<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1997
File No. 333-40247
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ARIEL CORPORATION
Delaware 3571 13-3137699
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
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
Approximate date of commencement of proposed sale to the public
As soon as practicable following the date on which this Registration Statement
becomes effective.
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.
If any of the securities being registered are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
===============================================================================
<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 DECEMBER 23, 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" PAGES 4-6.
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".
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 December 23, 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. See "Industry
Background". 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. ("ADI") 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
("CSG") 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 decision to seek
a buyer was based on the Company's recent strategic decision to focus on the
open RAS market space. The carrier class product does not fit well into the
Company's markets and customer base. The Company is currently in discussion
with several companies concerning the purchase of the Horizon product and team,
but no definitive sale agreement has been reached as of the date of this
Prospectus.
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>
<CAPTION>
<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 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:
Liquidity and Going Concern. For the nine months ended September 30, 1997
the Company has incurred a loss of $10,125,992, as compared with $5,501,660
for September 30, 1996. In June 1997, the Company completed a $10 million
credit facility with Transamerica Business Credit Corporation which provided
for an immediate advance of $3 million, which is outstanding as of September
30, 1997. Under terms of the credit facility the Company must maintain agreed
upon levels of financial performance as measured against specific financial
covenants. As of September 30, 1997 it was uncertain whether the Company would
meet its minimum cash on hand and certain other financial covenant obligations
at December 31, 1997 and has obtained a waiver of such covenants from
Transamerica. 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 credit facility, 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.
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. 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
4
<PAGE>
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. See "Competition".
Dependence on Third-Party Suppliers. The Company purchases DSP chips and
certain other components from TI, Rockwell International Inc., Lucent
Technologies, and ADI, 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. Any reduction or
interruption in supply or manufacturing from these third party contractors
would adversely affect its ability to continue to deliver its products.
Lack of Patent Protection; Intellectual Property. The Company believes
that its success is dependent upon its proprietary technology. 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 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. 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.
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. The Company is sole beneficiary. It has
not obtained, nor does it intend to obtain, similar policies on the other
executive officers. The Company's future success is also dependent on its
ability to recruit and retain additional experienced engineering and marketing
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."
5
<PAGE>
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."
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."
6
<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.
7
<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.
8
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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 (see "Industry Background"). 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 International
Data Corporation ("IDC"), a leading provider of information technology data,
analysis and consulting services.
Prior to 1996, the Company historically produced and sold DSP boards
incorporating DSP processors developed by TI, Motorola Inc., Lucent
Technologies and ADI 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
9
<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.
Data Communications Market
The Company offers the industry's highest density and most cost-effective
remote access data solutions for open systems platforms. The Company's standard
and custom remote access products target open systems servers spanning a broad
range of applications, including telecommuting, Internet access, corporate
Intranet access, on-line services, transaction processing, and unified
messaging. The company's RASCAL and T1-Modem product families are remote access
and modem pool solutions providing ISDN and 56-kbps modem remote access.
General Purpose DSP
DSP technology is being applied in a wide range of commercial and defense
applications which often require the processing power of multiple DSP chips.
The Company historically has focused on VME based DSP sub-systems that
incorporate TI or ADI DSP technology. Multiprocessing is often required in
specialized applications such as medical imaging, instrumentation, professional
audio, telecommunications, and defense electronics. The Company's
multiprocessing DSP products enable signal-processing tasks to run concurrently
on a low-cost computer platform.
Medical Imaging. There are many types of medical imaging techniques that
are well suited for DSP technology, such as mammography, computer tomography,
magnetic imaging and ultrasound. The Company believes that as a result of the
increasing use of digitized images, as opposed to film-based images, the use of
DSP sub-systems in medical imaging applications will increase. Many of these
applications require a combination of high-resolution images and very high
processing requirements which make multiprocessing DSP systems well-suited for
this market.
Instrumentation. Multiprocessing DSP boards may be used in instruments
which analyze a number of independent signals simultaneously. For example,
geologists may use underground instruments to search for oil and minerals.
Multiprocessing DSP systems are employed to analyze both passive and stimulated
subterranean signals entering the system from multiple channels.
Professional Audio. In the professional audio field, there is a
requirement for simultaneously processing many channels, or tracks, of audio.
Currently, the professional audio market is in the midst of a transition from
analog-based tape recording and analog mixing systems to digital hard disk
recording and DSP-based mixing systems using a Digital Audio Workstation
("DAW"). A DAW is used to modify and combine multiple audio sources into a mono
or stereo "mix" for distribution. DAWs are used in audio production in the
recording, broadcast, film and multimedia authoring fields. Multiprocessing DSP
systems are typically required for these uses.
Telecommunications. The telecommunications industry has historically been
a major user of DSP technology. In some cases, a multiprocessing DSP board is
necessary to meet performance requirements. Apart from the Computer Telephony
Integration market described above, multiprocessing DSP systems are used in
cellular base stations and central office stations. With the ready availability
of high performance, multiprocessing DSP systems, new applications in
telecommunications are emerging. For example, the Company's largest customer in
1996 developed a product that uses sophisticated techniques to examine the
radio transmissions of individual cellular phones thereby detecting and
recording the cellular phone's "fingerprint." This customer has stated that
cellular phone fraud can be combated by employing this technique. The amount of
processing required, however, demands the use of a multiprocessing DSP system.
This customer accounted for approximately 32% of total sales in 1996 and 24% of
total sales for the nine months ended September 30, 1997.
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<PAGE>
Defense Electronics. Multiprocessing DSP is often required in defense
applications, including radar, sonar, infrared processing, electronic
countermeasures, satellite imaging, surveillance and encryption. Multiprocessor
DSP boards have long been employed by the defense industry and, the Company
believes that, while the over-all defense budget has been decreasing, spending
for technological improvements and enhancements will continue.
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 sixteen, twenty-four or
thirty K56FLEX modems in a single ISA bus slot for network OEMS. The Company
believes that T1-Modem product line addresses the requirements of the RAS
concentrator market place.
RASCAL(TM) is an easy to install 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 providing the lowest cost per port
available. 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 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
11
<PAGE>
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., TI, and ADI, 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
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<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 has received an initial fee of $750,000 for its non-recurring
expenses, which is included in deferred revenues as of September 30, 1997, and
will receive 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
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<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.
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<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
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<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. The decrease is the result of lower export sales to certain DSP OEM
customers in the audio and medical industries.
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.
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<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
several companies concerning the purchase of the Horizon product and team, but
no definitive sale agreement has been reached as of the date of this
Prospectus.
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, were 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
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<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. As
of November 30, 1997 the Company could have borrowed $2.1 million under this
Revolver. 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
18
<PAGE>
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 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, Trans-america 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.
Such waived covenants are as follows: minimum tangible net worth of $10,000,000
as of December 31, 1997; minimum gross profit margin of 45% for the fiscal year
ended December 31, 1997; and a maximum operating loss percentage of (30%) for
the fiscal year ended December 31, 1997. The Company does not expect to be in
compliance with such covenants through December 31, 1997. The Company
anticipates being in compliance with such financial covenants in the future,
based on increased levels of new product sales, the anticipated sale of the
Horizon product and team and the possibility of an equity offering.
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 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.
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
19
<PAGE>
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
Company has commenced discussions with potential underwriters concerning the
possibility of an additional equity offering. While there can be no assurances
that an equity offering will be completed, the Company foresees closing such
offering during the second quarter of 1998. 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.
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.
20
<PAGE>
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.
21
<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, a provider of information and facilities
management services, 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 has been a Director of the Company and a member of the
Audit Committee since August, 1995. 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 has been a Director of the Company and member of the
Compensation Committee since June, 1995. 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 has been a Director of the Company and member of the
Compensation Committee since August, 1995. 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 has been a Director of the Company and a member of the
Audit Committee since August, 1995. 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.
22
<PAGE>
Mr. Agnello is a full-time employee who does not receive additional
renumeration for serving as a director. 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 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.
23
<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. Each
individual item is less than 10% of salary for each year in which an
aggregate amount appears in this column.
(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.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the six individuals named in the Summary Compensation Table. In
addition, in accordance with the Commission's rules, the table also shows a
hypothetical potential realizable value of such options based upon assumed
rates of annual compounded stock price appreciation of 5% and 10% from the date
such options were granted over the full term. The assumed rates of growth were
selected by the Commission for illustrative purposes only, and are not intended
to predict future stock prices which will depend upon market conditions and the
Company's future performance and prospects. Based upon the closing stock price
and the number of common shares outstanding at the end of 1996, an assumed
annual stock price appreciation of 10% would produce a corresponding aggregate
pretax gain over the full option term of approximately $241 million for the
Company's common stockholders.
<TABLE>
<CAPTION>
Potential Realized
Value at
Assumed Annual
Rates of
Number of Stock
Securities Price Appreciation
Underlying % of Total Options Per Share for
Options Granted to Employees Exercise Expiration Term
Name Granted (1) In Fiscal Year Price (2) Date 5% 10%
- ----------------- ------------- ---------------------- ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Brian Hoerl ... 50,000 8.84% $7.125 9/17/06 $580,294 $924,021
</TABLE>
- ------------
(1) All options were made pursuant to the 1995 Stock Option Plan.
(2) Exercise price is the fair market value of the common stock at the date of
grant.
24
<PAGE>
AGGREGATE FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information concerning stock option
exercises by the four individuals named in the Summary Compensation Table
during 1996 including the aggregate value of gains on the date of exercise. In
addition, this table includes the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1996. Also reported are
the values for "in-the-money" options which represent the excess of the closing
market price of the Common Stock at December 31, 1996 over the exercise price
of the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money-Options
Shares Acquired Value At December 31, 1996 (#) At December 31, 1996($)
Name On Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------- ----------------- ------------- -------------------------------- --------------------------
<S> <C> <C> <C> <C>
Jeffrey Sasmor ...... 20,000 $204,750 37,875/37,875 $300,159/$300,159
Brian Hoerl ......... -0- -0- 37,500/112,500 $245,625/$503,125
Gerard Dorsey ...... 50,000 $350,000 25,000/25,000 $146,875/$146,875
John Lynch ......... 5,900 $ 41,763 23,525/70,575 $ 97,513/$292,538
</TABLE>
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. Thus, 20,000 stock
options exercisable at $7.125 per share vested and were exercisable by Mr.
Sasmor as of September 26, 1997 rather than July 2, 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.
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
25
<PAGE>
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 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.
26
<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.
27
<PAGE>
Certain Relationships and Related Transactions
In 1982, the Company entered into an oral agreement with Messrs. Agnello
and Clayton to pay royalties, 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.
28
<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. Assuming exercise of all of the outstanding warrants, 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.
29
<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
Assuming exercise of all of the outstanding warrants, 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.
30
<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.
31
<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>
Percentage of Class
Name Number of Warrants(1) Exercise Price after offering
- ----------------------------------------------- ----------------------- ---------------- --------------------
<S> <C> <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 1.3%
</TABLE>
- ------------
(1) Represents all securities owned by the Selling Stockholder.
* less than 1%
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.
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.
The shares underlying the Warrants registered for sale on behalf of the
Selling Stockholders under this Registration Statement of which this Prospectus
forms a part may be offered and sold from time to time in transactions (which
may include block transactions) on Nasdaq in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Stockholders have advised the Company that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities. The Selling Stockholders
may effect such transactions by selling their securities directly to purchasers
or to or through broker-dealers, which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the Selling Stockholders and/or the purchasers of the
securities for whom such broker-dealers may act as agents or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions). The Selling Stockholders and any
broker-dealers that act in connection with the sale of the securities might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act. The Selling Stockholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of
the securities against certain liabilities, including liabilities arising under
the Securities Act.
In connection with a distribution of securities effected by a selling
stock holder, it shall be unlawful for such person, or any affiliated purchaser
of such person, directly or indirectly, to bid for, purchase, or attempt to
induce any person to bid for or purchase, a covered security during the
applicable restricted period, except that the foregoing shall not prevent a
Selling Stockholder from exercising any option or warrant, offering to sell or
soliciting offers to buy the securities or engaging in unsolicited purchases
not effected from or through a broker or dealer.
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.
32
<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.
33
<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.
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.
34
<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.
35
<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>
Additional
Common Stock
--------------------- 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
========= ====== ===========
<PAGE>
<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.
For the nine months ended September 30, 1997 the Company has incurred a
loss of $10,125,992, as compared with $5,501,660 for September 30, 1996. In
June 1997, the Company completed a $10 million credit facility with
Transamerica Business Credit Corporation which provided for an immediate
advance of $3 million, which is outstanding as of September 30, 1997. Under
terms of the credit facility the Company must maintain agreed upon levels of
financial performance as measured against specific financial covenants. As of
September 30, 1997 it was uncertain whether the Company would meet its minimum
cash on hand and certain other financial covenant obligations at December 31,
1997 and has obtained a waiver of such covenants from Transamerica. 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
credit facility, 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
Credit Facility, 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, net 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, Trans-america 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.
Such waived covenants are as follows: minimum tangible net worth of
$10,000,000 as of December 31, 1997; minimum gross profit margin of 45% for
the fiscal year ended December 31, 1997; and a maximum operating loss
percentage of (30%) for the fiscal year ended December 31, 1997. The Company
does not expect to be in compliance with such covenants through December 31,
1997. The Company anticipates being in compliance with such financial
covenants in the future, based on increased levels of new product sales, the
anticipated sale of the Horizon product and team and the possibility of an
equity offering. 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 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 ........................ 7
Capitalization ........................ 7
Price Range of Common Stock and Dividend
Policy .............................. 8
Business .............................. 9
Selected Financial Data ............... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................ 15
Management ........................... 22
Certain Relationships and Related
Transactions ........................ 28
Description of Securities ............ 29
Shares Eligible for Future Sale ...... 30
Selling Stockholders .................. 32
Plan of Distribution .................. 32
Legal Matters ........................ 33
Experts .............................. 33
Available Information .................. 33
Glossary .............................. 34
Index to Financial Statements ......... F-1
===============================================================================
<PAGE>
===============================================================================
250,000 Shares
ARIEL CORPORATION
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
December 23, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. 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 14. 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 15. Recent Sales of Unregistered Securities
In June 1997 the Company issued 125,000 Common Stock Purchase Warrants to
Transamerica Business Credit Corporation as partial consideration in connection
with a $10,000,000 credit facility comprised of a $6,000,000 term loan and a
$4,000,000 revolving credit facility. This issuance was made as an exemption
from registration not involving a public offering pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
Item 16. Exhibits
Exhibit
No. Description
- -------- -------------------------------------------------------------
3 (a) Certificate of Incorporation*
3 (b) Amendment to Certificate of Incorporation*
3 (c) Restated Certificate of Incorporation*
3 (d) Restated By-laws*
4 Certificate for Shares of Stock (Form)*
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.*
10 (h) License Agreement with AT&T
10 (i) Agreement with Texas Instruments
10 (j) Severance Agreement with Jeffrey Sasmor
10 (k) 1995 Stock Option Plan*
23 (a) Consent of Coopers & Lybrand L.L.P.
23 (b) Consent of Berger & Paul L.L.P. (included as part of Ex. 5)*
* previously filed
II-1
<PAGE>
- ------------
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 17. Undertakings
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
(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 December 18, 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 December 18, 1997
------------------------- of the Board
Anthony M. Agnello
Principal Accounting Officer and Chief
/s/ Gerard E. Dorsey December 18, 1997
------------------------- Financial Officer
Gerard E. Dorsey
/s/ Harold W. Paul Acting Secretary and Director December 18, 1997
-------------------------
Harold W. Paul
/s/ Jeffrey M. Sasmor Director December 18, 1997
-------------------------
Jeffrey M. Sasmor
/s/ Robert J. Ranalli Director December 18, 1997
-------------------------
Robert J. Ranalli
/s/ Edward D. Horowitz Director December 18, 1997
-------------------------
Edward D. Horowitz
/s/ Etienne A. Perold Director December 18, 1997
-------------------------
Etienne A. Perold
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- -------- -------------------------------------------------------------
3 (a) Certificate of Incorporation*
3 (b) Amendment to Certificate of Incorporation*
3 (c) Restated Certificate of Incorporation*
3 (d) Restated By-laws*
4 Certificate for Shares of Stock (Form)*
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.*
10 (h) License Agreement with AT&T
10 (i) Agreement with Texas Instruments
10 (j) Severance Agreement with Jeffrey Sasmor
10 (k) 1995 Stock Option Plan*
23 (a) Consent of Coopers & Lybrand L.L.P.
