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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, 1999 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 9,760,150 shares outstanding
as of June 30, 1999
Documents Incorporated by Reference: None
</TABLE>
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Ariel Corporation
Index
Part I. Financial Information
---------------------
Item 1. Financial Statements (Unaudited)
--------------------
A. Consolidated balance sheets as of June 30, 1999 and December 31, 1998
B. Consolidated statements of operations for the three and six months ended
June 30, 1999 and 1998
C. Consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998.
D. Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
---------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings
-------------------
Item 2. Changes in Securities
---------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
Item 4. Submission of Matters to a Vote of Shareholders
------------------------------------------------
A. Annual Meeting and Proxies
B. Election of Director
C. Other Matters and Results
Item 5. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
</TABLE>
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PART I. - FINANCIAL INFORMATION
ITEM I. - FINANCIAL STATEMENTS
ARIEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
------------ -------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ............................................ $ 11,026,567 $ 17,996,575
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $1,883,991 IN 1999 AND $1,460,855 IN 192,358,554 ... 3,593,709
OTHER RECEIVABLES .................................................... 1,099,123 1,378,781
INVENTORIES, NET ..................................................... 2,096,706 2,857,326
PREPAID EXPENSES ..................................................... 467,150 449,691
------------ ------------
TOTAL CURRENT ASSETS ............................ 17,048,100 26,276,082
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION ................................................ 1,308,213 1,365,354
INTANGIBLE ASSETS ........................................................... 805,490 997,225
GOODWILL .................................................................... 3,421,689 4,344,374
OTHER ASSETS ................................................................ 647,592 699,345
============ ============
TOTAL ASSETS ......................................................... $ 23,231,084 $ 33,682,380
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ..................................................... $ 1,849,353 $ 2,679,548
ACCRUED EXPENSES ..................................................... 3,074,147 5,388,661
CURRENT PORTION OF LONG-TERM DEBT .................................... 5,116,996 5,480,430
ROYALTIES PAYABLE .................................................... 42,021 95,410
------------ ------------
TOTAL CURRENT LIABILITIES ....................... 10,082,517 13,644,049
LONG-TERM DEBT .............................................................. 73,479 332,834
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 - 9,760,150 AT JUNE 30, 1999
AND 9,760,150 AT DECEMBER 31, 1998 9,760 9,760
ADDITIONAL PAID-IN CAPITAL ........................................... 33,302,342 33,302,342
UNREALIZED GAIN / (LOSS) ON FOREIGN CURRENCY TRANSLATION ............. (415,931) 31,272
ACCUMULATED DEFICIT .................................................. (19,821,083) (13,637,877)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ...................... 13,075,088 19,705,497
============ ============
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ............................. $ 23,231,084 $ 33,682,380
============ ============
The accompanying notes are an integral part of the
financial statements.
</TABLE>
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ARIEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For The Three Months Ended June 30, For The Six Months Ended June30,
1999 1998 1999 1998
------------------ ------------- ------------- --------------
SALES ................................................... $ 2,760,021 $ 4,111,190 $ 5,824,661 $ 10,387,808
COST OF GOODS SOLD ...................................... 1,129,731 2,468,064 2,521,869 6,148,445
--------- --------- --------- ---------
GROSS PROFIT ..................................... 1,630,290 1,643,126 3,302,792 4,239,363
EXPENSES:
SALES AND MARKETING ................................ 1,630,492 1,320,868 3,155,795 2,422,944
GENERAL AND ADMINISTRATIVE ......................... 1,925,207 1,681,821 3,738,654 3,037,868
RESEARCH AND DEVELOPMENT ........................... 1,359,278 1,922,063 2,712,961 3,771,203
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES ....................... 4,914,977 4,924,752 9,607,410 9,232,015
--------- --------- --------- ---------
LOSS FROM OPERATIONS ............................. (3,284,687) (3,281,626) (6,304,618) (4,992,652)
INTEREST INCOME ......................................... 132,502 23,405 293,350 40,208
INTEREST EXPENSE ........................................ (146,550) (180,239) (292,051) (277,402)
OTHER INCOME ............................................ 30,799 60,199 28,575 52,655
------ ------ ------ ------
LOSS BEFORE INCOME TAXES ......................... (3,267,936) (3,378,261) (6,274,744) (5,177,191)
---------- ---------- ---------- ----------
INCOME TAXES ...................................... 0 0 0 0
---------- ---------- ---------- ----------
NET LOSS ......................................... ($ 3,267,936) ($ 3,378,261) ($ 6,274,744) ($ 5,177,191)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS .......... (112,215) 0 (295,154) 0
-------- - -------- -
COMPREHENSIVE (LOSS) ..... (3,380,151) (3,378,261) (6,569,898) (5,177,191)
========== ========== ========== ==========
BASIC AND DILUTED PER SHARE DATA:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,760,150 9,697,114 9,760,150 9,514,482
========= ========= ========= =========
NET LOSS PER SHARE ............................... (0.33) (0.35) (0.64) (0.54)
========= ========= ========= =========
The accompanying notes are an integral part of the financial
statements.
