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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 Commission file number: 0-25326
Ariel Corporation
(exact name of registrant as specified in its charter)
Delaware 13-3137699
(State of incorporation) (IRS employer identification number)
2540 Route 130
Cranbury, New Jersey 08512
(Address of principal executive offices)
609-860-2900
(Telephone number, including area code)
--------------------------------------------
Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ( X ) No ( )
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.001 par value 9,720,750 shares outstanding
as of June 30, 1998
Documents Incorporated by Reference: None
</TABLE>
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Ariel Corporation
Index
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements (Unaudited)
---------------------------------
A. Balance sheet - June 30, 1998 and December 31, 1997
B. Statements of operations for the three and six months
ended June 30, 1998 and 1997.
C. Statements of cash flows for the six months ended June 30,
1998 and 1997.
D. Notes to financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------
Results of Operations.
----------------------
Part II. Other Information
- ---------------------------
Item 3. Submission of matters to a vote of Security Holders
---------------------------------------------------
A. Annual Meeting and Proxies
B. Election of Directors
C. Other Matters and Results
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ARIEL CORPORATION
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1998 1997
---------------- -------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ....................................................... $ 683,222 $ 2,645,864
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $217,433 IN 1998 AND $187,446 IN 1997 ......................... 3,536,690 1,395,624
OTHER RECEIVABLES ............................................................... 542,013 73,311
INVENTORIES ..................................................................... 4,251,893 3,536,190
PREPAID EXPENSES ................................................................ 443,238 299,336
------------ ------------
TOTAL CURRENT ASSETS .................................... 9,457,056 7,950,325
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION ........................................................... 2,084,865 2,382,645
OTHER ASSETS ........................................................................... 749,086 788,697
------------ ------------
TOTAL ASSETS .................................................................... $ 12,291,007 $ 11,121,667
============ ============
IABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ................................................................ $ 936,167 $ 1,186,876
ACCRUED EXPENSES ................................................................ 2,053,227 1,754,697
NOTES PAYABLE - CURRENT PORTION OF LONG-TERM DEBT ............................... 4,858,603 600,000
ROYALTIES PAYABLE ............................................................... 72,879 79,734
------------ ------------
TOTAL CURRENT LIABILITIES ............................... 7,920,876 3,621,307
NOTES PAYABLE - LONG TERM .............................................................. 2,475,914 2,367,147
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 - 9,720,750 AT JUNE 30, 1998
AND 9,234,250 AT DECEMBER 31, 1997 ................... 9,721 9,235
ADDITIONAL PAID-IN CAPITAL ..................................................... 32,831,481 30,949,180
UNEARNED COMPENSATION .......................................................... (55,409) (110,819)
ACCUMULATED DEFICIT ............................................................ (30,891,574) (25,714,383)
TOTAL STOCKHOLDERS' EQUITY ............................. 1,894,219 5,133,213
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ....................................... $ 12,291,007 $ 11,121,667
============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
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ARIEL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30 , Six Months Ended June 30,
1998 1997 1998 1997
------------- ------------ ----------- ----------
SALES ..................................................... $ 4,111,190 $ 2,540,036 $ 10,387,807 $ 7,059,562
COST OF GOODS SOLD ........................................ 2,555,497 1,547,971 6,313,622 3,940,863
------------ ------------ ------------ ------------
GROSS PROFIT ....................................... 1,555,693 992,065 4,074,185 3,118,699
EXPENSES:
SALES AND MARKETING ................................. 1,597,989 1,276,788 2,872,422 2,425,212
GENERAL AND ADMINISTRATIVE .......................... 959,262 979,366 1,828,610 1,923,011
RESEARCH AND DEVELOPMENT ............................ 2,280,067 2,588,341 4,365,804 5,253,717
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ........................ 4,837,318 4,844,495 9,066,838 9,601,940
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS .............................. (3,281,625) (3,852,430) (4,992,651) (6,483,241)
INTEREST INCOME .......................................... 23,405 93,067 40,208 211,423
INTEREST EXPENSE ......................................... (180,239) (24,759) (277,402) (28,733)
OTHER INCOME (EXPENSE) ................................... 60,198 147,749 52,655 146,281
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES .......................... (3,378,261) (3,636,373) (5,177,191) (6,154,270)
INCOME TAXES ....................................... 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS .......................................... $ (3,378,261) $ (3,636,373) $ (5,177,191) $ (6,154,270)
============ ============ ============ ============
BASIC AND DILUTED PER SHARE DATA:
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,697,114 9,169,325 9,514,482 9,118,091
============ ============ ============ ============