23 (b) Consent of Berger & Paul L.L.P. (included as part of Ex. 5)*
- ------------
* previously filed
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>
1
COOPERATIVE DEVELOPMENT & LICENSE AGREEMENT
This Agreement is entered into by and between Texas Instruments
Incorporated, a Delaware corporation with an office at 8505 Forest Lane,
Dallas, Texas 75243 (hereinafter "TI") and Ariel Corporation, a Delaware
corporation with an office at 2540 Route 130, Cranbury, New Jersey 08512
(hereinafter "Ariel").
WHEREAS, Ariel and TI desire to enter into a program to develop
V.34/V.PCM/V.ADSL products that meet mutually agreed upon specifications, and
which incorporate Ariel's proprietary Technology into TI's digital signal
processor (DSP) products.
WHEREAS, a Statement of Work defining tasks, resource allocation,
milestones, schedules and deliverable items has been agreed upon and is
attached hereto as Attachment A and incorporated herein by this reference.
NOW THEREFORE, the Parties agree as follows:
I. DEFINITIONS:
1.1. "VXX-Technology" means Ariel's inventions, patented or not,
copyrighted material, trade secrets, know how, designs, methods,
algorithms and all other forms of Ariel intellectual property
embodied in the contributions by Ariel to the Project defined in
Attachment A. Functional specifications for VXX-Technology are
given in Attachment B.
1.2. "VXX-Source" means the Host Software and DSP Software source
code as described in Attachment A, and that will be incorporated
into VXX-Products, but specifically excluding the ADSL source
code.
1.3. "VXX-Executable" means the Host Software and DSP Software
executable or object code components that incorporate
VXX-Technology, and that are required to execute either a
Central-Site or Client-Side modem function on a TI Digital
Signal Processor (DSP), independent of part number.
1.4 "VXX-Product" means any product, including Chipset Product,
which incorporates VXX-Technology using TI DSPs.
1.5. "End-Equipment Product" means board or system level product that
incorporates VXX-Technology.
1.6. "Chipset Product" means a modem semiconductor chipset product
that bundles a TI DSP with a VXX-Executable, and which is to be
developed and sold by TI.
<PAGE>
2
1.7. "EVM Product" means a complete modem implementation, which is
intended for evaluation purposes. The EVM Product includes an
EVM board containing the TMS320C6201 processor, and a
VXX-Executable. EVM Product description and components are given
in Attachment C.
1.8. "Trade Sale" means an arms-length sale of VXX-Product to a third
party, other than Ariel, anywhere in the world.
1.9 "TI Technology" means TI's inventions, patented or not,
copyrighted material, trade secrets, know how, designs, methods,
algorithms and all other forms of TI intellectual property
embodied in the hardware and software contributions by TI to
VXX-Source, Chipset Product, and EVM Product.
1.10 TI DSP means any TI digital signal processor, independent of
part number.
2. DEVELOPMENT FEES:
2.1. TI will pay Ariel $US 750,000 within thirty (30) days of
execution of this Agreement as an initial fee for Ariel's
non-recurring expenses (NRE) associated with this contract.
2.2. Additional non-recurring development fees will be paid to Ariel
by TI in accordance with the following schedule based upon
Ariel's fulfillment of milestones and delivery obligations as
set forth in the Statement of Work shown in Attachment A:
Milestone 1 $US 175,000
Milestone 2 $US 175,000
Milestone 3 $US 175,000
Milestone 4 $US 175,000
Milestone 5 $US 175,000
Milestone 6 $US 175,000
Milestone 7 $US 175,000
2.3 Several of Ariel's Milestone dates are dependent on deliverables
1,3,5 and 6 from TI, as identified in Attachment A. Therefore,
associated Milestone payments to Ariel shall be delayed by no
more than sixty (60) days if TI has delayed a deliverable to
Ariel that prevents Ariel from meeting it's Milestone
obligation. Ariel will review Milestone and deliverable dates
with TI on a monthly basis, and will notify TI of any TI
deliverables that are delayed and likely to cause Ariel to delay
a Milestone obligation.
<PAGE>
3
3. LICENSES:
3.1. Subject to TI's obligations under Sections 2,3.2 and 4, Ariel
hereby grants TI a royalty bearing, perpetual, worldwide, and
non-exclusive license, with the right to sublicense, under Ariel
patent rights, copyright, and trade secrets, to use, and make
derivatives of VXX-Technology, and to make, have made, copy,
sell and distribute VXX-Products.
3.2. In order to receive GDC source from Ariel, TI agrees to obtain a
source code license to GDC intellectual property embedded in the
VXX-Source; in the absence of such a license with GDC, TI may
access VXX-Source only in support of VXX-Product development
activities at the Ariel site.
3.3. License grants in this section shall survive termination of this
Agreement subject to payments described in Section 2 and Section
4.
4. LICENSE PAYMENT OBLIGATION:
4.1.1 In consideration of the licenses granted to TI in this
Agreement, TI will pay Ariel a per-unit royalty fee, payable in
US$, for every Trade Sale of any VXX-Product according to the
following schedule.
-----------------------------------------------------------------
Ports Shipped Royalty to Ariel ($)
-----------------------------------------------------------------
0 to 99,999 zero
-----------------------------------------------------------------
100,000 to 9,999,999 1.00
-----------------------------------------------------------------
>= 10,000,000 zero
-----------------------------------------------------------------
TI, at it's sole option, may choose to prepay these royalty
fees. TI may not retain it's VXX-Product license without paying
these royalty fees.
4.1.2. Alternatively, if TI does not secure from GDC a license to
distribute in object code form the GDC component of VXX-Source
and in consideration of the licenses granted to TI in this
Agreement, TI will pay Ariel a per-unit royalty fee, payable in
US$, for every Trade Sale of any VXX-Product according to the
following schedule.
-----------------------------------------------------------------
Ports Shipped Royalty to Ariel ($)
-----------------------------------------------------------------
0 to 99,999 1.50
-----------------------------------------------------------------
100.000 to 9,999,999 2.50
-----------------------------------------------------------------
>=0,000,000 1.50
-----------------------------------------------------------------
<PAGE>
4
If TI subsequently obtains a license to distribute object code
versions of the GDC component of VXX-Source, the future royalty
obligation shall revert to the corresponding volume/royalty set
forth in 4.1.1.
4.2. If Ariel hereafter grants to any other person or firm a license to
the VXX-Technology resulting in a royalty payment lower than that
which would result from the tables in 4.1 above, in similar
quantities under substantially similar licensing and payment terms
for the particular type of products, software or components
involved, then, at such time, TI's royalty rate shall be changed
to equal the royalty rate given to such other person or firm. In
such event, this Agreement shall continue in effect as described
herein in all respects without any change other than the change
regarding the royalty rate.
4.3. TI shall make payments to Ariel as specified in Section 4.1
quarterly within forty five (45) days of the end of each calendar
quarter, beginning in the quarter in which the VXX-Products are
first sold or distributed. TI will provide a statement showing the
quantity of VXX-Products sold by TI during such period. Ariel
shall have the right to have an independent Certified Public
Accountant, mutually agreeable to TI and Ariel, audit TI's books
and records pertaining to TI's distribution of VXX-Products no
more than one (1) time per year. Such audit shall be at Ariel's
expense unless an error producing an increase exceeding 5% of the
amount stated for the period covered by the audit is found,
whereupon TI shall pay the costs of such audit.
5. TRAINING
Ariel will provide a minimum of ten (10) man-days of assistance
and training per calendar quarter for the six calendar quarters
immediately following completion of Milestone 2 of the Statement
of Work to facilitate understanding by TI of the VXX-Technology.
Ariel will provide such assistance at the Ariel location.
6. MARKETING AND CUSTOMER SUPPORT EFFORTS
6.1. TI agrees to provide the first line of technical support for TI
customers regarding VXX-Products.
6.2. Ariel will offer a competitive fee-based support program to TI's
VXX-Product customers.
6.3. TI at its sole option may refer its VXX-Product customers to
Ariel for additional technical services, including reference
design and development, custom feature development, functional
improvements or other enhancements, on an individual basis and
subject to competitive non-recurring engineering (NRE) fees, to
be
<PAGE>
5
negotiated between TI customers and Ariel on a good faith basis.
The NRE will be payable to Ariel by TI's customers.
6.4. TI at it's sole option may promote VXX-Products through
marketing programs, collateral, demonstrations, beta programs,
trade shows, seminars and other marketing and sales activities.
6.5 An Ariel Copyright and Trademark shall be clearly visible on
applicable VXX-Product documentation distributed by TI until
such time that TI has paid all royalty obligations to Ariel as
specified in Section 4. TI further agrees to acknowledge Ariel
as the developer of VXX-Technology in TI's initial VXX-Product
announcements, and to promote Ariel VXX-Products in TI
newsletters such as "DSP Solutions", and "Details on Signal
Processing" which are contemporaneous with TI's initial
VXX-Product announcements.
7. IMPROVEMENTS AND FUTURE DEVELOPMENTS
7.1. Ariel and TI agree that "bug fixes" to the functionality of
VXX-Technology that are developed by Ariel or TI while this
Agreement is in effect will be made available to both parties, and
will be integrated into future versions of the VXX-Source, without
compromising, when practicable, the backward compatibility and
interoperability status of the original VXX-Source. TI grants
Ariel a fully paid, perpetual, worldwide, a non-exclusive license
under the intellectual property rights of TI arising out of any TI
generated bug fixes, with the right to grant sublicenses, to use
such bug fixes, and make derivatives thereof, and to copy, sell
and distribute VXX-Products incorporating such bug fixes.
7.2 Ariel agrees to provide, at no cost to TI, error correction,
"bug fix" support and services for the VXX-Source and EVM
Product, as identified by testing or use of VXX-Executables by
TI, TI customers and/or independent testing laboratories, for
the duration of this Agreement. Ariel is not responsible for
providing this support and service on derivatives of VXX-Source
that are not originated by Ariel.
7.3. Ariel grants TI the right of first refusal for participation
with Ariel in future cooperative developments as related to
licensing by TI of VXX-Technology derivatives for a period of
two (2) year following the signing of this contract.
7.4. Ariel agrees to provide TI with a roadmap that demonstrates
Ariel's commitment and plans to develop additional TMS320C6x
software, such as voice/fax over the internet and xDSL products,
and update this roadmap on a quarterly basis for a period of one
(1) year after the signing of this contract.
<PAGE>
6
8. INTELLECTUAL PROPERTY, INVENTIONS AND WORK PRODUCT OWNERSHIP:
8.1. Both parties shall retain ownership to their respective patents,
copyrights and trade secrets that were in existence prior to the
date of the agreement.
8.2. The Parties acknowledge that the VXX-Source and VXX-Products will
incorporate Confidential Information of each Party, will be the
product of a jointly defined specification and will be contributed
to in part by both of the Parties. The Parties agree that all
copyrights, patents, inventions and work products resulting from
the efforts associated with the Statement of Work (in Attachment
A) regarding the VXX-Source and VXX-Products, including but not
limited to software source code, hardware design, schematics,
Gerber files and technical documentation, shall be the joint
property of Ariel and TI; except as otherwise provided in Section
4, each party shall be free to exercise it's rights in jointly
owned property without accounting to the other. TI will be the
sole owner of the DSP component of the Chipset Products. TI agrees
to cooperate with Ariel on any patent filings on joint inventions
relating to VXX-Technology.
8.3. It is expressly agreed by Ariel that incorporation by TI of any
preexisting TI Technology or integrated circuit design in an
integrated circuit developed under this Agreement shall not give
rise to any right of Ariel in such preexisting integrated circuit
design and shall not derogate in any way from TI's rights in such
preexisting design or technology nor shall it limit the freedom of
TI to use such preexisting design for the benefit of itself or of
other parties. Title and all rights in any mask work(s), including
the right to register such mask work(s) within the period
permitted under the applicable statute, in the integrated circuit
design arising out of performance under this Agreement shall be
owned by TI.
9. PROPRIETARY INFORMATION:
9.1. Confidential information means the GDC and the ARTE components
of the VXX-Source.
9.2. TI agrees that the Confidential Information is received only for
its own use and only to the extent provided in this Agreement.
Each Party agrees to keep the Confidential Information
confidential and to disclose it only to such employees,
independent contractors and permitted sublicensees of the
receiving Party with a need to know such information. TI shall not
be liable for the unauthorized use or disclosure of such
information provided that TI exercises at least the same degree of
care as the receiving Party normally exercises to protect against
the unauthorized use or disclosure of its own confidential or
proprietary data and information of similar importance, and that
such degree of care affords at least reasonable protection.
<PAGE>
7
9.3. Confidential Information of Ariel is and shall remain owned by
Ariel or it's licensors, and the grant in this Agreement of
license or other rights therein or access thereto does not
transfer to the TI any present or future ownership rights in the
Confidential Information.
9.4. Notwithstanding the provisions of Section 9.1, nothing received by
TI is required to be treated as Confidential Information which
prior hereto, or during the term of this Agreement, is (i) or
becomes publicly known through no unauthorized act of TI or the
receiving party (provided that the fact that any specific element
of source code for any software, microcode or firmware is in the
public domain shall not permit TI to disclose such source code as
a whole or any other non-public elements of such source code),
(ii) rightfully received from a third party without obligation of
confidentiality, (iii) independently developed by TI, (iv) already
known by TI without an obligation of confidentiality, (v)
intentionally disclosed without similar restrictions by Ariel or
its licensors to a third party, or (vi) approved by Ariel for
public disclosure.
9.5. TI shall not be liable for disclosure of any Confidential
Information if such disclosure is:
in response to a valid order of a court or other
government body or any political subdivision thereof;
provided, however, that the Party proposing to disclose
such information shall first notify the other Party and
shall make a good faith effort to obtain a protective
order requiring that the Confidential Information so
disclosed be used only for the purpose for which such
protective order is issued; or
in connection with a patent application the subject
matter of which patent application belongs to TI and
which TI discloses to an appropriate patent agent and/or
patent office or court of any country of the world in
pursuance thereof; or
otherwise required by law.
9.6. It is understood that the parties have performed and will continue
to perform substantial independent development relating to modem
software and hardware products and technologies. Each party also
understands that, over time, the other party's employees may gain
familiarity with the general concepts and ideas in the other
party's technology disclosed under the Agreement from independent
sources. The parties understand that either party may currently or
in the future be developing information internally, or receiving
information from others, that may be similar to information
furnished hereunder. Accordingly, nothing contained in this
Agreement shall be construed as a representation or inference that
either party
<PAGE>
8
will not develop products for itself or for others that compete
with the products or systems contemplated by either party's
information.
10. RELATIONSHIP OF THE PARTIES:
10.1. Each of the parties hereto shall conduct the work to be performed
hereunder as an independent contractor and not as an agent or
employee of the other party. Subject to the terms and conditions
of this agreement, each party shall, at its sole discretion,
choose the means to be employed and the manner of carrying out its
obligations hereunder. It is recognized by the parties that the
work to be performed hereunder is of the state-of-the-art and
therefore it is understood that each of the parties shall be
responsible only to use its reasonable efforts in the performance
of its obligations hereunder.
10.2 TI will provide Ariel preferred pricing (TBD) for Chipset
Product sold to Ariel for inclusion into Ariel's End-Equipment
products. Further TI will sell to Ariel ADSL modem chipset
products as are commercially available during the term hereof.
Sales to Ariel will be subject to TI's standard terms and
conditions of sale.
11. INDEMNIFICATION AND WARRANTIES:
11.1. With the exception of the V.34 and V.PCM and GDC intellectual
property embedded in VXX-Technology, Ariel warrants that it owns
or is licensed to all of the intellectual property right(s)
associated with the VXX-Technology, and that it has the
unqualified right to make the VXX-Technology available to TI and
to grant licenses hereunder under the terms of this Agreement.
11.2. With the exception of the V.34 and V.PCM and GDC intellectual
property embedded in VXX-Technology, Ariel further warrants that
the VXX-Source and the VXX-Technology does not infringe any
copyright, trade secret or other trademark right of a third party,
that they are not in the public domain, and that to the best of
Ariel's knowledge and belief they do not infringe any patent right
of a third party, and that no adverse claims exist as to the
VXX-Technology.
11.3. Ariel warrants that it is not a party to any other existing
agreement which would prevent Ariel from entering into this
Agreement or which would adversely affect this Agreement.
