<PAGE>
As filed with the Securities and Exchange Commission on January 7, 1998
File No. 333-40247
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ARIEL CORPORATION
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<S> <C> <C>
Delaware 3571 13-3137699
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2540 Route 130
Cranbury, NJ 08512
(609) 860-2900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Mr. Anthony M. Agnello
Ariel Corporation
2540 Route 130
Cranbury, NJ 08512
(609) 860-2900
(Name, address and telephone number of agent for service)
Copies to:
Harold W. Paul, Esq.
Berger & Paul, LLP
630 Third Avenue
New York, New York 10017
(212) 661-2727
Fax (212) 661-7060
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
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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
- ----------------------------------------------------------------------------------------------------------
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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
- ----------------------------------------------------------------------------------------------------------
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<PAGE>
(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
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Registration Statement
Item Number and Caption Prospectus Caption
- ----------------------- ------------------
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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 JANUARY 7, 1998
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 January 7, 1998.
<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
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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.
The Company's auditors included an emphasis of a matter in their auditor's
report upon reissuance of their report dated March 7, 1997 as a result of
certain uncertainties that have arisen as described in the second paragraph of
Note 1 of the Company's financial statements with respect to the availability
of funds to sustain the Company's activities which indicate at November 12,
1997 that the Company may be unable to continue as a going concern through
December 31, 1998.
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."
4
<PAGE>
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 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."
5
<PAGE>
Effect of Outstanding Options and Warrants. As of September 30, 1997,
there were outstanding options to purchase 2,245,963 shares of Common Stock and
warrants to purchase 250,000 shares of Common Stock. The exercise of such
outstanding stock options and warrants will dilute the percentage ownership of
the Company's stockholders. Any sales in the public market of shares of Common
Stock underlying such stock options and warrants may adversely affect
prevailing market prices for the Common Stock. Moreover, the terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected since the holders of such outstanding securities can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than those
provided in such stock options and warrants. See "Management."
No Dividends. The Company has never paid cash dividends on its Common
Stock and does not anticipate that any cash dividends will be declared or paid
in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy."
Future Sales of Common Stock. Upon completion of this Offering, the
Company will have outstanding 9,479,125 shares of Common Stock. The outstanding
shares of Common Stock include 1,608,700 shares constituting "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933 as amended ("Restricted Shares") which may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Of the Restricted Shares, all are eligible for sale under Rule 144. The
Company is unable to predict the effect that sales made under Rule 144 or
otherwise may have on the market price of the Common Stock. However, the
possibility that substantial amounts of Common Stock may be sold in the public
market may have an adverse effect on the market prices for the Company's Common
Stock. See "Shares Eligible For Future Sale."
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
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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."
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September 30, 1997
-----------------------------------
Actual As Adjusted
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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
=========== ===========
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(1) Excludes 2,245,963 shares of Common Stock issuable upon exercise of
outstanding stock options.
7
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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
4th Quarter ..................... 8 5/8 5 1/4
On December 31, 1997, the closing price of the Company's common stock was
$5.625.
There were approximately 72 shareholders of record as of December 31,
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
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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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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
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<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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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>
Years ended December 31, Nine Months Ended 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
17
<PAGE>
35.1%. The increase in sales was due to the introduction of several new OEM
products during 1994 as part of the Company's shift in marketing strategy,
which had minimal impact on sales during 1994. Export sales increased to
$1,936,589 for 1995 from $1,257,169 in 1994, an increase of $679,420 or 54.0%.
The increase was the result of sales to a foreign affiliate of a domestic OEM
customer.
Gross profit increased to $4,900,084 for 1995 from $3,569,931 for 1994.
Gross profit margin decreased slightly to 51.5% in 1995 from 52.0% in 1994. The
slight decrease in gross profit margin reflects the change in product mix to the
OEM market which resulted in higher unit volumes with reduced gross profit
margins compared to prior years. Over the last six months of 1995, gross profit
margin was 53.9% compared to 52.3% for the last six months of 1994. The improved
gross profit margin trend over the last six months of 1995 reflects a positive
mix of sales of products and product configurations with higher gross margins.
Sales and marketing expenses were $2,922,826 or 30.7% of sales for 1995
compared to $1,937,227 or 28.2% of sales for 1994. The increase of $985,599 or
51% for 1995 includes approximately $370,000 in salaries and wages reflecting
additions to the field sales force and to technical staff in San Francisco,
California and Paris, France, as well as expansion of the marketing and sales
support groups during 1995. Sales commissions increased by approximately
$235,000 as a result of the increase in sales volume for 1995. Travel and
related expenses increased by approximately $177,000 reflecting the significant
increase in travel for the Company's field sales force and senior sales
executives for 1995 compared to 1994. The Company expects sales and marketing
expenses to increase as the Company further expands sales and marketing efforts
as part of the expansion of its CTI business.
