<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 March 31, 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 9,169,325 shares outstanding
as of March 31, 1997
Documents Incorporated by Reference: None
</TABLE>
<PAGE>
Ariel Corporation
Index
Part I. Financial Information
---------------------
Item 1. Financial Statements (Unaudited)
--------------------
A. Balance sheet - March 31, 1997 and December 31, 1996
B. Statements of operations for the three months ended
March 31, 1997 and 1996.
C. Statements of cash flows for the three months
ended March 31, 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
2
<PAGE>
PART I. - FINANCIAL INFORMATION
---------------------
ITEM 1. - FINANCIAL STATEMENTS
--------------------
ARIEL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
CASH & CASH EQUIVALENTS .................................................................... $ 4,968,318 $ 4,626,583
MARKETABLE SECURITIES ...................................................................... 2,350,000 5,999,377
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR .................................................. 2,845,945 3,199,542
DOUBTFUL ACCOUNTS OF $212,678 AT MARCH 31, 1997
AND DECEMBER 31, 1996
OTHER RECEIVABLES .......................................................................... 120,222 190,023
INVENTORIES ................................................................................ 3,944,320 3,528,252
PREPAID EXPENSES ........................................................................... 314,220 156,005
------------ ------------
TOTAL CURRENT ASSETS ........................................................... 14,543,025 17,699,782
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION AND
AMORTIZATION ......................................................................... 2,574,724 2,036,897
OTHER ASSETS ............................................................................... 400,747 366,385
------------ ------------
TOTAL ASSETS .......................................................... $ 17,518,496 $ 20,103,064
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ........................................................................... $ 995,667 $ 1,840,986
ACCRUED EXPENSES ........................................................................... 1,797,474 1,826,591
NOTES PAYABLE - CURRENT .................................................................... 39,255 154,021
ROYALTIES PAYABLE .......................................................................... 62,252 82,571
------------ ------------
TOTAL CURRENT LIABILITIES ............................................................... 2,894,648 3,904,169
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 - 9,169,325 AT MARCH 31, 1997
AND 8,949,975 AT DECEMBER 31, 1996 .................................................... 9,169 8,950
ADDITIONAL PAID-IN CAPITAL ................................................................. 30,219,674 29,321,748
UNEARNED COMPENSATION EXPENSE RELATED TO STOCK
OPTIONS ............................................................................... (134,114) (178,919)
ACCUMULATED DEFICIT ....................................................................... (15,470,881) (12,952,984)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .............................................................. 14,623,848 16,198,895
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................................. $ 17,518,496 $ 20,103,064
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
3
</TABLE>
<PAGE>
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
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Three months Ended March 31,
1997 1996
----------- -----------
SALES ............................................................................................. $ 4,519,526 $ 1,522,379
COST OF GOODS SOLD ................................................................................ 2,392,892 819,717
----------- -----------
GROSS PROFIT ............................................................... 2,126,634 702,662
EXPENSES:
SALES AND MARKETING ..................................................................... 1,148,424 949,259
GENERAL AND ADMINISTRATIVE .............................................................. 943,645 831,565
RESEARCH AND DEVELOPMENT ................................................................ 2,665,376 1,095,667
----------- -----------
TOTAL OPERATING EXPENSES ................................................... 4,757,445 2,876,491
----------- -----------
LOSS FROM OPERATIONS ................................................................ (2,630,811) (2,173,829)
INTEREST INCOME ................................................................................... 118,356 168,700
INTEREST EXPENSE .................................................................................. (3,974) (9,438)
OTHER (EXPENSE) INCOME ............................................................................ (1,468) 14,749
----------- -----------
LOSS BEFORE INCOME TAXES ................................................................ (2,517,897) (1,999,818)
INCOME TAXES ...................................................................................... - -
----------- -----------
NET LOSS ................................................................. ($2,517,897) ($1,999,818)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING .................................................................. 9,066,638 6,871,615
=========== ===========
NET LOSS PER SHARE ............................................................... ($ 0.28) ($ 0.29)
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
<S> <C> <C>
For The Three Months Ended March 31,
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss ....................................................................................... $ (2,517,897) $ (1,999,818)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................................ 256,913 105,797
Amortization of discount on royalties payable ........................................ 2,998 7,880
Amortization of discounts on investments ............................................. 4,319 -
Provision for inventory obsolescense ................................................. 15,000 -
Non-cash compensation expense ........................................................ 44,705 -
(Increase) decrease in assets:
Accounts receivable .................................................................. 423,400 454,476
Inventories .......................................................................... (431,069) (319,044)
Other assets ......................................................................... (192,578) 86,652
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ................................................ (845,281) 17,612
Royalties payable .................................................................... (20,320) (2,478)
Notes payable ........................................................................ (117,764) -
---------- ----------
Net cash used in operating activities ........................................... (3,377,573) (1,648,923)
---------- ----------
Cash flows from investing activities:
Proceeds from the sale and maturity of investments ................................... 3,643,594 -
Purchase of equipment ................................................................ (822,430) (750,765)
---------- ----------
Net cash provided by (used in) investing activities ............................. 2,821,164 (750,765)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of redeemable common stock
purchase warrants ................................................................ - 387,358
Proceeds from exercise of common stock options ...................................... 898,145 -
---------- ---------
Net cash provided by financing activities ...................................... 898,145 387,358
---------- ---------
Net increase (decrease) in cash ............................................................... 341,735 (2,012,330)
Cash and cash equivalents, begining of year ......................................... 4,626,583 13,979,009
---------- -----------
Cash and cash equivalents, end of period ...................................................... $ 4,968,318 $ 11,966,679
============ =============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
5
</TABLE>
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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.
