<TABLE>
<CAPTION>
<S> <C>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 Commission file number: 0-25326
Ariel Corporation
(exact name of registrant as specified in its charter)
Delaware 13-3137699
(State of incorporation) (IRS employer identification number)
2540 Route 130
Cranbury, New Jersey 08512
(Address of principal executive offices)
609-860-2900
(Telephone number, including area code)
--------------------------------------------
Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.001 par value 9,229,125 shares outstanding
as of September 30, 1997
Documents Incorporated by Reference: None
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Ariel Corporation
Index
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
--------------------
A. Balance sheets - September 30, 1997 and December 31, 1996
B. Statements of operations for the three and nine
months ended September 30, 1997 and 1996.
C. Statements of cash flows for the nine months ended
September 30, 1997 and 1996.
D. Notes to financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
-------------------------------------------------------------------------------------
Part II. Other Information
- --------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ARIEL CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
--------------------- ---------------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $5,057,362 $4,626,583
MARKETABLE SECURITIES 0 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 ACCUMULATED 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 0
NOTES PAYABLE, RELATED PARTIES 0 154,021
ROYALTIES PAYABLE 67,327 82,571
DEFERRED REVENUES 765,431 0
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 4,010,107 3,904,169
NOTES PAYABLE - LONG TERM 2,400,000 0
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
===================== =====================
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
================= ================== ================= ===============
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)
================= ================== ================= ===============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1997 1996
================== =================
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 0
Provision for doubtful accounts 30,000 30,000
Provision for inventory obsolescence 85,000 30,000
Non-cash compensation expense 134,117 0
(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 0
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 0
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 0
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 0 768,000
------------------ -----------------
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
================== =================
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.
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
5
<PAGE>
Ariel Corporation
Notes to Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included herein have been prepared by the Company,
pursuant to the Rules and Regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that the disclosure contained herein is adequate to
make the information presented not misleading. The financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-K for the year ended December 31, 1996. The year end
balance sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
As of September 30, 1997, the Company had working capital of $6,686,867,
including cash and cash equivalents of $5,057,362. The financial statements have
been prepared on a going-concern basis, which contemplates realization of assets
and liquidation of liabilities in the ordinary course of business. The Company
expects to incur costs and expenses in excess of expected revenues during the
ensuing six months as the Company continues to execute its business strategy in
the Remote Access market. There is no assurance that the Company will generate
sufficient cash flow from product sales to liquidate liabilities as they become
due. Accordingly, the Company may require additional funds to meet planned
obligations through December 31, 1998 and will seek to raise such amounts
through a variety of options, including equity financing, proceeds from the sale
of the Horizon product and team, borrowings under the existing Revolver, and the
expected future cash flows from operations. In the event the Company is unable
to 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.
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.
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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:
- 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.
- 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.
- $3 million is outstanding at September 30, 1997. Interest rate in
effect at September 30, 1997 was 11.66%.
- $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:
- 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.
- Interest rate is based on the prime rate plus 2.50 percent as of
the date the revolver is utilized.
- Available line of credit based on a formula of eligible accounts
receivable and inventory.
- As of September 30, 1997, this facility has not been utilized.
7
<PAGE>
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:
- 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.
- 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.
- 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.
- Gross Profit Margin / Operating Profit (Loss) Percentage / Net Income
(Loss) Before Taxes Percentage - The Gross Profit Margin, Opearating
Profit (Loss)Percentage and the Net Income (Loss) Before Taxes
Percentage must meet specified thresholds for the fiscal year ended
December 31, 1997 and each fiscal year thereafter as specified in
the credit agreement.
In addition, the credit agreement includes a material adverse effect
clause, whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions (financial or otherwise) are deemed to have a material
adverse effect on the Company or its ability to meet its obligations.
In anticipation of possible noncompliance of certain financial covenants at
December 31, 1997, Transamerica has given the Company an unconditional waiver
with respect to each of these financial covenants for the fiscal year ending
December 31, 1997, with the exception of the accounts receivable collection
period for which the Company is and expects to be in compliance. Additionally,
Transamerica has agreed to waive the minimum cash on hand covenant through
December 31, 1998, which allows the Company to use all of its cash, as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September 30, 1997 and its 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 occurence of a material adverse event is
remote.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
--------------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
- -----------------------------------
The following table sets forth, for the periods indicated, the percentage
relationship that certain items of the Company's results of operations bear to
total sales.