11.4. For a period of two years after the effective date of this
Agreement neither party shall separately engage any employee of
the other, associated with this project, to work on a permanent,
temporary, or part time basis on related matters.
11.5. Except as provided in Sections 11.1, 11.2, and 11.6 below, Ariel
shall, at its sole option, either reimburse TI for the cost of
defense, or defend all suits or
<PAGE>
9
proceedings brought against TI, but only to the extent which
such suits or proceedings are based on a claim that the
VXX-Source and/or VXX-Technology, or TI's use of same,
constitute direct infringement of any trademark, copyright or
patent of any member to the World Intellectual Property
Organization Treaty. Ariel shall pay, or at its sole option,
reimburse TI for damages and costs finally awarded therein
against TI with respect to such matter. Indemnification or
reimbursement shall not be required for costs or damages
resulting from the negligence, recklessness or intentional
misconduct of TI. Following notice of a claim or a threatened or
actual suit, Ariel shall at its expense, achieve one of the
following: (i) procure for TI the right to continue to use the
VXX-Technology as furnished, or; (ii) replace or modify same to
make it non-infringing.
11.6. TI shall defend any proceeding brought against Ariel insofar as
the proceeding is based on a claim that TI's contributions to the
VXX-Product constitutes direct infringement of any trademark,
copyright or patent of any member to the World Intellectual
Property Organization Treaty. TI shall pay all damages and costs
finally awarded with respect thereto against Ariel, provided that
TI is promptly informed and furnished a copy of each
communication, notice or other action relating to the alleged
infringement and is given authority, information and assistance
(at TI's expense) necessary to defend or settle the proceeding.
TI shall not be obligated to defend or be liable for costs and
damages if the infringement arises out of compliance with Ariel's
specifications or requirements. TI's obligations hereunder shall
not apply to any infringement by Ariel occurring after Ariel has
received notice of such proceeding or other communication
alleging the infringement unless TI has given written permission
for such continuing infringement.
11.7. Nothing contained in this Agreement shall be construed as
conferring by implication, or otherwise upon either party
hereunder any other license or other right except the licenses
and rights expressly granted hereunder to a party hereto.
11.8 As used in this Section 11, the terms V.34, V.PCM, and GDC
intellectual property mean:
o GDC intellectual property means GDC's copyrights and
patents in the GDC source code licensed by Ariel from
GDC.
o V.34 intellectual property means the patents used in the
GDC implementation of the ITU-T modem standard
recommendations as identified in Attachment B.
o V.PCM intellectual property means the patents used to
implement the TIA TR-30 Recommendation.
In the event that the license fees paid by TI are as in Section
4.1.2. the indemnities to be provided to TI as set forth in
Sections 11.1 and 11.2 shall extend to claims of infringement
with respect to GDC intellectual property embedded in
VXX-Technology.
<PAGE>
10
12. LIMITATION OF LIABILITY:
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INDIRECT DAMAGES,
INCLUDING ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OF
DATA, INTERRUPTION OF BUSINESS, OR FOR SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY KIND UNDER THIS AGREEMENT, EVEN IF
THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS.
13. TERM, TERMINATION AND SURVIVABILITY:
13.1. Unless this Agreement is terminated as provided herein, the period
of this Agreement shall be for a period commencing upon the
execution of this Agreement and expiring either five (5) years
from the date of execution or at such time as TI discontinues sale
of the VXX-Products or derivatives thereof whichever occurs
latest. As stated in Section 3, the licenses shall survive
termination of this agreement subject to payments described in
Section 4.
13.2.1 If TI terminates this co-development as defined in the statement
of work for TI's convenience, then license will survive as per
section 3.
13.2.2 Termination for cause by TI. If TI terminates the co-development
as a result of an Ariel breach prior to completion of Milestone
1, TI is entitled to refund of all moneys paid to Ariel. After
the completion of Milestone 1 if Ariel breaches any material
term of this Agreement, and fails to cure such breach within 60
days, TI may terminate the co-development activities under this
agreement; Ariel agrees to refund amounts previously paid by TI
as follows:
o If Milestones 2 through 4 are not complete; one half of
the payments associated with Milestones 2 through 4
o If Milestones 1 through 4 are complete. Ariel is entitled
to retain the initial payment, plus the Milestone
payments associated with 1 through 4, plus one half of
Milestone payments made subsequent to Milestone 4.
o If termination occurs after Milestone 7, and if TI
deliverable 8 and 9 have been made, then Ariel shall be
entitled to keep all payments previously made by TI, less
$150,000.
Refunds to TI will be made within ten days following notice of
TI's termination of the co-development activities. The parties
agree that if Ariel is working in good faith/due diligence, then
schedule slips by themselves shall not be considered to be a
material breach of this agreement.
13.2.3 If Arid terminates the co-development for its convenience, such
termination shall be handled as though TI were terminating the
agreement for Ariel's breach.
<PAGE>
Page 11 of 12
13.3. The rights and obligations of the Parties with respect to the
following Sections shall survive expiration or termination of
this Agreement: 3, 4, 8, 9, 11, 12 and 14.
14. RELEASE OF INFORMATION:
14.1. Neither party hereto shall, without securing the written consent
of the other, publicly announce the existence of this agreement
or advertise or release any publicity in regard thereto. This
provision shall survive the expiration or termination of this
agreement.
14.2. Notwithstanding the above, TI, at it's sole option, agrees to
use the Ariel Logo and Trademarks in connection with TI sale of
VXX-Products.
15. PROGRAM MANAGER:
The Program Managers named below are appointed by the parties
for the receipt and dispatch on their behalf of all
communications relating to this Agreement. The Program Managers
shall also be responsible for the good progress of the Statement
of Work and the timely resolution of all technical,
administrative and commercial issues which may arise from time
to time during the execution of this Agreement.
For Ariel: John Lynch
2540 Route 130
Cranbury, NJ 08512
For Texas Instruments: Terry Riley
P.O. Box 660199, MS 8650
Dallas TX 75266
16. FORCE MAJEURE:
16.1 Neither party shall be liable, wholly or in part, for
non-performance or a delay in performance of its obligations
under this Agreement, if such delay is due to Force Majeure or
contingencies or causes beyond the reasonable control of the
party, including but not limited to: flood, wind, hurricane,
tornado, earthquake, explosion, or other similar catastrophe,
hostilities, restraint of rulers or people, civil commotion, act
of terrorism, strike, labor dispute, blockage or embargo; or any
act of nature, fires, accident, epidemic or quarantine
restrictions.
16.2 Should the case arise the period of performance shall be
extended by the delay due to such Force Majeure and any
additional time that the parties may mutually agree is necessary
for the remobilization of people and equipment. If such delay
<PAGE>
Page 12 of 12
exceeds ninety (90) days, either party shall have the right to
terminate this Agreement forthwith and in this event neither
party shall have any further liability or obligation to the
other.
17. GOVERNING LAW:
The terms and conditions of this Agreement and performance
hereunder shall be construed in accordance with the laws of the
State of Texas (or NY).
18. ASSIGNMENT:
This Agreement shall not be assignable without the written
consent of both parties, and any purported assignment, including
full or partial assignment or delegation to any agent or
subcontractor, not permitted hereunder, shall be void.
19. SEVERABILITY:
If any provision or part of any provision of this Agreement, or
the Appendix hereto, is invalidated by operation of law or
otherwise, the provision or part will to that extent be deemed
omitted and the remainder of this Agreement or applicable
Appendix will remain in full force and effect. Should the case
arise, the parties agree that such invalidated provision or part
thereof shall be replaced by a similar but legally valid
provision which is as close as possible in commercial effect to
the invalidated provision or part thereof.
20. ORGANIZATION AND STANDING:
TI represents that it is a corporation validly existing and in
good standing under the laws of Texas, and has the full power
and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. Ariel represents that it is a
corporation validly existing and in good standing under the laws
of Delaware, and that it has the full power and authority to
enter into this Agreement and to carry out the transactions
contemplated hereby.
21. MERGER OF AGREEMENT:
21.1 This document constitutes the entire agreement between the
parties with respect to the subject matter hereof, and
supersedes all previous communications, representations,
understandings and agreements, either oral or written, between
the parties or any official or representative thereof.
<PAGE>
Page 13 of 12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date
hereof.
TEXAS INSTRUMENTS INCORPORATED ARIEL CORPORATION
By: /s/ John Scarisbrick By: /s/ Anthony Agnello
-------------------------------- ---------------------------------
Name: John Scarisbrick Name: Anthony Agnello
------------------------------ ------------------------------
Title: Sr. Vice President, SC Group Title: CEO
----------------------------- -----------------------------
Date: 8/20/97 Date: August 14, 1997
------------------------------ ------------------------------
<PAGE>
Page 1 of 4
ATTACHMENT A
STATEMENT OF WORK
Project Scope:
- --------------
The following defines the "who does what" for this project. Refer to
Attachment C for a description of the products. Following are the development
projects that Ariel and TI commits to:
1. Develop a Central-Site V.34/V.PCM Modem (D-Modem) EVM Product:
o Ariel will provide primary project management and development
resources.
o Ariel will develop the hardware EVM board and all host and DSP
software.
o TI will provide assistance as described below.
o Ariel Milestones are given below.
2. Develop a Client-Side V.34/V.PCM Modem (A-Modem) EVM Product:
o Ariel will provide primary project management and development
resources.
o TI will develop the hardware EVM board for the A-Modem.
o Ariel will develop the host and DSP software.
o TI will provide assistance as described below.
o Ariel Milestones are given below.
3. Develop a Hybrid Modem EVM Product:
o Ariel will develop the host and DSP software for the A-Modem.
o Ariel will provide guidance to the TI ADSL developers for the
purpose of making the ADSL modem and A-Modem compatible.
o TI will develop the hardware EVM board for the Hybrid Modem.
o TI will develop the host and DSP software for the ADSL Modem.
o Ariel will combine the A-Modem and ADSL modem to create the Hybrid
Modem.
o Ariel and TI Milestones are given below.
Deliverables:
- -------------
Ariel will develop and deliver the following EVM Products to TI:
o D-Modem EVM Product
o A-Modem EVM Product
o Hybrid Modem Product
Each EVM Product will have milestones deliverables. Alpha, Beta, and Final as
follows:
<PAGE>
Page 2 of 4
o Alpha Products are not fully featured, and not fully tested
o Beta Products are fully featured, and not fully tested
o Final Products are fully featured, and fully tested
Each EVM Product will contain the following components; the delivery of each
will be described in the following paragraphs and tables:
o EVM board
o Host software
o DSP software
o Documentation
EVM Boards: The D-Modem EVM board is described in Attachment C. At each
Milestone Ariel will provide TI with a complete and up-to date EVM board as
specified in Attachment C. Hardware boards, Functional Specification, and
electronic design information, including: Schematics, BOM, and Gerber files.
TI is responsible for supplying the EVM boards to Ariel for the A-Modem and
Hybrid Modem developments.
Host Software: Host software is currently being developed on and for Windows
NT Version 4. Milestone deliverables will be made on the version of NT that is
available to Ariel three (3) months prior to that Milestone. At each Milestone
Ariel will provide TI with the complete and up-to date host software as
specified in Attachment C. Both the executable and source code will be
delivered to TI.
DSP Software: DSP software is currently being developed on Windows NT Version
4, and using the C6x software development kit (SDK) supplied by TI. Milestone
deliverables will be made based on the SDK version that is available to Ariel
three (3) months prior to that Milestone. At each Milestone Ariel will provide
TI with the complete and up-to date DSP software as specified in Attachment C.
Both the executable and source code will be delivered to TI.
Documentation: At each Milestone Ariel will provide TI complete and up-to date
documentation, in electronic form, as specified in Attachment C.
<TABLE>
<CAPTION>
==========================================================================================================
TI Deliverables Description Delivery
to Ariel Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 25 TMX320C6201 Rev 2 devices 9/30/97
Required for: Ariel Milestones 2 thru 7
- ----------------------------------------------------------------------------------------------------------
2 Linker modifications as defined by Ariel, if needed TBD
Required for: Optimization for Milestone 2 thru 7
- ----------------------------------------------------------------------------------------------------------
3 Five (5) NT based fill C6x software development kits for 8/21/97
Windows NT PC computers as follows:
==========================================================================================================
</TABLE>
<PAGE>
Page 3 of 4
<TABLE>
<CAPTION>
==========================================================================================================
<S> <C> <C>
TMS32Oc6x code gen tools, PN: TMDX3246855-07 TMS32OC6x
Simulator, PN: TMDX3246851-07 And, One (1) TEB board and
debugger based on Rev.1 TMS320C6201 DSP as follows:
1. Test and Evaluation Board: PN: TMDX326106201
2. Debugger: PN.TMDX324016X-07
Required for: Ariel Milestones 1 thru 7
- ----------------------------------------------------------------------------------------------------------
4 Two (2) software programmers, employed by TI, 1 in -
Pittsburgh, 1 in Texas, from 8/30/97 thru 2/30/98
Required for: optimizing D-Modem product density, and
liaison with the Pittsburgh tools and BIOS development
team.
- ----------------------------------------------------------------------------------------------------------
5 TI will provide access to six (6) modem TAS test systems with -
operators from 9/30/97 thru Milestone 7 at TI site on an
as needed basis.
Required for: Milestones 2 thru 7
- ----------------------------------------------------------------------------------------------------------
6 Ten (10) A-Modem EVM boards, including available 2/28/98
documentation and engineering contact person for support.
Required for: Milestones 5 thru 7
- ----------------------------------------------------------------------------------------------------------
7 Five (5) TEB boards and debuggers based on Rev. 2 ASAP
TMS320C6201 DSP as follows:
1. Test and Evaluation Board: PN.TMDX326106201 (or
equivalent for Rev.2 DSP)
2. Debugger: PN.TMDX324O16X-07 (or equivalent for
Rev.2 DSP)
Required for: development support
- ----------------------------------------------------------------------------------------------------------
8 Hybrid Modem EVM Product Functional Specifications and 11/3/97
Development Plan (written jointly with Ariel)
Required for: Milestones 8 thru 11
- ----------------------------------------------------------------------------------------------------------
9 Hybrid Modem EVM board with ADSL modem software TBD
executables
Required for: Milestones 8 thru 11
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================================
Ariel Milestones Description Delivery
and Date
Deliverables to TI
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 GDC V.34 code ported to C, 10/30/97
and functional specifications for D-Modem EVM Board
- ----------------------------------------------------------------------------------------------------------
2 Alpha D-Modem EVM Product with two (2) EVM boards 1/30/98
- ----------------------------------------------------------------------------------------------------------
3 Beta D-Modem EVM Product with ten (10) EVM boards 3/30/98
- ----------------------------------------------------------------------------------------------------------
4 Final D-Modem EVM Product with no (0) EVM boards 5/30/98
- ----------------------------------------------------------------------------------------------------------
5 Alpha A-Modem EVM Product with no (0) EVM boards 4/30/98
==========================================================================================================
</TABLE>
<PAGE>
Page 4 of 4
<TABLE>
<CAPTION>
==========================================================================================================
<S> <C> <C>
6 Beta A-Modem EVM Product with no (0) EVM boards 5/30/98
- ----------------------------------------------------------------------------------------------------------
7 Final A-Modem EVM Product with no (0) EVM boards 6/30/98
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
8 Hybrid Modem EVM Product Functional Specifications and
11/3/97 Development Plan (written jointly with TI)
- ----------------------------------------------------------------------------------------------------------
9 Alpha Hybrid Modem EVM Product TBD
- ----------------------------------------------------------------------------------------------------------
10 Beta Hybrid Modem EVM Product TBD
- ----------------------------------------------------------------------------------------------------------
11 Final Hybrid Modem EVM Product VXX TBD
==========================================================================================================
</TABLE>
Note: V.PCM will be available 6 months after the TIA (Telecommunications
Industry Association) specification is issued.