NET LOSS PER SHARE ...................................... $ (0.35) $ (0.40) $ (0.54) $ (0.67)
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
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ARIEL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months Ended June 30,
1998 1997
Cash flows from operating activities: ---------- -----------
Net loss .................................................................................. $(5,177,191) $(6,154,270)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................. 631,725 541,265
Amortization of discount on royalties payable ................. 0 2,998
Loss on Sale of Marketable Securities ......................... 0 7,507
Amortization of non-cash financing costs ...................... 32,178 0
Provision for doubtful accounts ............................... 30,000 0
Provision for inventory obsolescence .......................... 180,000 30,000
Non-cash compensation expense ................................. 55,409 89,408
(Increase) decrease in assets:
Accounts receivable ........................................... (2,639,768) 1,485,885
Inventories ................................................... (895,703) (282,882)
Other assets .................................................. (136,470) (349,915)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ......................... 47,820 (1,476,734)
Royalties payable ............................................. (6,855) (14,866)
Notes payable-related parties ................................. 0 (154,021)
----------- -----------
Net cash used in operating activities .......... (7,878,855) (6,275,625)
----------- -----------
Cash flows provided by investing activities:
Purchases of Investments ...................................... 0 4,913,759
Purchase of equipment ......................................... (333,945) (1,021,530)
----------- -----------
Net cash provided by investing activities ...... (333,945) 3,892,229
----------- -----------
Cash flows provided by financing activities:
Proceeds from debt financing .................................. 4,500,000 3,000,000
Principal payments on Long-term debt .......................... (132,630) 0
Proceeds from exercise of common stock options and warrants ... 1,882,788 898,145
----------- -----------
Net cash provided by financing activities ...... 6,250,158 3,898,145
----------- -----------
Net increase (decrease) in cash ........................................................... (1,962,642) 1,514,749
Cash and cash equivalents, beginning of period ................ 2,645,864 4,626,583
----------- -----------
Cash and cash equivalents, end of period .................................................. $ 683,222 $ 6,141,333
=========== ===========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
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Ariel Corporation
Notes to Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included herein have been prepared by the
Company, pursuant to the Rules and Regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that the disclosure contained herein
is adequate to make the information presented not misleading. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1997. 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 June 30, 1998, the Company had working capital of $1,536,180,
including cash and cash equivalents of $683,222. 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 three months as the Company continues to execute its business strategy
in the Remote Access market. As of June 30, 1998 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 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 June 30, 1998 and the results of operations for the Six Months
Ended June 30, 1998 and 1997. The results for interim periods are not
necessarily indicative of results for the full year.
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2. Inventories, net of allowance:
Inventories, net of allowance, consists of the following:
June 30, December 31,
1998 1997
----------- ------------
Component Materials.............................................. $1,426,990 $2,077,866
Work-in process.................................................. 1,212,547 843,428
Finished Goods................................................... 1,612,356 614,896
---------- ------------
$4,251,893 $3,536,190
========== ============
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3. Debt
On February 19, 1998, the Company completed a $2 million bridge loan
("Bridge Loan") with Transamerica which provided for a single advance. This loan
matures on the earlier of: 1) December 31, 1998; 2) a public offering by the
Company of its equity securities which yields cash proceeds at least equivalent
to the amount of the Bridge Loan; 3) the closing of a sale by the Company of its
Horizon product line and team with net cash proceeds at least equivalent to the
amount of the Bridge Loan; or 4) the second advance to the Company of $3 million
under the Term Loan. The Bridge Loan interest rate is the prime rate plus 2.50%,
including all terms and conditions and affirmative and negative covenants.
On May 14, 1998 the Company drew $2.5 million against its revolving
credit facility with Transamerica ("Revolver"). Amounts drawn under the Revolver
mature on June 12, 2000 but can be extended for two additional one year periods.
The interest rate in effect under the Revolver is based on the prime rate plus
2.50% and is payable monthly in arrears.
As of June 30, 1998, $2,834,517 of the Term Loan was outstanding.
(See Note 5 - Subsequent Event.)
4. Adoption of Statements of Financial Accounting Standards
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full-set of general purpose financial statements and requires
reclassification of prior-period financial statements. For the quarters ending
June 30, 1998 and 1997, net income was equal to comprehensive income as there
were no items classified as other comprehensive income.
