasdaq then such price shall be equal to
the average of the last reported bid and asked prices on such day as reported by
The National Quotation Bureau Incorporated or any similar reputable quotation
and reporting service, if such quotation is not reported by The National
Quotation Bureau Incorporated); provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in this clause (v) are
available for the period required hereunder, the Current Market Price shall be
determined in good faith by the Board of Directors of the Company or, if such
determination cannot be made, by a nationally recognized independent investment
banking firm selected by the Board of Directors of the Company (or if such
selection cannot be made, by a nationally recognized independent investment
banking firm selected by the American Arbitration Association in accordance with
its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in
Section 5, the Company shall prepare a statement showing the facts requiring
such adjustment and the Warrant Price that shall be in effect after such
adjustment. The Company shall cause a copy of such statement to be sent by mail,
first class postage prepaid, to each Holder of this Warrant at its, his or her
address appearing on the Company's records. Where appropriate, such copy may be
given in advance and may be included as part of the notice required to be mailed
under the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of all or any part of this Warrant which is exercised
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such exercise by reason of the adjustment
required by such event over and above the shares of capital stock issuable upon
such exercise before giving effect to such adjustment exercise; provided,
however, that the Company shall deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
<PAGE>
SECTION 6. Ownership.
6.1. Ownership of This Warrant. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. Transfer and Replacement. This Warrant and all rights hereunder
are transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
SECTION 7. Mergers, Consolidation, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
<PAGE>
SECTION 8. Notice of Dissolution or Liquidation. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. Notice of Extraordinary Dividends. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. Special Arrangements of the Company. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. Will Reserve Shares. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. Will Not Amend Certificate. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. Will Bind Successors. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
<PAGE>
SECTION 12. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 2540 Route 130, Cranbury, New Jersey 08512
or to such other address as shall have been furnished in writing to the Holder
by the Company. Any notice so addressed and mailed by registered or certified
mail shall be deemed to be given when so mailed. Any notice so addressed and
otherwise delivered shall be deemed to be given when actually received by the
addressee.
SECTION 13. No Rights as Stockholder; Limitation of Liability. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. Miscellaneous.
(a) This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof.
(b) All capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the Financing
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this day of June, 1997.
ARIEL CORPORATION
[CORPORATE SEAL]
By:_________________________________________
Title:______________________________________
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
No.
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
Ariel Corporation (the "Company")
DATE OF INITIAL ISSUANCE: June _, 1997
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Forty-One Thousand Six Hundred Sixty Seven (41,667) shares of common
stock, $.001 par value, of the Company (the "Common Stock"), at the Warrant
Price, payable as provided herein. The exercise of this Warrant shall be subject
to the provisions, limitations and restrictions herein contained, and may be
exercised in whole or in part.
SECTION 1. Definitions.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
Common Stock - shall mean and include the Company's authorized Common
Stock, $.001 par value, as constituted at the date hereof.
Exchange Act - shall mean the Securities Exchange Act of 1934, as
amended.
Securities Act - the Securities Act of 1933, as amended.
Term of this Warrant - shall mean the period beginning on July 1, 1998
and ending on June 30, 2004; provided, however, that Holder shall be
required to return this Warrant to the Company unexercised if all of
the conditions set forth in Section 5.3 of a certain Loan and Security
Agreement dated as of June ___, 1997 between the Company and
Transamerica Business Credit Corporation, except the condition that the
B Term Note (as defined in such Loan and Security Agreement) be
executed and delivered, are satisfied prior to June 30, 1998 and the
Company has irrevocably elected not to borrow the B Term Loan.
Warrant Price - $7.50 per share, subject to adjustment in accordance
with Section 5 hereof
<PAGE>
Warrants - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated May 28, 1997 executed by the
Company and Transamerica Business Credit Corporation (the "Commitment
Letter") to the original holder of this Warrant, or any transferees
from such original holder or this Holder.
Warrant Shares - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. Exercise of Warrant.
2.1. Procedure for Exercise of Warrant. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the, amount of the
Warrant Price for each share being purchased, and (iii) this Warrant.