<PAGE>
ATTACHMENT B
VXX-TECHNOLOGY
FUNCTIONAL SPECIFICATIONS
VXX-Technology is the Ariel DSP software technology that is developed for use
an the TI TM5320C6201 DSP.VXX Following are the elements of VXX-Technology:
o ARTE: Ariel's Real-Time Environment
o Modem Datapump
o Modem Controller
ARTE:
o This is the real-time kernel and programming environment developed by
Ariel that is used to support multiple-functions and multiple-channels on
each TMS320C6201.
o An ARTE kernel exists for each TM5320C6201, and uses (approximately) 1
kbyte of onchip memory.
o The ARTE kernel supports:
o "object" modules to contain stand-alone DSP programs
o multiple instances of objects, restricted only by hardware interfaces,
and MIPS and memory
o multiple DSP systems
o load/link of DSP binary "objects"
o inter-object communication
o object scheduling
o memory-mapped object-object and host-object communications
o Device driver objects are used to interface to hardware communication ports
o DSP Objects are used to perform functions such as modem, fax, and voice
Modem Datapump:
This DSP code is based on the V.34 C51 assembly code which Ariel has licensed
from GDC.
o Automatic modulation selection
o ITU-T V.8 startup
o ITU-T V.13 carrier control detection
o ITU-T V.14 transmission protocol
o V.PCM as per TIA draft specification (expected 3Q97)
o ITU-T V.34 at 33.6, 31.2, 28.8, 26.4, 24.0, 21.6, 19.2, 16.8, 14.4, 12.0,
9.6, 7.2, 4.8 & 2.4 Kbps
o ITU-T V.32bis at 14.4, 12.0, 9.6, 7.2 & 4.8 Kbps
o ITU-T V.32 at 4.8 & 9.6 Kbps
o ITU-T V.22bis at 2400 & 1200 bps
o ITU-T V.22 at 1200 bps
o ITU-T V.21 at 300 bps
o Bell 212A at 1200 bps
o Bell 103A at 300 bps
<PAGE>
Page 2 of 2
Modem Controller Functions and Protocols:
This DSP code is based on the V.34 C51 assembly code which Ariel has licensed
from GDC.
o ITU-T V.42 and MNP 2-4 Error Correction
o ITU-T V.42bis and MNP 5 Data Compression
o Local and Remote Loopback with Self-Test
<PAGE>
Page 1 of 3
ATTACHMENT C
EVM PRODUCT DESCRIPTION AND BILL OF MATERIALS
EVM products contains all the hardware and software required to demonstrate,
evaluate and test VXX-Technology running on a TI DSP.
Following is an description of the functions of each EVM Product. Refer to
Attachment B for more information on ARTE and the V.34/V.PCM modems:
o D-Modem EVM Product
o Central-Site modem for use on digital phone lines
o 8-to-12 V.34/V.PCM modems per DSP
o The TMS320C6201 DSP will be used
o ARTE will be used for DSP multi-tasking and interfacing
o A-Modem EVM Product
o Client-Side modem for use on analog POTS phone lines
o One V.34/V.PCM modem per DSP
o The TMS320C6201 DSP will be used
o ARTE will be used for DSP multi-tasking and interfacing
o Hybrid Modem EVM Product
o Client-Side A-Modem and ADSL modem for use on analog POTS phone lines
o One V.34/V.PCM and one ADSL modem per DSP
o The TMS320C6201 DSP will be used.
o ARTE will be used for DSP multi-tasking and interfacing
The components of an EVM product are listed below and further described in the
following paragraphs:
o EVM board
o Host software
o DSP software
o Documentation
D-Modem EVM Board: Figure 1 below is a block diagram of the D-Modem EVM board
that Ariel is developing. The D-Modem EVM contains the following components:
o a single TMS320C6201 DSP
o 4 Mbytes of local SDRAM
o a PCI host computer interface port connected to the Host Interface port
on the DSP
o an MVIP I/O port connected to the Serial Port on the DSP for attaching to
a commercially available digital line interface card
<PAGE>
Page 2 of 3
o Functional Specification document describing the function. Operation and
design of the board
Figure 1
MVIP TDM Bus
[WAS REPRESENTED BY A FLOW CHART IN THE PRINTED MATERIAL]
[GRAPHIC OMITTED]
A-Modem EVM Board: Figure 2 below is a block diagram of the A-Modem EVM board
that TI is developing. The A-Modem EVM contains the following components:
o a single TMS320C6201 DSP
o 4 Mbytes of local SDRAM
o a PCI host computer interface port connected to the Host Interface port
on the DSP
o a DAA circuit connected to the serial port of the DSP (see description
below)
o Functional Specification document describing the function, operation, and
design of the board
o Test and evaluation software that demonstrates the operation of the
A-Modem EVM hardware.
Figure 2
A-Modem EVM Card
[WAS REPRESENTED BY A FLOW CHART IN THE PRINTED MATERIAL]
[GRAPHIC OMITTED]
<PAGE>
Page 3 of 3
The DAA circuit shall connect to POTS telephone lines via an "RJl1" female
connector on the board. The DAA shall be capable of passing V.34 and 56k modem
signals between the phone line and the DSP. Performance of the DAA shall be at
least as good as the existing "AKITA" DAA reference design as currently
provided by the TI's PC-Datacom group for X2 modem products. Following is a
summary of the features of the DAA:
1. Method to perform 2-Wire to 4-Wire conversion
2. Method to place the POTS line "Off-Hook" and "On-Hook" under control of
the DSP
3. Method to indicate "Ring Signal" to the DSP
4. Method to provide 16-bit A/D and D/A samples, at variable sampling rates
between 6-to- 12 ksps, to the DSP. Note that if an oversampling technique
is used by the A/D and D/A converters, then a decimation algorithm that
must execute on the DSP must also be supplied.
Host Software: Host software is being developed on and for Windows NT Version 4.
The components of the host software are:
o a sample application that exercises and demonstrates the modems on the EVM
o a sample host API that provides the low-level interfaces to the DSP
functions
o basic diagnostic and utility software for testing operation of the EVM
board
DSP Software: DSP software is being developed on Windows NT Version 4, and
using the C6x software development kit (SDK) supplied by TI. The components in
the DSP software are called "DSP Objects", and are listed below:
o ARTE kernel DSP Object
o Host and line interface device drivers DSP Objects
o D-Modem DSP Objects
o A-Modem DSP Objects o ADSL Modem DSP Objects (as supplied by TI and
defined in xxx)
Documentation: Documentation will contain the following information:
o EVM Functional Specifications, BOM, and Gerber files
o Description of DSP serial port and parallel port data formats
o Description of host and DSP program interfaces to DSP objects
o Description of sample host application and API
o Profile information: DSP MIPs. onchip/offchip memory speed/size
<PAGE>
I N T E R N A T I O N A L D A T A C O R P O R A T I O N
--------------------
Filing Information
June 1997
IDC# 13753
Volume: 1
Tab: Market Analysis
--------------------
Data Communications
Technology
Bulletin
Midyear 1997 Remote Access Server
Forecast Update, 1996--2001
Analyst: Brad Baldwin
IDC Opinion
The continuing explosion of public and private enterprisewide remote access
servers has driven revenue forecasts upward by an additional 12% over our
previous forecast. The market is expected to eclipse the $10 billion barrier
by 2001. The principal beneficiary is RAS concentrator technology, but a
counter-balance to greater market growth is a serious slowdown in the
fixed-port segment. IDC has added an "upgrade" forecast indicating the revenue
opportunity for component upgrades, and this bulletin also shows a new "public
vs. private" remote access forecast model. Public sector growth is expected to
contribute 58% of revenue in 1997.
Methodology and Definitions
The quantitative and qualitative information provided in this bulletin results
from IDC's ongoing research on remote access technology. Both primary and
secondary sources of information were used. Revenue data reflects the
estimated street price paid by the end user, including all channel margins and
relevant discounts. Product shipped during the year was assumed to have
received full revenue value.
[LOGO] IDC
5 Speen Street o Framingham, MA 01701
- -------------------------------------
(508) 872-8200 o Fax (508) 935-4015
<PAGE>
The forecast model considers and evaluates a wide number of often overlapping
sets of data, including the worldwide installed base of business PCs, home
PCs, portable PCs, individual Internet users, business Internet users,
work-at-home users/households with PCs and modems, telecommuters, corporate
after-hours homeworkers, and others.
Scope
Two segments are tracked within the boundaries of this bulletin: fixed-port
remote access servers and RAS (remote access server) concentrators.
Fixed-port remote access servers offer port densities that are "fixed" in
number -- usually, fixed-port RAS units are 4, 8,16, and up to 48 ports, hut
they rarely have more. They do not offer the ability to concentrate users on
an ISDN primary rate interface (PRI) line or a T1 line. In essence, if the
unit has 12 ports, 12 phone lines must come into the unit. Each port is fixed
with a line connection, and the number of ports is generally fixed in the
configuration.
IDC has expanded its definition of fixed port to include BRI technology.
IDC has expanded its definition of fixed port to include basic rate interface
(BRI). Examples of this technology might include units that offer 4 or 8 ports
of BRI, so the b-channel count is 8 ports and 16 ports, respectively (two
b-channels per BRI). The technology must focus on client-to-LAN applications
and not LAN-to-LAN routing applications.
The RAS concentrator segment examines products that receive incoming analog or
ISDN-based signals from off-LAN telecommuters. They aggregate, or
"concentrate," those calls onto a T1 or ISDN-based PRI. Modems are included in
revenue if they are part of the basic chassis; external modems contained in
modem banks are excluded. This segment counts b-channels, which means 24
b-channels for PRI and 24 b-channels for T1; in international markets, the
numbers are 30 b-channels for El and the European equivalent to PRI.
Not all T1/PRI lines are connected or used in a true remote access fashion.
Some might remain unconnected to allow for future expansion or used as a
LAN-to-LAN routed link. IDC simplifies the process by assuming all T1/PRI
connections (when part of a remote access server) are counted as remote
access.
Upgrade Revenue
A new feature to the forecast is upgrade revenue. The advent of DSP-based
modem architectures and software-based modem code
- --------------------------------------------------------------------------------
Quoting IDC Information and Data: Internal Document and Presentations--Quoting
individual sentences and paragraphs for use in your company's internal
communications does not require permission from DC. The use of large portions
or the reproduction of any DC document in its entirety does require prior
written approval and may involve some financial consideration. External
Publication--Any IDC information that is to be used in advertising, press
releases, or promotional materials requires prior written approval from the
appropriate IDC Vice President or Country Manager. A draft of the proposed
document should accompany any such request.
Copyright 1997 International Data Corporation.
Reproduction is forbidden unless authorized.
For additional copies please contact Cheryl Toffel, 508-935-4389.
Check us out on the World Wide Web! http://www.idcresearch.com
Printed on recycled materials
[LOGO] International Data Corporation
- 2 -
<PAGE>
Upgrade revenue takes into consideration products and upgrades that might not
get counted as part of the "new shipment" revenue.
will result in a market for component upgrades. Vendors have come out with a
wide array of blades to insert into the chassis that can be sold after the
fact. These blades -- analogous to plug-in cards in a PC -- can undergo future
design modification and get swapped out as an upgrade to the unit. Either way,
some revenue will be derived from upgrades as selected blades or components of
the chassis individually become retired. With the upgrade revenue line item,
IDC is able to fully account for the revenue opportunity and more accurately
assess yearly ASVs, unit shipments, and so forth. The upgrade data should be
considered preliminary because it requires additional evaluation and study.
Data Restatement
Novell's NetWare Connect shipments and other software-based RAS shipments are
counted as part of the server-based forecast.
As discussed in IDC bulletin #13224, 1996 Remote Access Market Shares: Dawn of
the Public Strategy (March 1997), IDC now eliminates forecast revenue and
shipments associated with server-based remote access communication software,
such as Apple's Personal Server, Attachmate's RLN, Microsoft's NT RAS Server,
and Novell's NetWare Connect. While add-in multiport async and multiport ISDN
cards have never been counted in forecasts, they, along with the associated
software, are now part of the server-based communications forecast
(Server-Based Remote Access Forecast and Market Shares, IDC #12655, January
1997).
ISPs located in outlying areas with weak or nonexistent T1/PRI deployment are
principal candidates for fixed-port remote access.
Another change in methodology is the addition of BRI-based units that are now
considered part of the fixed-port segment This bulletin restates 1995 data to
reflect that addition, but it amounts to only 9,000 b-channels, accounting for
approximately $9 million.
When combined, the data for the 1995 fixed-port historical figures decreases
by 408,000 ports and $69 million; 1992--1994 data was also changed. This
change in historical data influences forecast data, and after data
restatement, this bulletin revises the 1997 fixed-port shipments and revenue
downward by about 18% and 11%, respectively. Any remaining change to the
fixed-port forecasts is because of the overall softening of market
expectations for this particular segment. RAS concentrator data remains
unchanged historically.
Forecast Assumptions
Departmental sites and small ISPs are principal candidates for fixed-port
remote access.
The following assumptions represent some of the more influential drivers or
conditions of the RAS market during the forecast period:
o Internet service providers (ISPs), RBOCs, carriers, and large
corporations are the principal targets for RAS concentrators. This
segment consolidates low-speed traffic, but over time, it will gain
increased use to consolidate ISDN-based BRI traffic.
o Departmental sites, companies with pilot or low-key telecommuting
programs (fewer than 100 workers), small ISPs in the United States or
internationally, ISPs located in outlying areas with weak or nonexistent
T1/PRI deployment, are principal candidates for fixed-port remote access.
[LOGO] International Data Corporation
- 3 -
<PAGE>
o Target users of remote access include Internet users, telecommuters,
mobile workers (field staff) and small home office workers.
o In the case of Internet users, target users can be employees of companies
that fully deploy remote access (teLecommuters and work-at-home users) or
users that access the Internet as a personal option.
o Outsourcers (ISPs, network service providers, and especially carriers)
represent future opportunity but are not drivers. Outsourcing does not
directly create the remote access need, but it will offer a major
influence over the kinds of technology produced. On the other hand, the
growth and interest in virtual private networks will influence users'
ability to provide remote access to customers, suppliers, and a greater
number of employees worldwide.
o The market for remote access in the Pacific/Far East region appears to be
primarily driven by network service providers.
o One port can potentially service a number of users. This "user-to-port"
ratio varies widely according to application, target segment (Internet
users, occasional telecommuters, full-time mobile workers, permanent home
office workers), and the bandwidth available. For example, an ISP with 100
subscribers does not need 100 ports to service those subscribers. It will
need some fraction of that amount; not all users access the services
simultaneously or are on the line all day. This figure will decline over
time, moving from an average of 10 users per port in 1996 to fewer than
five users per port in 2001.
o Multiplying the installed base ports by whatever telecom factor necessary
is an incorrect procedure to gauge potential total user population and
will result in too high a figure. DSL and ISDN deployment, for example,
requires the bandwidth equivalent of multiple b-channels, which reduces
the effective user population.
In Europe, ISDN BR! is dominant (40%). In the United States, client-side analog
modem access reigns dominant.
o In Europe, the dominant Internet access method for telecommuter users is
ISDN BRI (40%) followed by analog modems (30%). In the United States,
analog modem access (to either ISPs or corporate remote access sites) is
at 95% levels.
o The market for corporate-based remote access is more aggressive in the
United States and will involve a greater penetration of companies and
employees than in Europe.
The industry will attempt to respond to all price cuts with "counter
price-erosion" measures to hold prices stable.
o The industry will attempt to respond to all price cuts with "counter
price-erosion" measures, such as new technology, faster performance,
increased integration (most important --increased integration of modems
in PALS concentrator platforms), and more bells and whistles (see text
for further discussion). The uplift in international sales also
stabilizes prices to some degree.
[LOGO] International Data Corporation
- 4 -
<PAGE>
Market Review
Fixed-Port Segment
As shown in Table 1, after coming off a fairly strong 1996 with about 44%
revenue growth, the market is expected to slow down in 1997, with just 15.5%
growth. From 1998--2001, the year-over-year growth will be well under 10%.
Port shipments grew nearly 60% in 1996, but are expected to drop to 21% in
1997.