5. Subsequent Events - Disposition of Assets
On June 10, 1998 the Company signed a definitive agreement to sell its
Communications Systems Group, (CSG, Horizon team or DSLAM unit), to Cabletron
Systems, Inc. of Rochester, New Hampshire. The Company will receive $33.5
million in cash for the assets of the CSG less expenses of the transaction of
approximately $3,975,000. The asset purchase agreement was voted on and approved
by the Company's Board of Directors on June 4, 1998. Form 8-K was filed with the
Securities and Exchange Commission on June 25, 1998. On July 27, 1998 the
Company received a $5 million deposit towards the sale with the balance due at
the closing scheduled September 1, 1998.
Under the terms of the Bridge Loan,(see Debt Note 3), the note will mature
upon the closing of the CSG sale. Accordingly, the entire outstanding balance of
$2 million and any accrued interest will be repaid when the sale is completed.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------------------------------------------------------------
AND RESULTS OF OPERATIONS.
---------------------------
COMPARISON OF RESULTS OF OPERATIONS
- ------------------------------------
The following table sets forth, for the periods indicated, the percentage
relationship that certain items of the Company's results of operations bear to
total sales.
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Six Months Ended
June 30,
1998 1997
----------- -----------
Sales 100% 100%
Cost of goods sold 61 56
----------- -----------
Gross profit 39 44
Expenses
Sales and marketing 28 35
General and administrative 17 27
Research and development 42 74
----------- -----------
Total Operating Expenses 87 136
Loss from operations (48) (92)
Interest Income * 3
Interest Expense (2) *
Other (expense) Income * 2
Loss before income taxes (50) (87)
Income taxes - -
----------- -----------
Net Loss (50)% (87)%
=========== ===========
*-Total is less than 1%
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Three months ended June 30, 1998 as compared to three months ended June 30, 1997
- --------------------------------------------------------------------------------
Net Sales
Worldwide sales were $4,111,190 for the Three months ended June 30,
1998, an increase of $1,571,154 compared to net sales of $2,540,036 for the
Three months ended June 30, 1997. Domestic sales were $3,710,666 for the Three
months ended June 30, 1998 compared to $2,199,234 for the Three months ended
June 30, 1997. The increase of $1,511,432 in domestic sales is attributable to
the increase in T1-Modem+ sales to OEM customers. Export sales were $400,524 for
the first quarter of 1998 compared to $340,802 for the first quarter of 1997.
Gross Profit
Gross profit increased by $563,628 or 57% to $1,555,693 for the Three
months ended June 30, 1998 from $992,065 for the Three months ended June 30,
1997. Gross profit margin was 38% for the Three months ended June 30, 1998
compared to 39% for the Three months ended June 30, 1997 reflecting an increase
in OEM sales from the same period last year.
Sales and marketing
Sales and marketing expenses were $1,597,989 or 39% of sales for the
Three months ended June 30, 1998 compared to $1,276,788 or 50% of sales for the
Three months ended June 30,1997. The variance of $321,201 included increases due
to salaries, consulting and related expenses, travel costs and other variable
selling expenses as the Company continues to expand product and brand
recognition through marketing programs and trade shows. Such increases were
offset by a reduction in advertising related to the Company's DSP OEM products.
General and administrative
General and administrative expenses were $959,262 for the Three months
ended June 30, 1998 compared to $979,366 for the Three months ended June 30,
1997. Reductions were due primarily to the departure of the Company's
Vice-Chairman in September 1997 and Chief Financial Officer in May of 1998.
Research and Development
Research and development expenses were $2,280,067 or 55% of sales for
the Three months ended June 30, 1998 compared to $2,588,341 or 102% of sales for
the Three months ended June 30, 1997, a decrease of $308,274 or 12%. Salaries,
consulting, recruiting and training expenses decreased by $521,848 reflecting a
decrease in engineers and other costs related to certain development projects.
Such decreases were offset by increases in expenses related to outside contract
labor of approximately $286,030 reflecting the continued enhancement of the
Company's Horizon Product ADSL unit and the development of its next generation
of remote access products.