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------- -------- -------- -------
Sales 100% 100% 100% 100%
Cost of goods sold 54 50 55 51
----------- ---------- ---------- ---------
Gross Profit 46 50 45 49
Expenses:
Sales and marketing 38 27 35 33
General and administrative 35 28 32 35
Research and development 89 48 77 48
Restructuring Charge 12 - 4 -
----------- ---------- ---------- ---------
Total Operating Expenses 174 103 148 116
Loss from operations (128) (53) (103) (67)
Interest Income 2 5 3 6
Interest Expense (4) * (1) *
Other (expense) Income * 1 1 *
----------- ---------- ---------- ---------
Loss before income taxes (130) (47) (100) (61)
Income taxes - - - -
=========== ========== ========== =========
Net Loss (130)% (47)% (100)% (61)%
=========== ========== ========== =========
* Total less than 1%
</TABLE>
9
<PAGE>
Three months ended September 30, 1997 as compared to three months ended
- --------------------------------------------------------------------------------
September 30, 1996
------------------
Net Sales
Worldwide sales were $3,044,843 for the three months ended September 30,
1997, a decrease of $715,524 compared to net sales of $3,760,367 for the three
months ended September 30, 1996. Domestic sales were $2,860,303 for the three
months ended September 30, 1997 compared to $ 3,326,217 for the three months
ended September 30, 1996. The decrease of $465,914 in domestic sales is solely
attributable to no additional shipments of a digital signal processing ("DSP")
OEM product that accounted for 36% of sales in the third quarter of 1996. All
outstanding purchase orders for this customer were completed during the first
quarter of 1997. Export sales were $184,540 for the three months ended September
30, 1997 compared to $434,150 for the three months ended September 30, 1996.
Gross Profit
Gross profit decreased by $464,864 or 25% to $1,409,452 for the three
months ended September 30, 1997 from $1,874,316 for the three months ended
September 30, 1996. Gross profit margin was 46% for the three months ended
September 30, 1997 compared to 50% for the three months ended September 30,
1996. The decrease in gross profit margin as a percent of sales reflects the
continued shift in product mix from sales of higher margin DSP OEM product to
shipments of the Company's T1-Modem products which initially contained higher
material costs for certain components. Such component costs have been reduced in
recent months and gross margins have increased to 49% in August 1997 and 52% in
September 1997.
Sales and marketing
Sales and marketing expenses were $1,157,894 or 38% of sales for the three
months ended September 30, 1997 compared to $1,024,198 or 27% of sales for the
three months ended September 30, 1996. The increase of $133,696 or 13% reflects
increased marketing expenses in conjunction with the introduction of the RASCAL
product line and an increase in trade show expenses related to participation in
the NT WINDOWS show. Such increases were offset by a reduction in sales
commissions due to the decrease in sales and a reduction in advertising expenses
related to the Company's DSP OEM products.
General and administrative
General and administrative expenses were $1,080,047 for the three months
ended September 30, 1997 compared to $1,045,844 for the three months ended
September 30, 1996. The increase of $34,203 or 3% related to an increase in
legal expenses in conjunction with various projects related to the Company's
ADSL product group and an increase in consulting expense related to certain
compensation issues offset by a reduction in various expenses, most notably
recruiting expense.
10
<PAGE>
Research and Development
Research and development expenses were $2,714,236 for the three months
ended September 30, 1997 compared to $1,806,204 for the three months ended
September 30, 1996, and increase of $908,032. Salaries and wages increased
approximately $334,000 reflecting the hiring of additional engineers to meet
internal product development demand related to Data Communications and the
Communications Systems Group ("CSG"). Additionally, expenses related to outside
contract labor increased by approximately $103,000 for certain research and
development projects related to forward looking technologies.
Restructuring Charge
In September 1997 the Company announced a reduction in workforce of 11
employees. Additionally, 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. 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
telecommunication 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 decisions
to focus on the Remote Access Server ("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 ADSL carrier class product does not fit well into the
Company's markets and customer base.