Table 1
Worldwide Fixed-Port Remote Access Server Market Forecast, 1995--2001
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units (K) 161.2 254.5 305.0 346.0 382.0 417.0 452.0
Growth (%) 94.9 57.9 19.8 13.4 10.4 9.2 8.4
Installed base units (K) 362.9 544.0 778.6 1,002.2 1,236.6 1,470.4 1,719.0
Growth (%) 42.5 49.9 43.1 28.7 23.4 18.9 16.9
Ports shipments (K) 2,087.6 3,333.8 4,026.0 4,601.8 5,157.0 5,671.2 6,192.4
Growth (%) 147.5 59.7 20.8 14.3 12.1 10.0 9.2
Ports insulted base (K) 3,467.3 6,477.9 10,037.9 13,214.2 16,451.8 19,720.2 23,232.8
Growth (%) 122.6 86.8 55.0 31.6 24.5 19.9 17.8
Ports/unit 13.0 13.1 13.2 13.3 13.5 13.6 13.7
ASV unit ($) 3,664 3,341 3,221 3,099 2,997 2,910 2,822
Growth (%) 45.0 -8.8 -3.6 -3.8 -3.3 -2.9 -3.0
ASV ports ($) 283 255 244 233 222 214 206
Growth (%) 14.2 -9.9 -4.3 -4.5 -4.7 -3.6 -3.7
Total end-user revenue ($M) 590.7 850.3 982.3 1,072.2 1,144.9 1,213.6 1,275.6
Growth (%) 182.6 44.0 15.5 9.2 6.8 6.0 5.1
- ------------------------------------------------------------------------------------------------------
</TABLE>
Source: International Data Corporation, 1997
IDC believes that fixed-port units may have hit a wall in terms of density
configuration.
IDC believes that fixed-port units may have hit a wall in terms of density
configuration. In 1995, the average number of ports per unit was 13.0; in
1996, this figure increased to just 13.1. Accordingly, our forecasts suggest a
similar very slight creeping up of port density through 2001. At densities
approaching 16--20 ports, end users may realize tariff cost savings by
deploying T1/PRI-based units over a bank of multiple incoming phone lines.
Microsoft NT RAS Server's impact on "traditional" hardware-based remote access
appears evident in a number of end-user surveys.
Although certain cannibalization from RAS concentrators has now taken effect
on this segment (a factor that did not appear to exist in 3Q96 and earlier),
there is another reason the market has slowed down so severely: competition
from server-based remote access. Microsoft NT RAS Server is a popular platform
for inexpensive and easy-to-deploy remote access. Its impact on "traditional"
hardware-based remote access appears evident in a number of end-user
[LOGO] International Data Corporation
- 5 -
<PAGE>
surveys. IDCs forecast of this market (again, refer to the server-based
forecast bulletin) indicates a 39% increase in revenue in 1997 and a 45%
increase in port shipments. If combined with the fixed-port figures, this
would indicate a revenue growth in 1997 of 22% and a combined market of $1.4
billion.
Increased modem integration, higher performance, and international
distribution help stabilize the price.
IDC does not expect a dramatic decline in average selling value (ASV) per
port. We expect an increasing integration of modems to help bolster the price,
and increased international distribution is likely to keep ASVs from dropping
too low (uplift pricing shift). While the ASV did drop 10% in 1996, the ASV
also went up 14% in 1995. As noted in the "Forecast Assumptions" section of
this bulletin, vendors will work hard to keep pricing stable by introducing
higher-performance technology, more integrated modems, and other features.
After 1998, fixed-port shipments should reach near-saturation in the United
States. Small local ISPs, both domestic and abroad, located in areas perhaps
not satisfactorily served by T1 or ISDN's PRI, will remain a potential market
for this segment; these organizations will experience less RAS saturation than
with corporate deployment. The installed base is expected to increase to 23.2
million ports by 2001, a 258% increase over 1996.
RAS Concentrator Segment
The RAS segment continues to be volatile, with revenue growth in 1996 of 414%,
reaching $1.9 billion, and a forecast of 117% expected in 1997, reaching
approximately $4.2 billion (see Table 2). By 2001, RAS concentrators will have
reached $9 billion.
The "slowdown" from 414% growth to 117% growth is certainly not a downturn.
This follows the pattern of most early-level, fast-growth high-tech markets in
which the initial installed base of revenue is fairly low; growth rates on top
of that will be phenomenal. Nevertheless, the market is expected to add $2.2
billion in revenue in 1997 on top of the $1.9 billion levels in 1996. From
this perspective, the growth is extremely impressive, especially when we
consider that the bulk of the revenue increase will be spread out to just a
handful of top-tier and middle-tier vendors, namely 3Com/USR, Ascend, Bay
Networks, Cisco, Livingston, Shiva, and Xyplex. With just 10 principal players
in the market at present, the rewards are much more prominent.
ASVs per port are bucking the generally expected price-decline trend. In 1995,
prices jumped 16%; in 1996, they increased 17% to $539 a port. However, early
1997 indications show that pricing will finally halt its upward drive and
should decrease by 2.5%. Despite most vendors' announcements of 20--30% lower
prices per port, "true" prices are held stable by shifts toward increased
modem integration, greater performance, international distribution, and all
the other usual suspects. A price decline should appear in 1997 as some of
these factors stabilize, the most important being modem integration. Although
some platforms still do not offer internal modems, this situation will lessen.
[LOGO] International Data Corporation
- 6-
<PAGE>
Table 2
Worldwide Remote Access Server Concentrator Market Forecast, 1995-2001
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units (K) 13.4 56.0 120.0 168.0 196.0 218.0 238.0
Growth (%) 109.4 317.9 114.3 40.0 16.7 11.2 9.2
Installed base units (K) 22.9 75.8 192.6 352.0 534.4 712.4 892.0
Growth (%) 141.1 231.0 154.1 82.8 51.8 33.3 25.2
Port shipments (K) 809.0 3,473.3 7,680.0 11,256.0 13,916.0 16,568.0 19,516.0
Growth (%) 146.6 329.3 121.1 46.6 23.6 19.1 17.8
Ports installed base (K) 1,229.0 4,610.3 12,126.3 22,894.7 35,978.0 50,041.3 65,864.0
Growth (%) 192.6 275.1 163.0 88.8 57.2 39.1 31.6
Ports/unit 60.4 62.0 64.0 67.0 71.0 76.0 82.0
ASV unit ($) 27,761 33,404 33,600 33,701 33,938 34,276 35,014
Growth (%) 36.7 20.3 0.6 0.3 0.7 1.0 2.2
ASV port ($) 460 539 525 503 478 451 427
Growth (%) 16.0 17.1 -2.6 -4.2 -5.0 -5.7 -5.3
New shipment revenue ($M) 372.0 1,870.6 4,032.0 5,661.8 6,651.8 7,472.2 8,333.3
Growth (%) 186.2 402.9 115.6 40.4 17.5 12.3 11.5
Upgrade revenue ($M) N/A 40.0 121.0 328.4 472.3 582.8 675.0
Growth (%) 202.5 171.4 43.8 23.4 15.8
Total end-user revenue ($M) 372.0 1,910.6 4,153.0 5,990.2 7,124.1 8,055.0 9,008.3
Growth (%) 413.6 117.4 44.2 18.9 13.1 11.8
- --------------------------------------------------------------------------------------------------------
</TABLE>
Source: International Data Corporation, 1997
Although the ASV per port is expected to decline 4--5% through 2001, the ASV
per unit is expected to stay flat. The reason is increased port density,
moving from 62 ports per unit in 1996 to 82 ports in 2001. More ports per unit
counteract the declining ASV per port.
Table 3 indicates several remote access market pricing factors.
A number of reasons exist to explain what appears to be an excessively large
installed base figure.
A fairly intimidating number is the figure that shows a ports installed base
of 65.9 million by 2001 (89.1 million ports for the total RAS market). These
figures are more an indication of bandwidth potential than actual user
available population. It is not appropriate to multiply 65.9 million by a
factor of four or five (assuming a decline in user-to-port ratio from today's
8:15, depending upon corporate or ISP and company size) to determine the
actual user population remote access targets. For example, a certain number of
ports are linked together to form one connection. Two b-channels are linked to
form a BRI connection, which will service a single user. Internationally, BRI
is more popular than analog modems here in the United States.
[LOGO] International Data Corporation
- 7 -
<PAGE>
Certain versions of DSL will essentially offer home users their own private
PRI capacity, with something approaching the bandwidth equivalent of 24
b-channels.
Table 3
Remote Access Pricing Factors
- --------------------------------------------------------------------------------
Factors Causing Price Increases (Stabilization)
- --------------------------------------------------------------------------------
o Increased modem integration
o Increased percentage of international distribution
o Enhanced performance and features (works mostly as a price stabilizer)
o Outsourcing requirements by the public sector add complexity
o Greater integration of network management, security, routing, and WAN
features
o Faster interface from the RAS to the LAN, such as switching, 100BaseT, and
ATM
o Migration to faster modems
o Migration toward DSP-based technology (short term, then reverses)
o Development of DSL and cable modem remote access equipment
- --------------------------------------------------------------------------------
Factors Causing Price Declines
- --------------------------------------------------------------------------------
o Increased port/unit density (more ports raise unit price but lower port
pricing)
o Basic price cuts because of stronger market, more shipments, better
manufacturing, and increased competition
o Increased density of modems onto single-card boards
o Eventual maturity of DSP-based digital modem technology
o Greater adoption of ISDN, which eliminates modem need (counter-balanced,
however, by requirement of two b-channels versus one for analog modem
users)
- --------------------------------------------------------------------------------
Source: International Data Corporation, 1997
IDC believes that overlap exists between private corporate remote access
connections. Those same private sector users also might maintain an account
with an ISP outside of whatever might be provided by the corporation. With
this arrangement, a single user then takes up two ports, again reducing the
"user population" concern.
Finally, not all T1 ports are used. IDC is aware that several vendors are
unable to fully populate each T1 with its 24 matching modems because of modem
density limitations on the plug-in cards. In some instances, a unit with
multiple T1 ports (for example, four T1/FRI lines) might leave one line
unoccupied for remote access to provide back-up capability to the WAN, or the
line might be used to provide an active LAN-to-LAN connection.
Total Market
Forecasts indicate a slowdown beginning in 1998.
When fixed-port and RAS concentrator segments are combined (Table 4), the data
indicates the market grew 187% in 1996 to $2.76 billion; we forecast growth of
86% in 1997 to $5.14 billion. Beyond that, the forecasts do indicate a
slowdown beginning in 1998, when the market is expected to climb "just" 37.5%
to $7.1 billion. However, using the same argument as for the RAS concentrator
growth slowdown from 1996 to 1997 of just 117%, the
[LOGO] International Data Corporation
- 8 -
<PAGE>
difference in revenue figures between 1997 and 1998 amounts to close to $2
billion. In addition, from 1996 to 1999, the market will effectively triple in
size. Still, vendors should not, in upcoming years, expect triple-digit growth
for remote access product lines as the inevitable and customary saturation
settles in. Some of the new growth will be from retirements of older
platforms, and upgrade revenue will also offer a significant contribution.
Figure 1 shows a comparison between the end-user revenue forecast for
fixed-port and concentrator segments; Figure 2 indicates the ASV-per-port
comparison.
<TABLE>
<CAPTION>
Table 4
Total Worldwide Remote Access Server Market Forecast, 1995--2001
=======================================================================================================
1995 1996 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units (K) 174.6 310.5 425.0 514.0 578.0 635.0 690.0
Growth (%) 96.0 77.8 36.9 20.9 12.5 9.9 8.7
Installed base units (K) 385.8 619.8 971.2 1,354.3 1,771.0 2,182.8 2,611.0
Growth (%) 46.0 60.7 56.7 39.5 30.8 23.3 19.6
Ports (K) 2,896.6 6,807.1 11,706.0 15,857.8 19,073.0 22,239.2 25,708.4
Growth (%) 147.2 135.0 72.0 35.5 20.3 16.6 15.6
Ports installed base (K) 4,696.3 11,088.2 22,164.2 36,108.9 52,429.8 69,761.5 89,096.8
Growth (%) 137.4 136.1 99.9 62.9 45.2 33.1 27.7
Ports/unit 16.6 21.9 27.5 30.9 33.0 35.0 37.3
ASV unit ($) 5,514 8,763 11,798 13,101 13,489 13,678 13,926
Growth (%) 44.9 58.9 34.6 11.0 3.0 1.4 1.8
ASV port ($) 332 400 428 425 409 391 374
Growth (%) 14.9 20.5 7.0 -0.7 -3.8 -4.4 -4.4
New shipment revenue ($M) 962.7 2,720.9 5,014.3 6,734.0 7,796.7 8,685.8 9,609.0
Growth (%) 184.0 182.6 84.3 34.3 15.8 11.4 10.6
Upgrade revenue NA 40.0 121.0 328.4 472.3 582.8 675.0
Growth (%) 202.5 171.4 43.8 23.4 15.8
Total end-user revenue ($M) 962.7 2,760.9 5,135.3 7,062.4 8,269.0 9,268.6 10,284.0
Growth (%) 186.8 86.0 37.5 17.1 12.1 11.0
- -------------------------------------------------------------------------------------------------------
</TABLE>
Source: International Data Corporation, 1997
[LOGO] International Data Corporation -9-
<PAGE>
Figure 1
Worldwide RAS Fixed-Port and Concentrator End-User Revenue, 1995-2001
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
[PLOT POINTS TO COME]
Source: International Data Corporation, 1997
Figure 2
Worldwide RAS Fixed-Port and Concentrator ASV/Port, 1995-2001
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
[PLOT POINTS TO COME]
Source: International Data Corporation, 1997
-10- [LOGO] International Data Corporation
<PAGE>
DSL Futures
We expect DSL technology (ADSL, HDSL, and SDSL) to integrate into RAS by 1998,
which will increase pricing. The advent of DSL would use the b-channel
equivalent bandwidth capacity of 24 to 140 b-channels per user.
HDSL and SDSL would use the bandwidth equivalent of 24 b-channels per user;
cable modems will be tougher to assess, because the expected 10MB to 20MB
bandwidth is shared across many users.
Although these forecasts currently do not specifically indicate a breakout for
DSL and cable modem technology used in remote access, a migration toward this
technology is assumed.
Private vs. Public
For 1997, IDC expects a 100% growth in public spending; public share will
increase to 58% of the total.
Products are sold to either private or public sectors. Table 5 and Figure 3
show the split between private and public revenue and indicate that in 1996,
the market comprised 54.2% public, or about $1.5 billion. For 1997, IDC
expects a near-100% growth in public spending, and the share will increase to
58% of the total. By the year 2001, the split between public and private will
be a 2:1 ratio.
Overall, the ISP market today represents more than 80% of the public sector,
but, in the future, we expect this figure to decline as outsourcing catches
on. Through 1Q97, IDC believes that 7-15% of the private sector outsources
some portion of its remote access. The principal outsourcers are ISPs
(40-45%), interexchange carriers (10-20%), and RBOCs and local exchange
carriers (15-18%). This data will be further explored in depth in an upcoming
bulletin based on two recently conducted end-user surveys.
<TABLE>
<CAPTION>
Table 5
Remote Access Server End-User Revenue Forecast, Private vs. Public Sectors,
1996-2001
===================================================================================
1996 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Worldwide revenue (SM) 2,760.9 5,135.3 7,062.4 8,269.0 9,268.6 10,284.0
Growth (%) 86.0 37.5 17.1 12.1 11.0
Private share (%) 45.8 42.0 38.5 36.5 35.0 33.5
Revenue ($M) 1,264.5 2,156.8 2,719.0 3,018.2 3,244.0 3,445.1
Growth (%) 70.6 26.1 11.0 7.5 6.2
Public share (%) 54.2 58.0 61.5 63.5 65.0 66.5
Revenue ($M) 1,496.4 2,978.5 4,343.4 5,250.8 6,024.6 6,338.8
Growth (%) 99.0 45.8 20.9 14.7 13.5
- -----------------------------------------------------------------------------------
</TABLE>
Source: International Data Corporation, 1997
[LOGO] International Data Corporation -11-
<PAGE>
Figure 3
Worldwide RAS End-User Revenue Forecast by Private and Public Sectors,
1996-2001
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
[PLOT POINTS TO COME]
Source: International Data Corporation, 1997
Summary
In 1996, one- to four-port T1/PRI units took care of most ISP needs, but
greater stratification is needed going toward 2001.
An examination of the data indicates that by 2001, 88% of revenue will be
derived from PAS concentrators, up from 69% in 1996. On top of this data,
further analysis shows that the public sector offers the largest and
fastest-growing opportunity.
Going down the public road, public sector platforms should offer, at a
minimum, a two-T1/PRI capacity unit that can handle 48 modems. This platform
is considered capable of targeting small ISPs. A four-to eight-T1/PRI unit
covers the midrange-to-large classification of ISPs, and a T3 unit with 28 T1
capacity will handle the large-to-super-large, metropolitan region ISPs and
carriers building an outsource business. However, specific platform size is
only part of the equation, and ISPs have long been successfully stacking up
units to build impressively sized networks.