Six Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997
- -----------------------------------------------------------------------------
Net Sales
Worldwide sales were $10,387,808 for the Six Months Ended June 30,
1998, an increase of $3,328,246 compared to net sales of $7,059,562 for the Six
Months Ended June 30, 1997. Domestic sales were $9,276,260 for the Six Months
Ended June 30, 1998 compared to $6,461,655 for the Six Months Ended June 30,
1997. The increase of $2,814,605 in domestic sales is attributable to the
increase in T1-Modem+ sales to OEM customers. Export sales were $1,111,548 for
the first and second quarters of 1998 compared to $597,907 for the same period
in 1997. The increase in export sales is a result of an increase in T1 Modem+
sales to new OEM customers and increased sales and marketing efforts in the
European market.
Gross Profit
Gross profit increased by $955,486 or 31% to $4,074,185 for the Six
Months Ended June 30, 1998 from $3,118,699 for the Six Months Ended June 30,
1997. Gross profit margin was 39% for the Six Months Ended June 30, 1998
compared to 44% for the Six Months Ended June 30, 1997. The decrease in gross
profit margin as a percent of sales reflects the continued shift in product mix
from shipments of higher margin DSP OEM product in the first half of 1997 to
shipments of the Company's T1-Modem products to OEM customers which carry lower
gross margins.
Sales and marketing
Sales and marketing expenses were $2,872,422 or 28% of sales for the
Six Months Ended June 30, 1998 compared to $2,425,212 or 35% of sales for the
Six Months Ended June 30,1997. The increase of $447,210 or 18% reflects an
increase in salaries and related expenses as the Company hired a Vice President
of Sales and expanded its sales force to a more senior data communications group
over the last six months of 1997 and also an increase in variable selling
expenses such as commissions and travel commensurate with increases in sales
volume as compared to the same period last year. Such increases were offset by a
reduction in advertising and marketing expenses related to the Company's DSP OEM
products.
General and administrative
General and administrative expenses were $1,828,610 for the Six Months
Ended June 30, 1998 compared to $1,923,011 for the Six Months Ended June 30,
1997. The decrease of $94,401 reflects a reduction in salaries and related
expenses related to the resignation of the Company's Vice Chairman in September
1997 and a reduction in consulting and other professional services incurred in
the first half of 1997 related to the Company's strategic planning process.
Research and Development
Research and development expenses were $4,365,804 or 42% of sales for
the Six Months Ended June 30, 1998 compared to $5,253,717 or 74% of sales for
the Six Months Ended June 30, 1997, a decrease of $887,913 or 17%. Salaries,
consulting and related expenses decreased by $533,876 reflecting a decrease in
engineers related to certain development projects. Additionally, expenses
related to outside contract labor decreased by approximately $95,023 reflecting
the discontinuance of certain research and development projects related to
forward looking technologies.
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 million term loan and a three-year, $4 million revolving credit
facility ("Revolver"). Upon closing, the Company took down $3 million under the
term loan. Further advances of up to $4 million can be extended upon achievement
of any one of the following milestones: positive (greater than 0) operating
profit and net income from continuing operations for the most recently ended
fiscal quarter; receipt by the Company 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
as a result of which, the Company's research and development expenses would be
reduced and the Company's revenues and profits 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 June 30, 1998 the Company had not achieved any of the above
milestones.
The Revolver provides for up to $4.0 million in advances based on a
formula of eligible accounts receivable and inventory. This Revolver can be
increased to $7.0 million in the event that the Company achieves one of the
milestones, but elects not to draw the second advance under the term loan.
Additionally, the Revolver can be extended for two additional one-year periods.
As of June 30, 1998, there was $2,834,517 outstanding under the term loan and
$2,500,000 outstanding under the Revolver. Based on the Revolver formula the
Company could have borrowed approximately an additional $700,000 for a total of
$3.2 million available under the Revolver at June 30, 1998. Term loan payments
of principal and interest are due in arrears in twenty consecutive quarterly
installments, payable on the first day of each calendar quarter commencing
October 1, 1997. 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 June 30, 1998,
the interest rate in effect was 12.099%. The interest rate in effect under the
Revolver is based on the prime rate plus 2.50% and is payable monthly in
arrears.
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 noncompliance of certain financial covenants at
December 31, 1997, Transamerica gave the Company an unconditional waiver with
respect to each of these financial covenants for the fiscal year ended December
31, 1997, with the exception of the accounts receivable collection period for
which the Company was in compliance as of December 31, 1997. Such waived
covenants are as follows: minimum tangible net worth of $10 million as of
December 31, 1997; minimum gross profit margin of 45% for the fiscal year ended
December 31, 1997; a maximum operating loss percentage of (30%) for the fiscal
year ended December 31, 1997; and a net loss before taxes percentage of (30%)
for the fiscal year ended December 31, 1997. The Company was not in compliance
with such covenants as of December 31, 1997.