Notwithstanding any provisions herein to the contrary, if the Current Market
Price (as defined in Section 5) is greater than the Warrant Price (at the date
of calculation, as set forth below), in lieu of exercising this Warrant as
herein above permitted, the Holder may elect to receive shares of Common Stock
equal to the value (as determined below) of this Warrant (or the portion thereof
being canceled) by surrender of this Warrant at the office of the Company
referred to in Section 12 hereof, together with the Notice of Exercise, in which
event the Company shall issue to the Holder that number of shares of Common
Stock computed using the following formula:
CS = WCS x (CMP-WP)
------
CMP
Where
Cs equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number
<PAGE>
of shares (except a remaining fractional share), if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
Holder hereof within such time. The person in whose name any certificate for
shares of Common Stock is issued upon exercise of this Warrant shall for all
purposes be deemed to have become the holder of record of such shares on the
date on which the Warrant was surrendered and payment of the Warrant Price and
any applicable taxes was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Company are closed, such person shall be
deemed to have become the holder of such shares at the close of business on the
next succeeding date on which the stock transfer books are open.
2.2. Transfer Restriction Legend. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. Covenants as to Common Stock. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and non-assessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. The
Company further covenants and agrees that if any shares of capital stock to be
reserved for the purpose of the issuance of shares upon the exercise of this
Warrant require registration with or approval of any governmental authority
under any federal or state law before such shares may be validly issued or
delivered upon exercise, then the Company will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be. If and so long as the Common Stock issuable upon the exercise
of this Warrant is listed on any national securities exchange, the Company will,
if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such Common Stock
issuable upon exercise of this Warrant.
<PAGE>
SECTION 4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Tenn of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
<PAGE>
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in
Section 5, the Company shall prepare a statement showing the facts requiring
such adjustment and the Warrant Price that shall be in effect after such
adjustment. The Company shall cause a copy of such statement to be sent by mail,
first class postage prepaid, to each Holder of this Warrant at its, his or her
address appearing on the Company's records. Where appropriate, such copy may be
given in advance and may be included as part of the notice required to be mailed
under the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall cive to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of all or any part of this Warrant which is exercised
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such exercise by reason of the adjustment
required by such event over and above the shares of capital stock issuable upon
such exercise before giving effect to such adjustment exercise;
<PAGE>
provided, however, that the Company shall deliver to such Holder a due bill or
other appropriate instrument evidencing such Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
SECTION 6. Ownership.
6.1. Ownership of This Warrant. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. Transfer and Replacement. This Warrant and all rights hereunder
are transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
SECTION 7. Mergers, Consolidation, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made
<PAGE>
with respect to the rights and interests of the Holder of this Warrant to the
end that the provisions hereof shall thereafter be applicable as nearly as may
be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. Notice of Dissolution or Liquidation. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. Notice of Extraordinary Dividends. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. Special Arrangements of the Company. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. Will Reserve Shares. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. Will Not Amend Certificate. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. Will Bind Successors. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
<PAGE>
SECTION 12. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 2540 Route 130, Cranbury, New Jersey 08512
or to such other address as shall have been furnished in writing to the Holder
by the Company. Any notice so addressed and mailed by registered or certified
mail shall be deemed to be given when so mailed. Any notice so addressed and
otherwise delivered shall be deemed to be given when actually received by the
addressee.
SECTION 13. No Rights as Stockholder; Limitation of Liability. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon its exercise in accordance with the terms hereof. No
provision hereof, in the absence of affirmative action by the Holder to purchase
shares of Common Stock, and no mere enumeration herein of the rights or
privileges of the Holder, shall give rise to any liability of the Holder for the
Warrant Price hereunder or as a shareholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
SECTION 14. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. Miscellaneous.
(a) This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by both parties
(or any respective predecessor in interest thereof). The headings in this
Warrant are for purposes of reference only and shall not affect the meaning or
construction of any of the provisions hereof
(b) All capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Financing Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this day of June, 1997.
ARIIEL CORPORATION
[CORPORATE SEAL]
By: _______________________________________
Title: ____________________________________
<PAGE>
Exhibit 23 (a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report, dated March 7, 1997, except for the second paragraph of Note 1, for
which the date is November 12, 1997, on our audits of the financial statements
of Ariel Corporation as of December 31, 1996 and 1995 and for the three years in
the period ended December 31, 1996. Such report includes an explanatory
paragraph about the Company's ability to continue as a going concern. We also
consent to the reference to our Firm under the captions "Experts" and "Selected
Financial Data".
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
November 13, 1997