Perhaps more important than port capacity will be the need for vendors to
address the features, performance, pricing, network management and security,
quality and reliability, service and support, and end-to-end strategy issues
that are so inherent in the public sector.
- 12 - [LOGO] International Data Corporation
<PAGE>
AMENDMENT NO. 1
to
SOFTWARE AGREEMENT
between
LUCENT TECHNOLOGIES INC.
(formerly AT&T CORP.'s Systems and Technology Business)
and
ARIEL CORPORATION
dated
May 2, 1995
The above-referenced agreement is hereby amended by the parties as
follows:
1. All references to AT&T Corp. throughout the above-referereced agreement are
changed to Lucent Technologies Inc. and all references to AT&T throughout the
above-referenced agreement are changed to LUCENT;
2. Add a new WHEREAS clause as follows: --WHEREAS, LICENSEE is willing to
support any and all existing LUCENT LICENSED SOFTWARE users;--;
3. In Section 3.0 delete the text "twenty-four (24) months" and replace it
with -five (5) years from the date of signing by both parties of this
Amendment No.
1-;
4. In section 4.3 at line 2 after "above" insert a period and delete the
remainder of this section in its entirety;
5. In Section 4.0 add a new section 4.9 which reads as follows: --4.9 In
consideration of the extension of the Agreement, LICENSEE agrees to provide
any and all support required by existing LUCENT VCOS systems users for a
period of six (6) months pending completion of negotiations for an expanded
relationship with LICENSEE.-- and add a new section 4.10 which reads as
follows: -.4.10 LUCENT agrees to refrain from any licensing of the LICENSED
SOFTWARE to any third parties for a period of at least six (6) mouths pending
completion of negotiations for an expanded relationship with LICENSEE.--;
6. In Section 6.0 delete the present text in its entirety and substitute the
following new text:
--Lucent Tech./ Other Processors
80x86/Pentium/
Power PC
License Fee/copy $0.00 $1.00
(Any Quantity)
LICENSEE agrees to pay to LUCENT the total amount of royalties due at the end
of the six (6) month period commencing upon the execution of this Amendment.
In the event the aggregate amount of such royalties due does not include a
quantity of units in excess of 25k, then
<PAGE>
LICENSEE shall be permitted to accrue the quantity and make payment in the
next six (6) month period when the aggregate quantity reaches an amount in
excess of 25k units.-;
7. In Sections 11.1 and 11.2 change all references to AT&T IPM CORP to LUCENT
TECHNOLOGIES INC.,
8. In Section 15.0 delete this section in its entirety and substitute the
following --LUCENT will not provide any on-going support of the LICENSED
SOFTWARE.--;
9. In Exhibit B add to the definition of LICENSED PRODUCT(S) the following:
--Teradon and derivative products; and
VCOS object code.--; and
10.. In Exhibit C at the end of line 7 add the following --and Windows 3.11
and Windows `95--.
11. Except for the changes noted above, all other terms and conditions of the
above-referenced agreemnt remain in full force and effect.
This amendment shall be effective as of the latest of the dates indicated
below.
ARIEL CORPORATION LUCENT TECHNOLOGIES INC.
By: /s/ A. Agnello By: /s/ Sohail Khan
----------------------- -----------------------------
Name: A. AGNELLO Name: SOHAIL KHAN
Title: PRESIDENT Title: Strategy & Market Planning
Date: MARCH 19, 1998 Date: 3/13/96
<PAGE>
AMENDMENT NO. 2
to
SOFTWARE AGREEMENT
between
LUCENT TECHNOLOGIES INC.
(formerly AT&T CORP.'s Systems and Technology Business)
and
ARIEL CORPORATION
dated
May 2, 1995
The above-referenced agreement, as amended by Amendment No. 1, is hereby further
amended by the parties as follows:
1. In Section 4.9 change "six (6) months" to --twelve (12) months--;
2. In Section 4.10 change "six (6) months" to --twelve (12) months--; and
3. In Section 6.0 change the sentence that now reads "LICENSEE agrees to pay
to LUCENT the total amount of royalties due at the end of the six (6) month
period commencing upon the execution of this Amendment." to --LICENSEE agrees
to pay to LUCENT the total amount of royalties due at the end of each six (6)
month period commencing upon the execution of this Amendment.--.
Except for the changes noted above, all other terms and conditions of the
above-referenced agreement remain in full force and effect.
This amendment shall be effective as of September 13, 1996.
ARIEL CORPORATION LUCENT TECHNOLOGIES INC.
By: /s/ A. Agnello By: /s/ Sohail Khan
----------------------- -----------------------------
Name: A. AGNELLO Name: SOHAIL KHAN
Title: PRESIDENT Title: Strategy & Market Planning
Date: MARCH 19, 1998 Date: 3/13/96
<PAGE>
April 24, 1995
DSP32XX AND ROYALTY FEES FOR ARIEL
The following represents pricing for Ariel on DSP32XX devices and royalty fees
associated with the Software Agreement between Ariel Corp. and AT&T Corp. Upon
signature of the License Agreement, Ariel will pay a royalty fee (as outlined
below) with each DSP32XX purchase.
Per Device
Quantity DSP3210-60ns D5P3207-60ns D5P3207-72ns Royalty Fee
- -------- ------------ ------------ ------------ -----------
1st 10K Units $40.00 $36.00 $26.00 $ 0.00
Next 30K Units $35.00 $32.00 $23.00 $ 5.00
40.001 & Greater $32.00 $30.00 $21.00 $ 5.00
Prior to this Sofware Agreement going into effect, 3210-60ns prices will
remain $50.00, 3207-60ns prices at $46.00. and 3207-72ns prices at $33.00.
/s/ Maureen Russell
M. A. Russell
DSP Product Marketing
<PAGE>
SOFTWARE AGREEMENT
THIS AGREEMENT is made between AT&T CORP., a New York corporation, acting
through its AT&T Microelectronics business unit, having an office at Two Oak
Way, Berkeley Heights. New Jersey 07922 ("AT&T") and ARIEL CORPORATION, a
Delaware corporation, having an office at 433 River Road, Highland Park, New
Jersey 08904 ("LICENSEE"). The effective date of this Agreement is the later
of the dates of execution by the respective parties.
WHEREAS, AT&T has developed and owns LICENSED SOFTWARE; and
WHEREAS, LICENSEE desires to port LICENSED SOFTWARE from a Windows environment
to other operating system environments; and
WHEREAS, LICENSEE represents that it has in place facilities and an
organization to port, promote, market, distribute and support LICENSED
SOFTWARE, and wishes to distribute various ported versions of LICENSED
SOFTWARE to its customers; and
WHEREAS, AT&T is willing to grant access by LICENSEE to LICENSED SOFTWARE;
NOW, THEREFORE, in consideration of the mutual covenants set forth below, the
parties agree to the following terms and conditions:
1.0 DEFINITIONS
1.1 "LICENSED SOFTWARE" means AT&T's proprietary VCOS software package in
source code form, as specified in Exhibit A, and any object code versions
thereof, as also specified in Exhibit A.
1.2 "PRE-LOADING" means an AT&T approved process whereby applicable
object code versions of LICENSED SOFTWARE, without substantive modification,
are loaded into memory in LICENSEE PRODUCT, or copied into other storage media
prior to delivery by LICENSEE to any End-User or other third party. UPDATES to
LICENSED SOFTWARE may also be included.
1.3 "UPDATE" means a new release or edition of the current version of
LICENSED SOFTWARE that includes corrective actions, bug-fixes, or other
necessary modifications. Such term does not mean any new or later version of
LICENSED SOFTWARE that includes additional or enhanced functionality.
1.4 "LICENSEE PRODUCT" is defined in Exhibit B.
AT&T / ARIEL Proprietary
<PAGE>
1.5 "SUBSIDIARY" of a company means a corporation or other legal entity
(i) the majority of whose shares or other securities entitled to vote for
election of directors (or other managing authority) is now or hereafter
controlled by such company either directly or indirectly; or (ii) which does
not have outstanding shares or securities but the majority of whose ownership
interest representing the right to manage such corporation or other legal
entity is now or hereafter owned and controlled by such company either
directly or indirectly; but any such corporation or other legal entity shall
be deemed to be a SUBSIDIARY of such company only as long as such control or
ownership and control exists.
2.0 EXHIBITS
The following exhibits are attached hereto and made a part thereof:
Exhibit A: Summary of AT&T Licensed Software
Exhibit B: Software Distribution Rights
Exhibit C: Approved Operating Systems
Exhibit D: Minimum Requirements for End-user Software License
Agreement
3.0 TERM
This Agreement shall continue for a term of twenty-four (24) months,
unless earlier terminated in accordance with Section 17. LICENSEE's
obligations under Sections 9, 10, 14, 16 and 18 shall survive any termination
of this Agreement, including its expiration.
4.0 LICENSE GRANT
4.1 AT&T hereby grants to LICENSEE a personal, nontransferable, and
non-exclusive right to use and port, at LICENSEE's United States headquarters,
a source code version of LICENSED SOFTWARE to the operating systems identified
in Exhibit C, as amended from time to time by mutual agreement of the parties
hereto.
4.2 AT&T hereby further grants to LICENSEE a personal, nontransferable,
and non-exclusive right to reproduce, market, distribute, maintain and support
worldwide only object code versions of the ported LICENSED SOFTWARE to
End-User customers or other third parties in accordance with the minimum terms
and conditions set forth in Exhibit D.
4.3 No right is granted for the use of LICENSED SOFTWARE in source code
form for or by any third person except as provided above or for use of any
portion of LICENSED SOFTWARE in source code or object code form other than in
AT&T digital signal processors. AT&T grants LICENSEE the right of first
refusal to port VCOS to non-AT&T chips.
AT&T / ARIEL Proprietary
<PAGE>
-3-
4.4 LICENSEE may make those copies of LICENSED SOFTWARE necessary to the
use by LICENSEE for which rights are granted hereunder, provided that each
such copy contains any copyright and/or proprietary notice appearing on or in
the LICENSED SOFTWARE being copied.
4.5 LICENSEE agrees that it will not use or copy LICENSED SOFTWARE except
as authorized herein.
4.6 LICENSEE agrees that it will not develop and/or market a competitive
technology using techniques embodied in the LICENSED SOFTWARE during the term
of this Agreement and for a period of one (1) year following the expiration or
termination of this Agreement. AT&T agrees to forebear from developing,
marketing, distributing, maintaining and supporting any ported versions of the
LICENSED SOFTWARE for a period of one (1) year from the Effective Date of this
Agreement.
4.7 Certain software that may be included in LICENSED SOFTWARE may be
subject to third party patents. Third parties, of whom AT&T is aware, who may
maintain that they own pertinent patents are specified in Exhibit A. It is up
to LICENSEE to investigate and to obtain, at its own expense, any and all
third party licenses it needs or its customers need to utilize object code
versions of LICENSED SOFTWARE.
4.8 As general policy, AT&T does not recommend the use of any of its
products for medical or life support applications wherein a failure or
malfunction of the product may threaten life or cause injury and will not
knowingly license or sell its products for either such use. LICENSEE is not
authorized to license or furnish LICENSED SOFTWARE to customers whom LICENSEE
believes may intend to use LICENSED SOFTWARE for such applications except with
the prior written approval of AT&T.
5.0 SCOPE OF SOFTWARE ADAPTATIONS
5.1 The scope of changes to the LICENSED SOFTWARE by LICENSEE shall be
limited to:
5.1.1 Porting at LICENSEE's United States headquarters a source code
version of LICENSED SOFTWARE to the operating systems identified in
Exhibit C; and
5.1.2 Making enhancements for improved performance, including bug
fixes.
5.2 Except for those operating systems listed in Exhibit C, any other
adaptations of LICENSED SOFTWARE to other operating systems shall require
AT&T's approval in writing in the form of an amendment to this Agreement. Such
approval will not be unreasonably withheld.
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5.3 To ensure the quality associated with the LICENSED SOFTWARE for use
with AT&T digital signal processors. LICENSEE shall provide to AT&T beta test
versions of all adaptations in object code form for the sole purpose of
testing and evaluation by AT&T. The test period shall not exceed four (4)
weeks, after which AT&T shall return to LICENSEE all copies of beta test
versions of all adaptations in object code form provided by LICENSEE. In the
event that the adapted software fails to meet AT&T's quality standards for
software to be made generally available in the commercial marketplace, then
LICENSEE shall undertake commercially reasonable efforts to fix the adapted
software within a mutually agreed to time period.
6.0 FEES
License Fees for LICENSED SOFTWARE shall be specified by AT&T in a
separate written document and may be changed by AT&T upon written notice. Any
such writing shall become a part of this Agreement. Any increases in fees will
not exceed ten percent (10%) at any point in time and AT&T will give LICENSEE
at least six (6) months advance written notice of any such fee increase.
7.0 TAXES
Fees to be specified pursuant to Section 6.0 generally will not include
local, state or federal taxes. LICENSEE hereby agrees to pay all such taxes as
may be imposed upon LICENSEE or AT&T (other than taxes based on AT&T's income)
with respect to the marketing, reproduction, distribution, possession,
maintenance, support or use of LICENSED SOFTWARE pursuant to this Agreement.
8.0 DISTRIBUTION
Distribution rights granted to LICENSEE under this Agreement are
expressly specified in Exhibit B.
9.0 EXPORTS
LICENSEE hereby assures AT&T that it does not intend to and will not
knowingly, without the prior written consent (if required) of the Office of
Export Administration of the U.S. Department of Commerce. Washington, D.C.
20230, transmit, directly or indirectly;
(i) LICENSED SOFTWARE; or
(ii) any immediate product (including processes and services) produced
directly by or through the use of LICENSED SOFTWARE; or
(iii) any commodity produced by such immediate product if such immediate
product is a plant capable of producing a commodity or is a
substantial
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component of such plant:
to any group Q, S, W, Y, or Z country (or any national or resident of those
countries), as defined in the Export Administration Regulations of the U.S.
Department of Commerce.
10.0 CONFIDENTIALITY
10.1 LICENSEE agrees to keep LICENSED SOFTWARE (including methods and
concepts utilized therin) in confidence. LICENSEE shall ensure that an
obligation not to disclose confidential information is a part of the terms and
conditions of employment for its employees.
10.2 AT&T agrees to keep LICENSEE's proprietary information in
confidence. AT&T shall ensure that an obligation not to disclose confidential
information is a part of the terms and conditions of employment for its
employees.
10.3 The receiving party's obligations under this Section shall not apply
to any information relating to AT&T's LICENSED SOFTWARE (including any method
or concept utilized therein) or LICENSEE's proprietary information that:
(i) is or becomes available without restriction to the general public
by acts not attributable to the receiving party or its employees;
(ii) was rightfully in the receiving party's possession without
limitation on disclosure before disclosure hereunder to the
receiving party;
(iii) is rightfully disclosed to the receiving party by a third party
without restrictions on disclosure; or
(iv) is independently developed by the receiving party.
11.0 OWNERSHIP OF LICENSED SOFTWARE
11.1 LICENSED SOFTWARE is solely the property of AT&T IPM CORP. LICENSEE
understands and acknowledges that no ownership interest in LICENSED SOFTWARE
is transferred to LICENSEE or to any third party by virtue of this Agreement.
11.2 LICENSEE hereby grants to AT&T IPM CORP. all right, title and
interest in and to any and all ported versions of LICENSED SOFTWARE and
further including but not limited to any and all enhancements, UPDATES,
adaptations, modifications and improvements based on any ported version of
LICENSED SOFTWARE.
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11.3 After the one (1) year period specified in Section 11.3. AT&T may
contract with other parties for the development, marketing, distribution,
maintenance and support of software having functionality similar to the ported
versions of LICENSED SOFTWARE made by LICENSEE, or AT&T may develop, market,
distribute, maintain and support similar software independently. LICENSEE
shall not share any of its own confidential information with AT&T.
12.0 DISCLAIMER OF AT&T WARRANTIES
12.1 AT&T MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED. BY WAY
OF EXAMPLE, BUT NOT LIMITATION, AT&T MAKES NO REPRESENTATION OR WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT USE OF LICENSED
SOFTWARE WILL NOT INFRINGE ANY COPYRIGHT OR TRADEMARK OF A THIRD PARTY.
ADDITIONALLY, AT&T SHALL NOT BE HELD TO ANY LIABILITY WITH RESPECT TO ANY
CLAIM ON ACCOUNT OF, OR ARISING FROM, THE USE OF LICENSED SOFTWARE. AT&T IS
NOT AWARE OF ANY SUCH CLAIM BY ANY THIRD PARTY, EXCEPT AS SPECIFIED IN SECTION
4.7.