General and administrative expenses were $2,914,835 or 30.6% of sales for
1995 compared to $2,012,490 or 29.3% of sales for 1994. The increase of
approximately $902,000 or 45% includes an increase of $203,131 in salaries and
wages related to the addition of a Chief Financial Officer (effective May 1,
1995), a Corporate Controller (November 1994), and certain other staff and
clerical positions, some of whom were not employed by the Company until 1995.
Payroll related expenses increased by approximately $101,000 reflecting the
employee headcount increase December 31, 1994 to December 31, 1995. Recruitment
and relocation expenses increased by $95,000 as a result of the recruitment and
relocation of certain senior level management and engineering personnel.
Commercial insurance costs increased by $122,000, principally reflecting premium
expense for directors and officers liability insurance, which was not in effect
in 1994. Health and life insurance expenses increased by $100,000 due to the
increase in headcount in 1995. Consulting and contracting expenses increased by
$101,000, primarily related to the retention of a consultant who provides
management advisory services.
Research and development expenditures were $2,482,561 or 26.1% of sales for
1995 compared to $1,111,394 or 16.2% of sales for 1994, an increase of
$1,371,167 or 123.4%. The increase was due primarily to hiring additional
engineers to meet the demands for product development testing and engineering
activities related to developing products specifically for the OEM marketplace.
Additionally, during the second quarter of 1995, the Company hired a core group
of senior level software engineers and a general manager to pursue opportunities
in the CTI industry.
For the foregoing reasons, the Company incurred a net loss of $3,223,401
for 1995 compared to a net loss of $1,399,072 for 1994.
Liquidity and Capital Resources
On June 12, 1997, the Company announced it had completed a $10 million
credit facility with Transamerica Business Credit Corporation's Technology
Finance Division, of Farmington, Connecticut. This facility provides a
five-year, $6.0 million term loan and a three-year, $4.0 million revolving
credit facility ("Revolver"). The term loan provides for an immediate advance of
$3.0 million and a second advance of $3.0 million upon achievement of any one of
the following milestones: operating profit and net income from continuing
operations for the most recently ended fiscal quarter shall be greater than
zero; the Company shall have received net proceeds of at least $7 million from
the issuance and sale of shares of its capital stock; or the Company shall have
received net proceeds of at least $7 million from the sale of the Horizon
product line and team; or the Company shall have entered into a significant
joint venture with TI and as a result of such joint venture, the Company's
research and
18
<PAGE>
development expenses would be reduced and the Company's revenues and profits
will be increased as reasonably determined by Transamerica; or the Company
shall have entered into such other agreement or consummated such other
transaction and as a result thereof, the Company's research and development
costs will be materially reduced and the Company's revenues and profits
materially increased as reasonably determined by Transamerica. As of December
31, 1997, the Company had not achieved any of the above milestones, and it is
unlikely that the Company will achieve the last two milestones in the
foreseeable future. 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 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, 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. 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
19
<PAGE>
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. If the Company is able to meet its
increased levels of new product sales and attain profitability and is able to
raise a minimum of $5 million from its sale of the Horizon product and team or
through an equity offering, the Company believes it will be able to continue as
a going concern through December 31, 1998. However, if the increased levels of
sales and the attainment of profitability are not met, the dollar amount needed
to be raised will be significantly greater. 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. The
Company's present capital resources are expected to provide sufficient capital
through April 30, 1998 before an additional infusion of capital is required.
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
20
<PAGE>
on or after June 28, 1996 all warrants outstanding on the redemption date. Each
holder of a warrant called for redemption could, within 30 days, elect to
preempt the redemption by exercising the warrant and purchasing one share of
common stock of the Company at an exercise price of $3.50. The Company received
net proceeds of approximately $6,555,000 with respect to the exercise of such
warrants.
Cash flows from financing activities for 1996 amounted to $7,807,064. As
previously discussed, the Company received $6,554,501 from the exercise of the
outstanding publicly traded warrants. Additionally, the Company received
$768,000 resulting from the exercise of 150,000 unit purchase options issued to
the Company's underwriters in conjunction with its Initial Public Offering. Such
options entitle the holder to purchase for an aggregate consideration of
$768,000, 150,000 Underwriter Units. Upon exercise, each Underwriter Unit
entitles the holder to one share of common stock and one warrant. The Company
also received $516,087 from the exercise of outstanding stock options. Cash
flows from financing activities for 1995 were approximately $19.2 million. On
December 31, 1995, the Company had working capital of $16,084,594, including
$13,979,000 in cash and cash equivalents. The Company began 1995 with cash and
cash equivalents of approximately $313,000 and in January 1995 received net
proceeds of approximately $5.7 million from its initial public offering. In
December 1995, the Company received net proceeds of approximately $13.5 million
from its secondary stock offering.