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments, consisting of normal recurring
accruals, which are necessary to present fairly the financial position of the
Company as of March 31, 1997 and the results of operations for the three months
ended March 31, 1997 and 1996. The results for interim periods are not
necessarily indicative of results for the full year.
<TABLE>
2. Inventories, net of allowance:
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Inventories, net of allowance, consists of the following:
March 31, December 31,
1997 1996
---------- -----------
Component Materials ........................................ $1,160,751 $1,313,092
Work-in process ............................................ 868,054 620,367
Finished Goods ............................................. 1,915,515 1,594,793
----------- ----------
$3,944,320 $3,528,252
=========== ==========
</TABLE>
6
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<TABLE>
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.
<CAPTION>
<S> <C> <C>
Three months ended
March 31,
1997 1996
------- -------
Sales ..................................................................................... 100% 100%
Cost of goods sold ........................................................................ 53 54
----- -----
Gross profit ......................................................................... 47 46
Expenses
Sales and marketing .................................................................. 25 62
General and administrative ........................................................... 21 55
Research and development ............................................................. 59 72
---- ----
Total Operating Expenses ............................................................. 105 189
Loss from operations ...................................................................... (58) (143)
Interest Income ........................................................................... 3 11
Interest Expense .......................................................................... * (1)
Other (expense) Income .................................................................... * 1
---- ----
Loss before income taxes .............................................................. (55) (132)
Income taxes ......................................................................... -- --
---- ----
Net Loss ................................................................. (55)% (132)%
==== ====
* Total is less than 1%
</TABLE>
7
<PAGE>
Three months ended March 31, 1997 as Compared to three months ended March 31,
1996
Net Sales
Worldwide sales were $4,519,526 for the three months ended March 31, 1997,
an increase of $2,997,147 or 197% compared to net sales of $1,522,379 for the
three months ended March 31, 1996. Domestic sales were $4,262,421 for the three
months ended March 31, 1997 compared to $1,109,814 for the three months ended
March 31, 1996. One customer purchased one digital signal processing ("DSP") OEM
product that accounted for approximately 54% of total sales for the first
quarter of 1997. The Company's backlog of $3,594,651 at March 31, 1997 does not
contain any additional orders for such customer. Export sales were $257,105 for
the first quarter of 1997 compared to $412,565 for the first quarter of 1996, a
decrease of $155,460.
Gross Profit
Gross profit increased to $2,126,634 for the three months ended March 31,
1997 from $702,662 for the three months ended March 31, 1996, an increase of
$1,423,972 or 203%. Gross profit margin also increased to 47.1% for the three
months ended March 31, 1997 from 46.2% for the three months ended March 31,
1996. The improvement in the gross margin percentage is primarily reflected in
cost reductions of certain components of OEM products sold during the three
months ended March 31, 1997.
Sales and marketing
Sales and marketing expenses were $1,148,424 for the first quarter of 1997
compared to $949,259 for the first quarter of 1996. The increase of $199,165 or
21% for the first quarter of 1997 includes approximately $62,000 for increased
sales commissions resulting from the increase in sales for the first quarter of
1997. Advertising expense increased by approximately $58,000 reflecting
increased print advertising for the Company's T-1 Modem product and certain DSP
OEM products. Trade show expense increased by approximately $28,000 reflecting
increased activity related to the Company's Computer Telephony ("CTI") product
line.
General and administrative
General and administrative expenses were $943,645 for the first quarter of
1997 compared to $831,566 for the first quarter of 1996. The increase of
approximately $112,000 includes approximately $36,000 for increased health
insurance expense incurred by the Company and approximately $24,000 in increased
expense related to the Company's matching contribution under its 401(k) Plan.
Such increases reflect the increase in the number of employees from the first
quarter of 1996.
8
<PAGE>
In addition, consulting expense increased by approximately $50,000
reflecting principally the use of certain outside consultants for management
process issues. Rent expense increased by approximately $37,000 for the first
quarter of 1997 as a result of the Communications Systems Group's ("CSG") move
to approximately 10,000 square feet of space in Piscataway, New Jersey.
Research and Development
Research and development expenditures were $2,665,376 or 59% of sales for
the three months ended March 31, 1997 compared to $1,095,667 or 72% of sales for
the three months ended March 31, 1996, an increase of $1,569,709 or 143%.
Salaries and wages increased by approximately $444,000 due primarily to hiring
additional engineers to meet the internal product development milestones for its
CTI and CSG products. The company incurred approximately $700,000 for outside
contract labor in conjunction with development of certain products related to
the Company's CTI and ADSL technologies. The Company expects such expenditures
to decrease from the first quarter as the use of outside contract labor
decelerates.