12.2 AT&T SHALL HAVE NO LIABILITY UNDER THIS AGREEMENT FOR ANY CLAIM OR
SUIT TO THE EXTENT THE INFRINGEMENT ARISES DIRECTLY FROM THE COMBINATION,
OPERATION, OR USE OF LICENSED SOFTWARE WITH DEVICES, PARTS, OR SOFTWARE NOT
SUPPLIED BY AT&T OR ITS SUBCONTRACTORS AND SUCH CLAIMS OF INFRINGEMENT WOULD
HAVE BEEN AVOIDED BUT FOR THE COMBINATION, OPERATION, OR USE OF THE LICENSED
SOFTWARE WITH SUCH DEVICES, PARTS, OR SOFTWARE.
13.0 LICENSEE WARRANTY
LICENSEE, on its own behalf, may warrant LICENSED SOFTWARE to its
customers as it deems appropriate. LICENSEE shall NOT provide any warranty to
its customers on behalf of AT&T with respect to LICENSED SOFTWARE.
14.0 NO POWER TO BIND AT&T
LICENSEE specifically assures AT&T that it will not extend, directly or
indirectly, any warranty or representation in the name of AT&T or purport to
bind AT&T in any way. LICENSEE further agrees that it will indemnify AT&T and
hold it harmless from any claim arising out of LICENSEE's exercise of any of
the rights granted in this Agreement.
15.0 LIMITED SUPPORT
AT&T will provide limited support, to LICENSEE only, in accordance with
AT&T's general support program for the source code version of LICENSED
SOFTWARE operating
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under the Windows environment. Under no circumstances will AT&T provide any
level of support for any of the ported versions of LICENSED SOFTWARE or any
object code versions of LICENSED SOFTWARE. Neither the execution of this
Agreement nor anything in it or in LICENSED SOFTWARE shall be construed as an
obligation upon AT&T to furnish any other assistance of any kind whatsoever,
or to provide any information or documentation.
16.0 LIMITATION OF LIABILITY
AT&T shall in no event be liable to LICENSEE or any third party for loss
of time, inconvenience, loss of use of any products or property damage caused
by LICENSED SOFTWARE in source or object code form or its failure to work, or
for any special, incidental or consequential loss or damages arising out of
the use of or inability to use LICENSED SOFTWARE in source or object code form
(whether in an action for or arising out of alleged breach of warranty,
alleged breach of contract, delay, negligence, strict liability or otherwise),
even if AT&T has been advised of the possibility of such damages. No action or
proceeding against AT&T may be commenced more than two years after the last
delivery, as specified in Exhibit D, by AT&T to LICENSEE of LICENSED SOFTWARE.
LICENSEE agrees to defend and indemnify AT&T from any and all claims, suits,
and liabilities (including attorney's fees) arising out of or resulting from
any actual or alleged act or omission on the part of LICENSEE, its authorized
third parties, employees or agents, in connection with the distribution of
LICENSED SOFTWARE to End-Users, including, without limitation, claims, suits
and liability for bodily or other injuries to End-Users resulting from use of
LICENSEE PRODUCT not caused solely by faults in LICENSED SOFTWARE as provided
by AT&T to LICENSEE.
17.0 TERMINATION FOR BREACH
AT&T may initiate termination of this Agreement for cause by giving to
LICENSEE sixty (60) days prior written notice specifying the reason for
termination, which termination shall occur unless such reason for termination
is cured within the sixty (60) day period. A right to terminate under this
Section 17.0 shall arise upon the happening of any of the following events:
(i) if LICENSEE becomes the subject of a bankruptcy petition filed in a
court in any jurisdiction, whether voluntary or involuntary; or a
receiver or a trustee is appointed for all or a substantial portion
of LICENSEE's assets; or LICENSEE makes an assignment for the
benefit of its creditors; or
(ii) if LICENSEE fails to perform substantially any material covenant,
obligation, representation or warranty under this Agreement
including but not limited to the timely payment of any license fees
specified under this Agreement.
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18.0 TERMINATION PROCEDURE
18.1 Upon termination of this Agreement, LICENSEE will promptly comply
with the termination procedures described herein, and shall certify in writing
to AT&T that the procedures described herein have been complied with.
18.1.1 Upon termination, the following procedures shall be executed
by LICENSEE within thirty (30) working days:
18.1.2 If applicable, LICENSEE will promptly return to AT&T, at
LICENSEE's expense and as instructed by AT&T, all AT&T-furnished copies
of LICENSED SOFTWARE and any reproductions thereof whether in ported or
unported form in its inventory. If this Agreement is terminated by AT&T,
AT&T will refund any payment made by LICENSEE for unopened, returned
copies in undamaged condition, but not freight, shipping and/or other
handling costs, as applicable.
18.1.3 If applicable, LICENSEE shall cease promotion, marketing,
reproduction, use, distribution, maintenance and support of LICENSED
SOFTWARE and destroy any copies in its inventory.
18.1.4 LICENSEE shall, at its expense, remove all copies of LICENSED
SOFTWARE and/or documentation from its distribution channels and destroy
such copies. Upon termination of this Agreement, any end user licenses
already granted by LICENSEE pursuant to Exhibit D shall not be affected.
18.1.5 LICENSED SOFTWARE and/or documentation shall be removed from
all LICENSEE PRODUCT not yet shipped to customers at the time of
termination and destroyed or returned to AT&T.
18.1.6 LICENSEE shall indemnify, hold harmless and defend AT&T
against any claims arising out of termination of this Agreement.
19.0 USE OF AT&T TRADEMARKS
19.1 LICENSEE recognizes AT&T's rights in its trademarks, service marks,
trade names and logos, including VCOS(R). Except as permitted by United States
trademark law and expressly provided herein, nothing in this Agreement shall
imply the grant to LICENSEE of a license to use (i) any trademark, service
mark, trade name or logo of AT&T or any of its affiliates in connection with
the advertising, licensing, marketing or any other use by LICENSEE of LICENSED
SOFTWARE, or (ii) any trademark, service mark, trade name or logo that is
confusingly similar to a name or mark used by AT&T or any of its affiliates.
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19.2 LICENSEE shall include, in its packaging, documentation, promotional
materials, advertising and, where applicable, installation screen
("materials") concerning all LICENSEE PRODUCTS, the following statement "AT&T
VCOS Software included." LICENSEE shall label disks "AT&T VCOS(R) Operating
System". Such statement or disk label shall be of a size, and in a location,
sufficient for reasonable visibility, but less prominent than LICENSEE's own
name and trademarks(s). All such materials shall be subject to AT&T's prior
approval before use by LICENSEE. LICENSEE shall submit two (2) copies of all
proposed materials to AT&T for such prior approval. AT&T will notify LICENSEE
either of its approval or any necessary remedial action in writing within
twenty (20) days of receipt of such material.
19.3 LICENSEE shall not represent, directly or indirectly, that any
product or service of LICENSEE is a product or service of AT&T or any of its
affiliates.
20.0 NOTICES
All notices required or permitted under this Agreement shall be in
writing and shall be deemed given: (i) when delivered personally; (ii) when
sent by confirmed telex or facsimile; (iii) five (5) days after having been
sent by registered or certified mail, return receipt requested, postage
prepaid; or (iv) one (1) day after deposit with a commercial overnight
carrier, with written verification of receipt. All communications will be sent
to the addresses set forth below. Either party may change its address by
giving notice pursuant to this Section 20.0.
if to AT&T: if to LICENSEE:
AT&T Corp. Ariel Corporation
AT&T Microelectronics 433 River Road
Wireless and Messaging Organization Highland Park, New Jersey 08904
Room 55A-310 Tel. No.: 908-249-2900
1247 South Cedar Crest Boulevard Fax No.: 908-249-2123
Allentown, PA 18103
Tel. No.: 610-712-3257
Fax No.: 610-712-2772
With a copy to:
AT&T Law Division
AT&T Microelectronics
Room 55C-1l
Two Oak Way
Berkeley Heights, NJ 07922
Fax No.: 908-771-4582
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21.0 AUTHORITY
AT&T and LICENSEE each represents and warrants to the other that it has
the right and power to enter into this Agreement, and that there are no
outstanding assignments, grants, licenses, encumbrances, obligations or
agreements, either written, oral or implied, inconsistent with any provision
of this Agreement.
22.0 FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in
performance of any part of this Agreement to the extent such delay or failure
is caused by fire, flood, explosion, war, strike, embargo, government action
or failure to act, civil or military authority, act of God, inability to
secure material or transportation facilities, act of omission of carriers or
other causes beyond its control whether or not similar to the foregoing.
23.0 HEADINGS
Section headings used in this Agreement are used for convenience only and
shall in no event be used for interpretation purposes.
24.0 NON-WAIVER
No failure by AT&T to enforce any provision of this Agreement shall
constitute a waiver or affect its right to require the performance thereof by
LICENSEE or affect the validity of any other provision.
25.0 ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the parties
and supersedes any and all prior oral or written agreements, memoranda,
letters of intent, representations or understandings by or between the parties
relating to the subject matter hereof, including any provision of any purchase
order to the extent inconsistent herewith.
26.0 MODIFICATIONS
This Agreement shall not be modified, altered, changed or amended in any
respect unless in writing signed by a duly authorized representative of each
of the parties hereto.
27.0 RESTRICTION ON ASSIGNMENT
The rights and obligations provided under this Agreement may not be
transferred or assigned by LICENSEE without the prior written consent of AT&T,
which consent shall not be
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unreasonably withheld. Any attempted assignment in contravention of this Section
27.0 shall be void and ineffective.
28.0 SEVERABILITY
In the event any provision of this Agreement should be held invalid or
unenforceable, the remaining provisions of this Agreement, and any and all
concurrent agreements pertaining to LICENSED SOFTWARE, shall remain valid.
29.0 CHOICE OF LAW
This Agreement shall be governed by, and construed in accordance with,
the law of the State of New York, excluding its choice of law rules.
30.0 DISPUTE RESOLUTION
30.1 If a dispute arises out of or relates to this Agreement, or the
breach, termination or validity thereof, the parties agree to submit the
dispute to a sole mediator selected by the parties or, at any time at the
option of a party, to mediation by the American Arbitration Association
("AAA"). If not thus resolved, it shall be referred to a sole arbitrator
selected by the parties within thirty (30) days of the mediation, or in the
absence of such selection, to AAA arbitration which shall be governed by the
United States Arbitration Act.
30.2 Any award made (i) shall be a bare award limited to a holding for or
against a party and affording such remedy as is deemed equitable, just and
within the scope of this Agreement; (ii) shall be without findings as to
issues or a statement of the reasoning on which the award rests: (iii) may in
appropriate circumstances include injunctive relief; and (iv) may be entered
in any court.
30.3 The requirement for mediation and arbitration shall not be deemed a
waiver of any right of termination under this Agreement and the arbitrator is
not empowered to act or make any award other than based solely on the rights
and obligations of the parties prior to any such termination.
30.4 The arbitrator may not limit, expand or otherwise modify the terms
of this Agreement.
30.5 This agreement shall be interpreted in accordance with the laws of
the State of New York, excluding its choice of law rules, and the place of
mediation and arbitration shall be New York City.
30.6 Each party shall bear its own expenses but those related to the
compensation and expenses of the mediator and arbitrator shall be borne
equally.
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30.7 A request by a party to a court for interim measures shall not be
deemed a waiver of the obligation to mediate and arbitrate.
30.8 The parties, their representatives, other participants and the
mediator and arbitrator shall hold the existence, content and result of
mediation and arbitration in confidence.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate originals through their duly authorized officials.
AT&T CORP.
----------------------------------------------------
Signature
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Printed Name
----------------------------------------------------
Title
----------------------------------------------------
Date
ARIEL CORPORATION
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Signature
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Printed Name
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Title
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Date
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EXHIBIT A
SUMMARY OF AT&T LICENSED SOFTWARE
1.0 LICENSEE RESPONSIBILITIES
1.1 As specified in Section 4.3 of the AT&T Software Agreement, certain
third parties, identified below, may maintain that they own patents pertinent
to LICENSED SOFTWARE. It is up to LICENSEE to investigate and to obtain, at
LICENSEE's expense, any necessary licenses before LICENSEE or any customer of
LICENSEE uses such software.
1.2 Applicable Third Parties for MPEG Audio Encode and Decode:
AEG-Telefunken JVC
Bell Communications Research (Bellcore) Kokusai Denshin Denwa (KDD)
British Telecom (BT) NEC
CCETT (France) Philips N.V.
Compression Labs, Inc. (CLI) PictureTel
Fraunhofer-Gesellschaft (FhG) Sharp
Hitachi Sony
Instit Fur Rundfunktechnik Gmbh (IRT) Vistacom
Intel
2.0 AT&T LICENSED SOFTWARE
2.1 AT&T agrees that the version of LICENSED SOFTWARE described herein
shall be equivalent in functionality, within the limits of the capabilities of
LICENSEE PRODUCT, to the "standard" LICENSED SOFTWARE furnished by AT&T. This
Section 2.0 specifies the applicable LICENSED SOFTWARE covered by the
Agreement.
2.1.1 Source Code
DSP Source Code sufficient to build the following VCOS/DSP3210 modules:
VCOS OS Modules: os, schedule
Debugger Modules: bp, bpsim, iostm
Speech Coding: sbcl6e, sbcl6d, sbc24e, sbc24d
Caller ID: cid, cidmon
Call Progress Detection: cpd_lpc, cpd, cpdmon, silmon, pulsdial
Sample Rate Conversion (all): src*
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Host Source Code sufficient to build the following APIs and Utilities:
VCAS: Main VCOS Host API VRM: VCOS Resource Manager VTSP: VCOS TAPI
API Service Provider LLA: VCOS WAV API Service Provider VCSIM
Simulator VCD Debugger VCC C Compiler TaskWalk Utility Vcosify Utility
coffdump Utility d32ar Archiver d32as Assembler d32conv Utility d32cpp
Preprocessor d32dis Disasembler d32dump Utility d32hex Utility d321d
Utility d32make Utility d32nm Utility d32optim Utility d32sect Utility
d32size Utility d32strip Utility d32trans Utility
VCOS modem controller software
2.1.2 Object Code
DSP Binary:
All DSP binary as shipped in V1.21 VCOS 2/9/95 release of VCOS Runtime
Classic, and associated SDK, MDK, HDK development kits.
2.1.3 Documentation
Document Source:
SDK Manual
MDK Manual
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HDK Manual
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3.0 GRANT OF DISTRIBUTION RIGHTS
3.1 AT&T hereby grants to LICENSEE a worldwide, non-transferable, and
non-exclusive right to reproduce and distribute, and authorize third parties
to distribute, subject explicitly to the restrictions of this Exhibit B,
copies of LICENSED SOFTWARE in object code form only. LICENSEE shall require
that all authorized third parties agree in writing (i) to comply with the
terms and conditions of this AT&T Software Agreement, and (ii) not to make any
copy or copies of LICENSED SOFTWARE. LICENSEE shall assert its best efforts to
enforce such written agreements.
3.2 LICENSEE and authorized third parties may distribute LICENSED
SOFTWARE in object code form only and only with LICENSEE PRODUCT (or included
in LICENSEE PRODUCT through PRE-LOADING) to any End-User and only in
combination with a written agreement supplied by LICENSEE which either (i) is
signed by the End-User, or (ii) is placed on the package containing LICENSED
SOFTWARE that is fully visible to the End-User and that the End-User accepts
by opening the package, or (iii) where LICENSED SOFTWARE is included in
LICENSEE PRODUCT through PRE-LOADING, is (1) referenced in a sticker on
LICENSEE PRODUCT which is visible to an End-User before the End-User opens the
package containing LICENSEE PRODUCT, and (2) is placed on a package containing
End-User documentation that is fully visible to the End-User and that the
End-User accepts by opening the package containing such documentation. Such
written agreement shall contain provisions fully consistent with those set
forth in Exhibit D. AT&T may, at its option require that such written
agreement be submitted for prior AT&T review and approval, which approval
shall not be unreasonably withheld. AT&T may also, at its option, revise any
provision or provisions of Exhibit D upon thirty (30) days' written notice to
LICENSEE.