Statements contained in this Prospectus that are not historical facts are
forward looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward looking
statements involve risks and uncertainties, including the timely development and
acceptance of new products, the impact of competitive products and pricing,
changing market conditions and the other risks detailed in the Company's
prospectus and from time to time in other filings. Actual results may differ
materially from those projected. These forward looking statements represent the
Company's judgment as of the date of this document. The Company disclaims,
however, any intent or obligation to update these forward looking statements.
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 (1) Options Compensation (2)
<S> <C> <C> <C> <C> <C> <C>
Anthony Agnello ...... 1997 $193,462 -- $ 18,780 -- $ 5,338
1996 202,408 65,000 19,669 -- 4,476
1995 160,000 -- 12,863 -- 4,620
Brian Hoerl ............ 1997 181,231 47,104 20,393 -- 3,228
1996 159,470 36,888 13,214 50,000 --
1995 -- -- -- -- --
Jeffrey Sasmor ......... 1997 140,539 -- 14,507 40,000 84,019(5)
1996 154,166 30,000 137,747(4) -- 3,578
1995 140,000 -- 15,775 -- 2,800
Gerard E. Dorsey ...... 1997 146,538 -- 25,461 -- 4,396
1996 150,000 -- 20,020 -- 4,500
1995 -- -- -- -- --
John Lynch ............ 1997 150,000 -- 13,134 -- 8,536
1996 148,847 -- 12,092 -- 4,465
1995 -- -- -- -- --
Mark Clayton ......... 1997 -- -- -- -- --
1996 72,365 -- 12,591 -- 87,291(3)
1995 150,000 -- 13,212 -- 4,500
</TABLE>
- ------------
(1) 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.
(2) Represents the Company's contributions to the Company's 401 (k) plan and
profit sharing plan on behalf of its executive officers.
(3) Includes severance payment of $85,006.
(4) Includes $114,184 of relocation expenses.
(5) Includes severance payment of $80,000.
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 1997, an assumed
annual stock price appreciation of 10% would produce a corresponding aggregate
pretax gain over the full option term of approximately $135 million for the
Company's common stockholders.
<TABLE>
<CAPTION>
Number of
Securities Potential Realized Value at
Underlying % of Total Options Per Share Assumed Annual Rates of Stock
Options Granted to Employees Exercise Expiration Price Appreciation for Term
Name Granted (1) In Fiscal Year Price (2) Date 5% 10%
---- ----------- -------------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Jeffrey Sasmor 40,000 14.52% $7.125 7/02/07 $464,234 $739,217
</TABLE>
- ------------
(1) All options were made pursuant to the 1995 Stock Option Plan.
(2) Exercise price is the fair market value of the common stock at the date of
grant.
24
<PAGE>
AGGREGATE FISCAL YEAR-END OPTION VALUE
The following table sets forth certain information concerning stock option
exercises by the four individuals named in the Summary Compensation Table
during 1997 including the aggregate value of gains on the date of exercise. In
addition, this table includes the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1997. Also reported are
the values for "in-the-money" options which represent the excess of the closing
market price of the Common Stock at December 31, 1997 over the exercise price
of the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money-Options
Shares Acquired Value At December 31, 1997 (#) At December 31, 1997($)
Name On Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jeffrey Sasmor ...... -0- -0- 115,750/-0- $240,506/-0-
Brian Hoerl ......... 25,000 $255,625 50,000/75,000 $43,438/$43,438
Gerard Dorsey ...... -0- -0- 50,000/-0- $56,250/-0-
John Lynch ......... 4,100 $ 29,213 40,000/50,000 $7,500/$15,000
</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 December 31, 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 .......................................... 557,000 6.0%
2540 Route 130
Cranbury, NJ 08512
Jeffrey M. Sasmor ....................................... 237,750(l) 2.6%
2540 Route 130
Cranbury, NJ 08512
Brian Hoerl ............................................. 50,000(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) ...... 1,886,550 20.4%
</TABLE>
- ------------
* Less than one percent.
(1) Includes 115,750 shares subject to presently exercisable options.