For the foregoing reasons, the Company incurred a net loss of $2,517,897
for the three months ended March 31, 1997 compared to a net loss of $1,999,818
for the three months ended March 31, 1996.
Liquidity and Capital Resources
During the three months ended March 31,1997, there was a net increase of
$341,735 in cash and cash equivalents, including a net amount of $3,643,594 in
proceeds from the maturity and sale of investments in marketable securities
which were used to fund operations. Cash and cash equivalents amounted to
$4,968,318 at March 31, 1997. Marketable securities amounted to $2,350,000 at
March 31, 1997. Working capital amounted to $11,648,377 at March 31, 1997
compared to $13,795,613 at December 31, 1996, a decrease of $2,147,236.
Net cash used in operating activities for the three months ended March 31,
1997 was $3,377,573. The negative cash flow from operations was primarily the
result of the Company's net loss of $2,517,897. Additionally, trade accounts
payable decreased by $845,281 during the three months ended March 31, 1997. Net
cash used in operating activities for the three months ended March 31, 1996 was
$1,648,923. The negative cash flow from operations was the result of the
Company's net loss of $1,999,818 partially offset by a decrease in trade
accounts receivable of $531,750 reflecting lower shipments during the first
quarter of 1996.
Net cash provided by investing activities for the three months ended March
31, 1997 was $2,821,164. This included net proceeds of $3,643,594 from maturity
and subsequent sale of high quality government agency securities. The Company's
capital expenditures amounted to $794,740 for the three months ended March 31,
1997 reflecting purchases of computers 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 used in investing activities for the three
months ended March 31, 1996 was $822,430 and consisted primarily of purchases of
computer and peripheral equipment to support the increase in engineering and
support staff and also purchases of office furniture related to the Company's
relocation to a larger facility in January 1996.
9
<PAGE>
Cash flows provided by financing activities amounted to $898,145 and was
the result of proceeds from the exercise of common stock options. Cash flow
provided by financing activities for the three months ended March 31, 1996
amounted to $387,358 as a result of the exercise of the Company's redeemable
common stock purchase warrants.
The Company recently signed a proposal letter with a lending institution
under which the Company would obtain a total credit facility of up to $13
million. Such proposal is subject to additional due diligence on the part of the
lending institution and the negotiation of specific loan documents satisfactory
to both the Company and the lending institution. The Company expects to complete
this transaction no later than June 15, 1997. Management believes that cash,
cash equivalents, marketable securities, and the above described credit facility
will be adequate to support operating cash requirements for at least the next
twelve months.
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 judgement as of the date of this document. The Company disclaims,
however, any intent or obligation to update these forward looking statements.
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 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.
10
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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.
11
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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: May 14, 1997
12
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<TABLE>
EXHIBIT 11
ARIEL COPRORATION
STATEMENT OF COMPUTATION OF PER SHARE AMOUNTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Three Months Ended March 31,
<CAPTION>
<S> <C> <C>
1997 1996
---------- -----------
Primary:
Net loss for the period .......................................................... $ (2,517,897) $ (1,999,818)
=========== ===========
Weighted average number of shares of common
stock outstanding ............................................................... 9,066,638 6,871,615
Shares issuable upon exercise of outstanding
options and warrants ............................................................ - -
Shares assumed to be acquired in accordance
with the treasury stock method .................................................. - -
----------- -----------
Shares used in computing per share loss .......................................... 9,066,638 6,871,615
=========== ===========
Net loss per share ............................................................... $ (0.28) $ (0.29)
=========== ===========
Fully Diluted:
Net loss for the period .......................................................... $ (2,517,897) $ (1,999,818)
=========== ===========
Weighted average number of shares of common
stock outstanding ............................................................... 9,066,638 6,871,615
Shares issuable upon exercise of outstanding
options and warrants ............................................................ 2,026,614 3,271,387
Shares assumed to be acquired in accordance
with the treasury stock method .................................................. (1,885,200) (1,651,904)
----------- -----------
Shares used in computing per share loss .......................................... 9,208,052 8,491,098
=========== ===========
Net loss per share ............................................................... $ (0.27) $ (0.24)
=========== ===========
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000911167
<NAME> ARIEL CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,968,318
<SECURITIES> 2,350,000
<RECEIVABLES> 3,058,623
<ALLOWANCES> 212,678
<INVENTORY> 3,944,320
<CURRENT-ASSETS> 14,543,025
<PP&E> 4,374,337
<DEPRECIATION> 1,799,613
<TOTAL-ASSETS> 17,518,496
<CURRENT-LIABILITIES> 2,894,648
<BONDS> 0
0
0
<COMMON> 9,169
<OTHER-SE> 14,614,679
<TOTAL-LIABILITY-AND-EQUITY> 17,518,496
<SALES> 4,519,526
<TOTAL-REVENUES> 4,519,526
<CGS> 2,392,892
<TOTAL-COSTS> 2,392,892
<OTHER-EXPENSES> 4,757,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,974
<INCOME-PRETAX> (2,517,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,517,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,517,897)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.27)
</TABLE>