In anticipation of non-compliance with certain of the covenants,
the Company has obtained an additional waiver from Transamerica of selected
covenants and/or revised covenants for the terms of the debt agreement. The
covenants that were waived for fiscal year 1998 are as follows: tangible net
worth, operating profit percentage and net income before taxes percentage. In
addition, the credit agreement also amended some of the financial covenants as
follows: gross profit margin was amended to 35% from 50% for the fiscal years
ended December 31, 1998 and thereafter; operating profit percentage was amended
to 7.5% from 20% for the fiscal years ended December 31, 1999 and thereafter;
and net income before taxes was amended to 5% from 15% for the fiscal years
ended December 1999 and thereafter. Transamerica also amended the debt agreement
to delete the cash on hand covenant, which allows the Company to use all of its
cash, as needed. Transamerica has reviewed the Company's forecasted balance
sheets and statements of operations and cash flows dated March 20, 1998 for the
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.
On February 19, 1998, the Company announced it had completed a $2
million bridge loan ("Loan") with Transamerica. This facility allowed for a
single advance provided to the Company on February 19, 1998. This loan matures
on the earliest of: 1) December 31, 1998; 2) a public offering by the Company of
its equity securities which yields cash proceeds at least equivalent to the
amount of the Loan; 3) the closing of a sale by the Company of its Horizon
product line and team with net cash proceeds at least equivalent to the amount
of the Loan; or, 4) the second advance to the Company of $3.0 million under the
term loan. The interest rate under the Loan is the prime rate plus 2.50%. The
Loan is subject to the existing $10 million credit facility loan and security
agreement, including all terms and conditions and affirmative and negative
covenants.
On June 10, 1998 the Company signed a definitive agreement to sell its
Communications Systems Group, (CSG, Horizon team or DSLAM unit), to publicly
held Cabletron Systems, Inc. of Rochester, New Hampshire. The Company will
receive $33.5 million in cash for the assets of CSG less expenses of the
transaction of approximately $3,975,000. On July 27, 1998 the Company received a
$5 million deposit towards the sale with the balance due at the closing
scheduled September 1, 1998. (See note 5 to the financial statements -
Subsequent Events.)
The CSG sale will accelerate the due date of the $2 million bridge loan
to the scheduled closing date of September 1, 1998. Further, the Company's
option of either drawing an additional $3 million term loan or extending its
Revolver an additional $3 million expired on June 11, 1998. There are currently
no plans to extend that option. The credit agreement also included a variable
additional bridge loan interest fee based on net proceeds and closing date.
Based on the June 10, 1998 asset sale agreement with Cabletron that fee is $1
million due at the scheduled closing date. On July 30, 1998 the Company amended
its credit agreement with Transamerica to reduce that fee to $750,000 and
accelerate the payment to July 31, 1998. Payment of the $750,000 fee was
subsequently made on July 31, 1998.
During the Six Months Ended June 30, 1998, there was a net decrease in
cash and cash equivalents of $1,962,642. At June 30, 1998, cash and cash
equivalents amounted to $683,222. Working capital amounted to $1,536,180 at June
30, 1998 compared to $4,329,018 at December 31, 1997.
Net cash used in operating activities for the Six Months Ended June
30, 1998 amounted to $7,878,855. The negative cash flow from operations was
primarily the result of the Company's net loss of $5,177,191, as well as
increases in accounts receivable and inventory of $2,639,768 and $895,703
respectively. The increase in accounts receivable is a result of approximately
$2.3 million in shipments occurring in the last month of the second quarter. The
increase in inventory occurred in finished goods and was due primarily to
rescheduling and subsequent cancellations of orders in June 1998.
Net cash used in investing activities for the Six Months Ended June 30,
1998 amounted to $333,945 for purchases of computer and peripheral equipment
related to engineering staff and final test and assembly in manufacturing.
Net cash provided by financing activities for the Six Months Ended June 30,
1998 amounted to $6,250,158, reflecting proceeds of $2,000,000 received in
February 1998 as a result of the Transamerica bridge loan, $2,500,000 drawn
against the Revolver in May 1998 and $1,882,788 in proceeds from the exercise of
common stock options and warrants. These proceeds were partially offset by
principal payments on term loans of $132,630.