The Company has incurred approximately $4.9 million in costs and expenses
on a cumulative basis from January 1, 1996 through September 30, 1997, related
to this product effort. For the nine months ended September 30, 1997, costs and
expenses approximate $3.1 million for such product. The Company expects to incur
approximately $1.0 million of costs and expenses in the fourth quarter of 1997
with respect to this product. The Company is currently in discussion with a
number of companies concerning a purchase of the Horizon product and team, but
no definitive sale agreement has been reached as of October 31, 1997.
For the foregoing reasons, the Company incurred a net loss of $(3,971,722)
for the three months ended September 30, 1997 compared to a net loss of
$(1,765,142) for the three months ended September 30, 1996.
11
<PAGE>
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 nine
months ended September 30, 1996. The increase in domestic sales for the nine
months ended September 30, 1997 reflects increased shipments of the Company's
T1-Modem and CTI Modem products offset by decreased shipments of various DSP OEM
products. Export sales were $782,447 for the nine months ended September 30,
1997 compared to $1,336,752 for the nine months ended September 30, 1996.
Gross Profit
Gross profit increased $168,441 or 4% to $4,528,272 for the nine months
ended September 30, 1997 compared to $4,359,831 for the nine months ended
September 30, 1996. Gross profit margin as a percentage of sales was 45% for the
first nine months of 1997 compared to 49% for the first nine months of 1996. The
decrease is the result of a shift in product mix from DSP OEM products to
shipments of Data Communication 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.
12
<PAGE>
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 work force of 11
employees. Additionally, 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. As a result of the
reduction in work force 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
telecommunication 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 decisions
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.
The Company has incurred approximately $4.9 million in costs and expenses
on a cumulative basis from January 1, 1996 through September 30, 1997, related
to this product effort. For the nine months ended September 30, 1997, costs and
expenses approximate $3.1 million for such product. The Company expects to incur
approximately $1.0 million of costs and expenses in the fourth quarter of 1997
with respect to this product. The Company is currently in discussion with a
number of companies concerning a purchase of the Horizon product and team, but
no definitive sale agreement has been reached as of October 31, 1997.
13
<PAGE>
Liquidity and Capital Resources
On June 12, 1997, the Company announced it had completed a $10 million
credit facility with Transamerica Business Credit Corporation's Technology
Finance Division, of Farmington, Connecticut. This facility provides a
five-year, $6.0 million term loan and a three-year, $4.0 million revolving
credit facility ("Revolver"). The term loan provides for an immediate advance of
$3.0 million and a second advance of $3.0 million upon achievement of any one of
certain milestones such as profitability, net proceeds of at least $7 million
from the sale of common stock, or achievement of a significant strategic partner
relationship. The Revolver provides for up to $4.0 million in advances based on
a formula of eligible accounts receivable and inventory. This Revolver can be
increased to $7.0 million in the event that the Company achieves one of the
milestones, but elects not to draw the second advance under the term loan.
Additionally, the Revolver can be extended for two additional one-year periods.
As of September 30, 1997, there was $3.0 million outstanding under the term loan
and there were no 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 ending December
31, 1997 and $4.0 million during the fiscal year ended December 31, 1998 and
$4.5 million thereafter.
In addition, the credit agreement includes a material adverse effect
clause, whereby Transamerica can accelerate the due date of the loan if certain
changes in conditions (financial or otherwise) are deemed to have a material
adverse effect on the Company or its ability to meet its obligations.
In anticipation of possible noncompliance of certain financial covenants at
December 31, 1997, Transamerica has given the Company an unconditional waiver
with respect to each of these financial covenants for the fiscal year ending
December 31, 1997, with the exception of the accounts receivable collection
period for which the Company is and expects to be in compliance. Additionally,
Transamerica has agreed to waive the minimum cash on hand covenant through
December 31, 1998, which allows the Company to use all of its cash, as needed.
Transamerica has reviewed the Company's Form 10-Q for the quarterly period ended
September 30, 1997 and its forecasted balance sheets and statements of
operations and cash flows dated October 16, 1997 for the fourth quarter of 1997
and calendar years 1998 and 1999, and does not deem such information contained
in such documents as a material adverse event. Management believes such
forecasted balance sheets and statements of operations and cash flows are
reasonable and the likelihood of the occurence 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.
14
<PAGE>
Net cash provided by investing activities for the nine months ended
September 30, 1997 amounted to $4,695,884. This included net proceeds of
$5,993,634 from the maturity and subsequent sale of high quality government
agency securities. Capital expenditures of $1,297,750 reflected purchases of
computer and peripheral equipment related to engineering staff and final test
and assembly in manufacturing and also office furniture related to the Company's
relocation of its CSG group to Piscataway, New Jersey in January, 1997.