(2) Includes 50,000 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
============ ===========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................ $ 1,840,986 $ 486,291
Accrued expenses ............................................ 1,826,591 1,059,860
Notes payable, related parties ............................. 154,021 196,295
Royalties payable ............................................ 82,571 76,508
------------ ------------
Total current liabilities ................................ 3,904,169 1,818,954
Notes payable, related parties, net of discount of $32,621
in 1995 ...................................................... -- 124,376
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized -- 2,000,000 shares
Issued and outstanding -- none
Common stock, $.001 par value:
Authorized -- 20,000,000 shares
Issued and outstanding -- 8,949,975 shares in 1996 and
6,798,625 shares in 1995 ................................ 8,950 6,799
Additional paid-in capital ................................... 29,321,748 21,133,832
Unearned compensation expense related to stock options ..... (178,819) --
Accumulated deficit ......................................... (12,952,984) (4,151,527)
------------ ------------
Total stockholders' equity ................................ 16,198,895 16,989,104
------------ ------------
Total liabilities and stockholders' equity .............. $ 20,103,064 $ 18,932,434
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ARIEL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Sales .................................... $ 13,030,637 $ 9,515,433 $ 6,865,249
Cost of goods sold ........................ 6,753,029 4,615,349 3,295,318
------------ ------------ ------------
Gross profit ........................... 6,277,608 4,900,084 3,569,931
------------ ------------ ------------
Selling and marketing expenses ............ 4,341,151 2,922,826 1,937,227
General and administrative expenses ...... 4,621,630 2,914,835 2,012,490
Research and development expenses ......... 6,860,665 2,482,561 1,111,394
------------ ------------ ------------
Total operating expenses ............... 15,823,446 8,320,222 5,061,111
------------ ------------ ------------
Loss from operations .................. (9,545,838) (3,420,138) (1,491,180)
Interest income ........................... 702,665 184,420 14,885
Interest expense ........................ (36,552) (34,743) (10,309)
Other income .............................. 78,268 47,060 30,131
------------ ------------ ------------
Loss before income tax benefit ......... (8,801,457) (3,223,401) (1,456,473)
Income tax benefit ........................ 0 0 57,401
------------ ------------ ------------
Net loss .............................. $ (8,801,457) $ (3,223,401) $ (1,399,072)
============ ============ ============
Weighted average number of common shares
outstanding .............................. 7,979,249 4,739,083 2,993,011
============ ============ ============
Net loss per share ........................ $ (1.10) $ (0.68) $ (0.47)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ARIEL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-In
Shares Amount Capital
----------- -------- --------------
<S> <C> <C> <C>
Balance at December 31, 1993 ... 2,950,000 $2,950 $ 2,038,020
Issuance of common stock ......... 40,625 41 40,584
Issuance of common stock ......... 43,000 43 68,757
Additional paid-in capital in
connection with discount of
royalty payable ............... -- -- 69,275
Cost incurred in connection with
issuance of common stock ...... -- -- --
1994 Net Loss .................. -- -- --
--------- ------ -----------
Balance at December 31, 1994 ... 3,033,625 3,034 2,216,636
Issuance of 1,725,000 units, each
unit consisting of one share of
common stock and one
redeemable common stock
purchase warrant ............... 1,725,000 1,725 5,381,577
Issuance of 2,040,000 shares of
common stock .................. 2,040,000 2,040 13,535,619
1995 Net Loss .................. -- -- --
--------- ------ -----------
Balance at December 31, 1995 ... 6,798,625 6,799 21,133,832
Issuance of 1,872,630 shares of
common stock in connection with
the exercise of redeemable
common stock purchase warrants... 1,872,630 1,873 6,552,628
Issuance of common stock in
connection with exercise of
150,000 underwriter purchase
options ........................ 150,000 150 767,850
Issuance of common stock in
connection with exercise of
128,720 common stock options ... 128,720 129 515,958
Costs incurred in connection with
the issuance of common stock ... -- -- (31,524)
Unearned compensation related to
stock options .................. -- -- 383,004
Amortization of unearned
compensation .................. -- -- --
1996 Net Loss .................. -- -- --
--------- ------ -----------
Balance at December 31, 1996 ..... 8,949,975 $8,950 $29,321,748
========= ====== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unearned Retained
Deferred Compensation Earnings Total
Financing Related to (Accumulated Stockholders
Costs Stock Options Deficit) Equity
----------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ... -- -- $ 470,946 $ 2,511,916
Issuance of common stock ......... -- -- -- 40,625
Issuance of common stock ......... $ (68,800) -- -- --
Additional paid-in capital in
connection with discount of
royalty payable ............... -- -- -- 69,275
Cost incurred in connection with
issuance of common stock ...... (206,831) -- -- (206,831)
1994 Net Loss .................. -- -- (1,399,072) (1,399,072)
---------- -- ------------- ------------
Balance at December 31, 1994 ... (275,631) -- (928,126) 1,015,913
Issuance of 1,725,000 units, each
unit consisting of one share of
common stock and one
redeemable common stock
purchase warrant ............... 275,631 -- -- 5,658,933
Issuance of 2,040,000 shares of
common stock .................. -- -- 13,537,659
1995 Net Loss .................. -- -- (3,223,401) (3,223,401)