3.3 LICENSEE shall distribute one (1) copy only of LICENSED SOFTWARE in
object code form only for each LICENSEE PRODUCT provided to an End-User;
provided however, in the course of furnishing to End-Users UPDATES (not
providing additional functionality) of LICENSED SOFTWARE, LICENSEE may
distribute additional copies of LICENSED SOFTWARE to such End-Users where such
distribution is intended to completely replace the previously distributed copy
of LICENSEE PRODUCT.
3.4 LICENSEE shall ensure that all copies of LICENSED SOFTWARE
distributed or copied pursuant to this Section 3.0 contain all relevant AT&T
trademark and copyright notices.
3.5 For each copy of LICENSED SOFTWARE distributed by LICENSEE or
authorized third parties pursuant to this Section 3.0, LICENSEE shall pay AT&T
the fees pursuant to the terms thereof, except for any replacement copies
provided pursuant to Section 3.3 above.
3.6 If and when AT&T makes UPDATES or other new versions of LICENSED
SOFTWARE generally commercially available, AT&T will use reasonable efforts to
create and/or, at LICENSEE's expense, lend all reasonable assistance and
authority to LICENSEE so as
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to enable LICENSEE to create, a new version of LICENSEE PRODUCT for
distribution under the terms and conditions of this Exhibit B.
3.7 LICENSEE shall, on a quarterly basis, provide AT&T, at Wireless and
Messaging Organization, Room 55A-310, 1247 South Cedar Crest Boulevard,
Allentown, Pennsylvania 18103, a complete and current listing of third parties
authorized to distribute LICENSED SOFTWARE. AT&T shall hold such information
confidential and use such solely for the purpose of assisting AT&T in
marketing and further development of LICENSED SOFTWARE. Such listing shall be
accompanied by an accounting for all copies of LICENSED SOFTWARE made by
LICENSEE during the preceding quarter.
3.8 If an AT&T-provided sign-on logo and/or trademark notice is provided,
LICENSEE shall display such as part of the LICENSEE sign-on procedure for a
reasonable time to the End-User each time the End-User begins using (e.g.:
signs on, logs on, or activates) LICENSED SOFTWARE. Such AT&T-provided sign-on
notice may change with future LICENSED SOFTWARE. Any such changes shall be
provided to LICENSEE part of such future revisions of LICENSED SOFTWARE.
3.9 AT&T reserves the right to inspect LICENSEE's accounting and record
keeping materials applicable to LICENSED SOFTWARE, upon reasonable prior
written notification of not less than three (3) business days to the
LICENSEE's address in Section 19.0 of the AT&T Software Agreement for the
purpose of assuring compliance with these provisions. Such audit procedures
shall be in conformance with reasonable accepted practices. Such audits shall
be performed no more frequently than twice per calendar year.
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EXHIBIT C
APPROVED OPERATING SYSTEMS
Ariel is granted rights to develop VCOS products for the following host UNIX
and UNIX-derivative operating system environments.
SysV, Novell, SCO, Linux, Interactive, Xinu, SunOS, Solaris, Ultrix, OSF,
VMS VxWorks, pSOS, OS9, LynxOS, VRTX, BE, SGI, BSDI, UnixWare and QNX.
Ariel is granted rights to develop VCOS products for the following OEM
proprietary operating system environments.
IBM OS/2, IBM OS/2 Warp, Amiga OS, Windows NT and Apple OS
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EXHIBIT D
MINIMUM REQUIREMENTS FOR END-USER SOFTWARE LICENSE AGREEMENT
This Exhibit D describes the MINIMUM AT&T requirements for an End-User
software license agreement to be provided by LICENSEE to its customers in lieu
of an AT&T-provided End-User Software License Agreement (the "End-User
Agreement") for use in accordance with Exhibit B.
1.0 OWNERSHIP OF LICENSED SOFTWARE
Each End-User Agreement shall provide that LICENSED SOFTWARE is owned by
AT&T and/or its suppliers, that it is protected by United States and
international copyright laws and contains proprietary information protected by
law, and that nothing in the End-User Agreement constitutes a waiver by AT&T
of its rights under any copyright law or treaty or any other law in any
country.
2.0 LICENSE GRANT
2.1 LICENSEE may grant each End-User a personal, non-transferable and
nonexclusive right to use one (1) copy of LICENSED SOFTWARE in the End-User's
country only; on or with a single terminal connected to a single computer
(CPU) at a time. No right may be granted to use LICENSED SOFTWARE on a network
server; for such purposes the End-User must obtain a version of LICENSED
SOFTWARE configured for network usage and agree to the terms and conditions of
a separate Network LICENSED SOFTWARE License Agreement. The End-User may make
a single archive copy of LICENSED SOFTWARE for personal use only, provided
such copy contains the same copyright notices and proprietary markings,
including diskette markings, appearing on the original LICENSED SOFTWARE. Any
other use of LICENSED SOFTWARE or export of LICENSED SOFTWARE not authorized
by AT&T shall automatically terminate the License to the End-User.
2.2 Each End-User must agree not to reverse assemble, reverse compile,
reverse engineer, disassemble, sublicense, rent, lease, disclose or assign
LICENSED SOFTWARE and not to use, copy, modify, merge or transfer copies of
LICENSED SOFTWARE or create derivative works from LICENSED SOFTWARE, or make
copies of LICENSED SOFTWARE, except as provided in the End-User Agreement.
2.3 If an End-User ceases using LICENSED SOFTWARE or if the End-User's
right to use LICENSED SOFTWARE is terminated, all LICENSED SOFTWARE, together
with any archive copy thereof, shall either be returned to LICENSEE or
destroyed.
AT&T / ARIEL Proprietary
<PAGE>
- 22 -
3.0 LIMITED WARRANTY
LICENSEE may extend to End-Users a "standard" End-User limited software
warranty as it deems appropriate. LICENSEE shall not provide any warranty to
End-Users on behalf of AT&T with respect to LICENSED SOFTWARE.
4.0 MAINTENANCE
Maintenance for all software shall be provided by LICENSEE. AT&T shall
have no obligation to provide any assistance whatsoever to LICENSEE's End-User
or others.
5.0 EXCLUSIVE REMEDIES AND LIMITATIONS OF LIABILITIES
5.1 LICENSEE shall require End-Users to agree that their sole remedy for
loss and/or damage caused by any defect or failure in LICENSED SOFTWARE,
regardless of the form of action, shall be limited to the replacement of
LICENSED SOFTWARE or refund of the license fee by LICENSEE, except for a right
to claim damages for bodily injury to any person.
5.2 Neither AT&T nor its affiliates, contractors, suppliers or agents
shall be liable for any indirect, incidental or consequential damages
(including loss of profits, revenues or data) sustained or incurred in
connection with the use, or inability to use, software or for damages due to
causes beyond the reasonable control of such entities.
6.0 UNITED STATES GOVERNMENT RESTRICTED RIGHTS
LICENSED SOFTWARE is provided to agencies of the U.S. Government only with
RESTRICTED RIGHTS. Use, duplication or disclosure by the U.S. Government and
its contractors is subject to restrictions set forth in subdivision (g) (3) of
the Rights in Data - General clause in Volume 48 of the Code of Federal
Regulations, Section 52.227-14, Art. III, or in subdivisions (c) (1) and (2)
of the Rights in Technical Data and Computer Software clause at Section
252.227-7013, or others, as applicable. The contractor/manufacturer is AT&T
Corp., AT&T Microelectronics, Two Oak Way, Berkeley Heights, New Jersey 07922.
7.0 EXPORT
End-Users must acknowledge that LICENSED SOFTWARE is subject to export
restrictions under U.S. Export Administration Regulations and international
arrangements of the U.S. Government. Each End-User must agree not to export
LICENSED SOFTWARE outside the End-User's country without obtaining prior
written approval from AT&T and conforming with all such U.S. Government
regulations and arrangements.
AT&T / ARIEL Proprietary
<PAGE>
TERMINATION AGREEMENT
AGREEMENT made this 12th day of September 1997, between ARIEL
CORPORATION, a Delaware corporation, hereinafter called the "Employer," and
Jeffrey Sasmor, hereinafter called the "Employee."
WHEREAS. Employee and Employer entered into a written agreement dated
January 1, 1997 (the "Employment Agreement"); and
WHEREAS, on February 19, 1997 Employee executed a "Non-Competition,
Non-Disclosure and Non-Solicitation Agreement" which is hereinafter referred
to as the "Non-Compete Agreement"; and
WHEREAS, pursuant to the terms of the Employment Agreement, Employee
would be entitled to a payment in the amount of two (2) years base salary upon
termination of his employment; and
WHEREAS, the Employee and Employer now desire to mutually terminate the
Employment Agreement and all employment thereunder and to modify the terms and
provisions of the Non-Compete Agreement under the terms and conditions
contained herein;
NOW THEREFORE, in consideration of their mutual promises set forth
herein, the sufficiency of which is hereby acknowledged by the parties hereto,
the parties hereby agree as follows:
1. Termination of Employment and Employment Agreement. Employer and
Employee hereby mutually agree that the employment of Employee by
Employer is hereby terminated, which termination shall be effective as
of September 26, 1997 (the "Termination Date") and that the Employment
Agreement dated January 1, 1997 is hereby mutually terminated as of
the Termination Date. The termination of employment hereunder shall be
deemed to be a termination of employment "without cause" as such term
was utilized in the Employment agreement. The terms and conditions of
this Agreement shall be deemed irrevocable upon the execution hereof
by Employer and Employee, except upon the mutual agreement of both
parties.
2. Compensation to Employee. In consideration for Employee executing
this Agreement and foregoing certain rights to compensation he would
have under the Employment Agreement, Employer shall pay the
following compensation to Employee:
A. Final Payroll Period(s) from execution of this agreement
through Termination Dare. Employer will pay Employee
compensation for the Final Payroll Period or periods at his
current base pay rate, less federal and state tax withholding
and FICA taxes.
B. Vesting of Stock Options. All of the following stock options in
the Employer's Company stock (NASDAQ:ADSP) shall be deemed
currently and completely vested and immediately exercisable.
Number of 0ptions Exercise Price
============================================
75,750 $2.45
--------------------------------------------
40,000 $7.125
--------------------------------------------
C. Additional Compensation. In addition to payment for the Final
Payroll Period (2A), Employer shall also pay to Employee
nineteen months salary at the base rate specified in the
Employment Agreement. This additional compensation shall be
paid on the date or dates specified:
i. On the date hereof, payment of Eighty Thousand and no/lO0
Dollars ($80,000.00). Employee shall not perform any
services for this compensation.
ii. The Remaining Compensation is $205,000. Employee shall not
perform any services for this compensation. This sum will be
paid in two equal installments on January 2, 1998 and July
1, 1998. Employer shall pay this amount to Employee in cash.
In the event that the Employer is acquired, merged with
another company, or is a party to some other type of
business reorganization prior to July 1, 1998, then the
amount still due of the Remaining Compensation will be paid
in cash on the date of consummation of such acquisition,
merger, or reorganization.
D. Reimbursement of Business Expenses. On the termination date,
Employer will pay or have paid all outstanding business
expenses as final reimbursement to Employee. Employer warrants
that it will assume responsibility for all amounts due to third
parties insofar as such amounts are related to business
expenses incurred by Employee, and for business accounts
instantiated for the Employer by the Employee.
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<PAGE>
3. Return of Credit Cards. Employee hereby acknowledges and represents
that he has returned to Employer all credit cards furnished for his
use. Employee hereby agrees not to use said credit cards past the
Termination Date.
4. Non-Compete Agreement. Employer and Employee agree that the terms of
the Non-Compete Agreement shall continue in full force and effect
except, (i) Section 2 thereof is hereby modified to permit Employee's
continued use of the items described in Section 7 hereof; and, (ii)
Section 3 thereof (entitled "Solicitation of Customers;
Non-Competition") is hereby DELETED in its entirety and of no force or
effect; and, (iii) Section 4 thereof ("Assignment to Company") is
modified to delete the phrase "or other relationship with the
Company".
5. Resignation of Office. On the Termination Date, Employee shall
resign as an officer of Employer, but shall continue to serve as a
Director and may continue after the date hereof to again seek
reelection to the Board of Directors if he desires.
6. Insurance. Employer shall continue, at its sole cost and expense, the
presently existing health insurance and dental coverage for Employee
and his family through and including December 31, 1998. In the event
that Employer cannot for any reason continue Employee and his family
on the Employer's group policy it agrees to immediately reimburse
Employee for the cost of obtaining similar coverage on a private,
individual, or family basis. On the Termination Date, Employer may
terminate any existing life insurance and group disability coverage
currently maintained for Employee. Employer agrees to execute such
additional instruments and/or documentation after the date hereof to
carry out the terms and conditions of this paragraph.
7. Continued Services, Use of Equipment, and Software License. Employee
shall after the termination date be permitted to utilize Employer's
CAD libraries for non-competitive products. For a period of six (6)
months after the Termination Date, Employee shall be permitted at no
charge to continue using Employer's voice-mail system, and to have
E-mail forwarded. Employer gives to Employee a fully-paid,
royalty-free, non-exclusive, unlimited source- and object-code license
to the software technology embodied in the "SDI," "BUG-56," and
"DSP-56 SCSI DRIVER" products. Employer agrees to execute such
additional documents and instruments that may be necessary to carry
out the provisions of this paragraph.
8. Debts. On the date hereof, Employer agrees that Employee has
discharged all outstanding debts, if any, to Employer.
9. Default. In the event that either party shall default in the
performance of this Agreement, the parties hereby agree that either
party may seek damages as may be permitted by law and/or the
enforcement of this Agreement by specific performance.
10. Amendments. This Agreement may not be modified, altered, amended,
changed, waived, or terminated, except pursuant to a writing signed
by the party to be charged herewith.
ii. Notices. Any and all notices and other correspondence required or
permitted to be given hereunder shall be in writing and shall either
be personally delivered or sent by United States certified or
registered mail, return receipt requested, with full postage prepaid
and addressed to the parties at their respective addresses set forth
(or to such other address as the parties may from time to time
designate by notice to the others given in the foregoing manner) and,
if so mailed as aforesaid, shall be deemed effectively given and
received upon mailing.
12. Entire Agreement. This writing contains the entire agreement of the
parties hereto, and no agreements, promises, covenants,
representations, warranties, or indemnities have been made or relied
upon by any of them other than those that are expressly herein set
forth.
13. Binding Effect. This agreement shall be binding upon and inure to
the benefit of the successors and assigns of the Employer, and the
heirs, representatives, and beneficiaries of the Employee.
14. No Waiver. The failure by any party hereto to object or take
affirmative action with respect to any conduct of any other party
which is in violation of this Agreement shall not constitute, nor be
construed as, a waiver thereof, or of any future breach or
subsequent wrongful conduct.
15. Captions. All paragraph headings used herein are included for the
convenience of reference purposes only and shall be accorded no
consideration in the interpretation of the provisions, terms and
conditions hereof.
2
<PAGE>
16. Multiple Counterparts. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed to be an original
hereof, but all of which, when taken together, shall constitute one
and the same instrument, and, in making proof of this Agreement, it
shall not be necessary for any party to produce or account for one
(1) such counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this
Termination Agreement the day and year first above written.
EMPLOYER:
Ariel Corporation, a Delaware Corporation
By: /s/ Brain Hoerl , as
- ----------------------------- ----------------------------------
Title: PRESIDENT
- ----------------------------- -------------------------------
Witnesses
EMPLOYER:
/s/ Jeffrey Sasmor
- ----------------------------- --------------------------------------
Jeffrey Sasmor
- -----------------------------
Witnesses
STATE OF NEW JERSEY )
COUNTY OF __________________ )
BEFORE ME personally appeared BRAIN HOERL as PRESIDENT of Ariel
Corporation, A Delaware Corporation, to me well known and known to me to be
the person described in and who executed the foregoing instrument, and
acknowledged to and before me that he executed said instrument for the
purposes therein expressed.
STATE OF NEW JERSEY )
COUNTY OF ILLEGIBLE )
BEFORE ME personally appeared Jeffrey Sasmor, to me well known and known
to me to be the person described in and who executed the foregoing instrument,
and acknowledged to and before me that he executed said instrument for the
purposes therein expressed.
/s/ Stephen E. Cook
------------------------------
NOTARY PUBLIC
State of New Jersey at Large
My commission expires: 5/2/2002
STEPHEN E. COOK
Notary Public of New Jerseyy
My Commission Expires May 2, 2002
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<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
December 19, 1997