Net cash provided by financing activities for the nine months ended
September 30, 1997 amounted to $4,078,501, reflecting a draw down of $3,000,000
under the Transamerica term loan and $1,078,501 in proceeds from the exercise of
common stock options.
The financial statements have been prepared on a going-concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. The Company expects to incur costs and expenses in
excess of expected revenues during the ensuing six months as the Company
continues to execute its business strategy in the Remote Access market. There is
no assurance that the Company will generate sufficient cash flow from product
sales to liquidate liabilities as they become due. Accordingly, the Company may
require additional funds to meet planned obligations through December 31, 1998
and will seek to raise such amounts through a variety of options, including
equity financing, proceeds from the sale of the Horizon product and team,
borrowings under the existing Revolver, and the expected future cash flows from
operations. In the event the Company is unable to liquidate its liabilities,
planned operations will need to be scaled back. Continuance of the Company as a
going concern is dependent upon the Company's ability to generate capital and
its attainment of profitable operations. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Statements contained in this Form 10-Q 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.
15
<PAGE>
Impact of the Adoption of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board 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 anticipates no material impact resulting from
SFAS 128. 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.
Part II. Other Information
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits -
Exhibit 11 - Statement of Computation of Per Share Amounts
Exhibit 27 - Financial Data Schedule (filed electronically)
b) Reports on Form 8-K - None.
16
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Ariel Corporation
---------------------------------
Registrant
/s/ GERARD E. DORSEY
---------------------------------
Gerard E. Dorsey
Chief Financial Officer and
Principal Accounting Officer
Date: November 14, 1997
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Exhibit 11
ARIEL CORPORATION
STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
For the Three Months and Nine Months Ended
September 30, 1997 and 1996
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
------------- ------------- -------------- ------------
Primary:
Net loss for the period ($3,971,722) ($1,765,142) ($10,125,992) ($5,501,660)
============= ============= ============== ============
Weighted average number of shares of common
stock outstanding 9,179,201 8,813,487 9,139,023 7,660,248
Shares issuable upon exercise of outstanding
options and warrants 0 0 0 0
Shares assumed to be acquired in accordance
with the treasury stock method 0 0 0 0
------------- ------------- -------------- ------------
Shares used in computing per share loss 9,179,201 8,813,487 9,139,023 7,660,248
============= ============= ============== ============
Net loss per share ($0.43) ($0.20) ($1.11) ($0.72)
============= ============= ============== ============
Fully Diluted:
Net loss for the period ($3,971,722) ($1,765,142) ($10,125,992) ($5,501,660)
============= ============= ============== ============
Weighted average number of shares of common
stock outstanding 9,179,201 8,813,487 9,139,023 7,660,248
Shares issuable upon exercise of outstanding
options and warrants 2,454,621 1,329,515 2,191,339 2,482,754
Shares assumed to be acquired in accordance
with the treasury stock method (1,344,642) (400,727) (1,084,757) (402,854)
------------- ------------- -------------- ------------
Shares used in computing per share loss 10,289,180 9,742,275 10,245,605 9,740,148
============= ============= ============== ============
Net loss per share ($0.39) ($0.18) ($0.99) ($0.56)
============= ============= ============== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911167
<NAME> ARIEL CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,057,362
<SECURITIES> 0
<RECEIVABLES> 1,611,372
<ALLOWANCES> 178,416
<INVENTORY> 3,696,574
<CURRENT-ASSETS> 10,696,974
<PP&E> 4,877,346
<DEPRECIATION> 2,381,946
<TOTAL-ASSETS> 13,997,047
<CURRENT-LIABILITIES> 4,010,107
<BONDS> 0
0
0
<COMMON> 9,229,125
<OTHER-SE> 7,577,711
<TOTAL-LIABILITY-AND-EQUITY> 13,997,047
<SALES> 10,104,405
<TOTAL-REVENUES> 10,104,405
<CGS> 5,576,133
<TOTAL-COSTS> 5,576,133
<OTHER-EXPENSES> 14,933,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,709
<INCOME-PRETAX> (10,125,992)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,125,992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,125,992)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (0.99)
</TABLE>