---------- -- ------------- ------------
Balance at December 31, 1995 ... -- -- (4,151,527) 16,989,104
Issuance of 1,872,630 shares of
common stock in connection with
the exercise of redeemable
common stock purchase warrants .. -- -- -- 6,554,501
Issuance of common stock in
connection with exercise of
150,000 underwriter purchase
options ........................ -- -- -- 768,000
Issuance of common stock in
connection with exercise of
128,720 common stock options ... -- -- -- 516,087
Costs incurred in connection with
the issuance of common stock ... -- -- -- (31,524)
Unearned compensation related to
stock options .................. -- (383,004) -- --
Amortization of unearned
compensation .................. -- 204,185 -- 204,185
1996 Net Loss .................. -- -- (8,801,457) (8,801,457)
---------- -------- ------------- ------------
Balance at December 31, 1996 ... $ -- $ (178,819) $ (12,952,984) $ 16,198,895
========== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1996 1995 1994
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (8,801,457) $ (3,223,401) $ (1,399,072)
Adjustments to reconcile net loss to net cash used in
operating 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-dilutive
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
amortization .................................... (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
===============================================================================
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250,000 Shares
ARIEL CORPORATION
COMMON STOCK
------------
PROSPECTUS
------------
January 7, 1998
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<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 exhibits 3(a)-3(d) and 4 filed with
prior registration statements pursuant to File #33-87286 and exhibit 10(k)
filed with prior registration statement pursuant to 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 January 6, 1998.
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>
<CAPTION>
<S> <C> <C>
/s/ Anthony M. Agnello Chief Executive Officer and Chairman January 6, 1998
------------------------- of the Board
Anthony M. Agnello
/s/ Gerard E. Dorsey Principal Accounting Officer and Chief January 6, 1998
------------------------- Financial Officer
Gerard E. Dorsey
/s/ Harold W. Paul Acting Secretary and Director January 6, 1998
-------------------------
Harold W. Paul
/s/ Jeffrey M. Sasmor Director January 6, 1998
-------------------------
Jeffrey M. Sasmor
/s/ Robert J. Ranalli Director January 6, 1998
-------------------------
Robert J. Ranalli
/s/ Edward D. Horowitz Director January 6, 1998
-------------------------
Edward D. Horowitz
/s/ Etienne A. Perold Director January 6, 1998
-------------------------
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 exhibits 3(a)-3(d) and 4 filed with
prior registration statement pursuant to File #33-87286 and exhibit 10(k) filed
with prior registration statement pursuant to File # 33-99184.
<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
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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
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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.
AT&T / ARIEL Proprietary
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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
AT&T / ARIEL Proprietary
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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.
AT&T / ARIEL Proprietary
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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
AT&T / ARIEL Proprietary
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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.
AT&T / ARIEL Proprietary
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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.
AT&T / ARIEL Proprietary
<PAGE>
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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
AT&T / ARIEL Proprietary
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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
AT&T / ARIEL Proprietary
<PAGE>
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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.
AT&T / ARIEL Proprietary
<PAGE>
-12-
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.
AT&T / ARIEL Proprietary
<PAGE>
- 13 -
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate originals through their duly authorized officials.
AT&T CORP.
----------------------------------------------------
Signature
----------------------------------------------------
Printed Name
----------------------------------------------------
Title
----------------------------------------------------
Date
ARIEL CORPORATION
----------------------------------------------------
Signature
----------------------------------------------------
Printed Name
----------------------------------------------------
Title
----------------------------------------------------
Date
AT&T / ARIEL Proprietary
<PAGE>
- 14 -
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*
AT&T / ARIEL Proprietary
<PAGE>
- 15 -
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
AT&T / ARIEL Proprietary
<PAGE>
- 16 -
HDK Manual
AT&T / ARIEL Proprietary
<PAGE>
- 18 -
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
AT&T / ARIEL Proprietary
<PAGE>
- 19 -
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.
AT&T / ARIEL Proprietary
<PAGE>
- 20 -
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
AT&T / ARIEL Proprietary
<PAGE>
- 21 -
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>
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>
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.
1
<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
3
<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
January 6, 1998