Other Matters
The Company's strategic decision to focus on the Remote Access Server
("RAS") marketplace led to the announcement in November 1997 of its intent to
seek a buyer for the Horizon product and team. The ADSL carrier class product
does not fit well into the Company's target markets and customer base. In June
1998 the Company accomplished that objective with the signing of a definitive
agreement with Cabletron Systems, Inc.. The sale will allow the Company to fully
dedicate management resources towards achieving its strategic objectives while
the proceeds will substantially improve the Company's capital structure and its
ability to position itself to take advantage of the growing RAS market.
The Company has incurred approximately $8.4 million in costs and
expenses on a cumulative basis from January 1, 1996 through June 30, 1998,
related to the Horizon product effort. Expenses for the first six months of 1998
attributable to the CSG represent approximately 25% of the Company's total
operating expenses over that period. Additionally, the Company expects to incur
approximately $350,000 in expenses through July 1998 for this product effort.
For the foregoing reasons, the Company incurred a net loss of
$(5,177,191) for the Six Months Ended June 30, 1998 compared to a net loss of
$(6,154,270) for the Six Months Ended June 30, 1997.
Statements contained in this Form 10Q that are not historical facts are
forward looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward looking
statements involve risks and uncertainties, including the timely development and
acceptance of new products, the impact of competitive products and pricing,
changing market conditions and the other risks detailed in the Company's
prospectus and from time to time in other filings. Actual results may differ
materially from those projected. These forward looking statements represent the
Company's judgement as of the date of this document. The Company disclaims,
however, any intent or obligation to update these forward looking statements.
Part II. Other Information
- ------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
a) The Company held its annual meeting of Stockholders, through the
solicitation of proxies, on June 24, 1998.
b) Anthony Agnello, Theodore Coburn and Harold Paul were re-elected
as directors at the meeting. Messrs. Etienne Perold, Robert
Ranalli, and Edward Horowitz continued as directors.
c) In addition, the stockholders voted to amend the Company's 1995
Stock Option Plan, increasing the number of shares authorized
under the Plan from 1,200,000 to 1,700,000. The stockholders also
voted to amend the Company's 1996 Director's Stock Option Plan,
increasing the number of shares authorized under the Plan from
250,000 to 450,000. Finally, the stockholders voted to ratify the
selection of Coopers & Lybrand, LLP as the Company's auditors for
the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
The voting totals were as follows:
(i) Election of Anthony Agnello
For 8,389,966; Against 519,593; Withheld 0;
(ii) Election of Theodore Coburn
For 8,398,186; Against 511,373; Withheld 0;
(iii) Election of Harold Paul
For 8,398,589; Against 510,973; Withheld 0;
(iv) Amendment to the 1995 Stock Option Plan
For 2,803,431; Against 1,101,207; Withheld 85,025;
(v) Amendment to the 1996 Director's Stock Option Plan
For 2,541,133; Against 1,358,695; Withheld 89,835;
(vi) Proposal to ratify Coopers & Lybrand, LLP as Independent
Public Accountants for the Company for the fiscal year
ending December 31, 1998
For 8,816,860; Against 64,703; Withheld 27,996;
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits-Exhibit 27-Financial Data Schedule (Filed Electronically)
b) Reports on Form 8-K. - None.
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ariel Corporation
--------------------------
Registrant
/s/ John R. Loprete
--------------------------
John R. Loprete
Corporate Controller
Date: August 14, 1998
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<ARTICLE> 5
<CIK> 0000911167
<NAME> ARIEL CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 683,222
<SECURITIES> 0
<RECEIVABLES> 3,754,123
<ALLOWANCES> 217,433
<INVENTORY> 4,251,893
<CURRENT-ASSETS> 9,457,056
<PP&E> 5,400,042
<DEPRECIATION> 3,315,176
<TOTAL-ASSETS> 12,291,007
<CURRENT-LIABILITIES> 7,920,876
<BONDS> 0
0
0
<COMMON> 9,720,750
<OTHER-SE> 1,884,498
<TOTAL-LIABILITY-AND-EQUITY> 12,291,007
<SALES> 10,387,807
<TOTAL-REVENUES> 10,387,807
<CGS> 6,313,622
<TOTAL-COSTS> 6,313,622
<OTHER-EXPENSES> 9,066,838
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277,402
<INCOME-PRETAX> (5,177,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,177,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,177,191)
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<EPS-DILUTED> (.54)
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