</TABLE>
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ARIEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months Ended June 30,
1999 1998
============== ============
Cash flows from operating activities:
Net Loss ............................................................... ($ 6,274,744) ($ 5,177,191)
Adjustments to reconcile net loss to net cash used in .................. 0
operating activities: ............................................. 0
Depreciation and amortization .............. 458,780 631,725
Amortization of goodwill & intangibles ..... 515,930 0
Amortization of debt issuance costs ........ 32,181 32,178
Provision for doubtful accounts ............ 270,093 30,000
Provision for inventory obsolescence ....... (65,321) 180,000
Non-Cash compensation expense .............. 0 55,409
(Increase) decrease in assets:
Accounts receivable ........................ 1,222,171 (2,639,768)
Inventories ................................ 810,959 (895,703)
Other assets ............................... (117,030) (136,470)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ...... (2,820,300) 47,820
Royalties payable, related parites ......... (53,389) (6,855)
------------ ------------
(6,020,669) (7,878,855)
------------ ------------
Cash flows from investing activities:
Purchase of equipment ...................... (349,366) (333,945)
------------ ------------
(349,366) (333,945)
------------ ------------
Cash flows from financing activities:
Proceeds from debt financing ............... 0 4,500,000
Principal payments on long-term debt ....... (575,888) (132,630)
Proceeds from exercise of common stock
and stock warrants ...................... 0 1,882,788
------------ ------------
(575,888) 6,250,158
------------ ------------
Effect of exhange rate changes on cash ................................. (24,085) 0
Net increase (decrease) in cash ........................................ (6,970,008) (1,962,642)
Cash and cash equivalents, beginning of year 17,996,575 2,645,864
---------- ---------
Cash and cash equivalents, end of period ............................... $ 11,026,567 $ 683,222
============ ============
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<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 generally accepted accounting principles and 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, 1998.
As of June 30, 1999, the Company had working capital of $6,965,583,
including cash and cash equivalents of $11,026,567. 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 Internet
Service Provider (ISP) and Technical Original Equipment (TOEM) markets. There is
no assurance 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, 1999 and will
seek to raise such amounts through a variety of options, including future cash
from operations, borrowings and proceeds from equity financings. In the event
the Company is unable to liquidate its liabilities, planned operations may be
scaled back. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Additional funding may not be available when needed or on terms acceptable
to us, which could have a material adverse effect on our business, financial
condition and results of operations. If adequate funds are not available we may
delay or eliminate some expenditures.
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Company as
of June 30, 1999 and the results of operations for the three and six months
ended June 30, 1999 and 1998. 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,
1999 1998
------------------------
Component Materials......................................... $ 494,214 $1,040,115
Work-in process.......................................... 1,211,815 1,536,870
Finished Goods.......................................... 390,678 280,341
------- -------
$ 2,096,706 $2,857,326
=========== ==========
</TABLE>
3. Debt
As of June 30, 1999 the Company had total debt of $5,190,475 consisting of
notes due to Transamerica Business Credit Corporation's Technology Finance
Division of Farmington Connecticut of $4,819,789 and acquired foreign debt of
$370,686.
Under its credit facility with Transamerica, outstanding debt of $4,819,789
as of June 30,1999 consisted of a $2,504,788 Term Loan payable quarterly in
arrears over twenty consecutive quarters commencing October 1, 1998, and
$2,315,001 drawn against a Revolver which matures on June 12, 2000. The Revolver
can be extended for two additional periods of one year each. Amounts drawn under
the Revolver are based on a formula of eligible accounts receivable and
inventory. Approximately $185,000 of the Revolver balance was paid in June as
the Company had insufficient eligible accounts receivable and inventory to
support amounts drawn. As of June 30, 1999 the Company had sufficient eligible
accounts receivable and inventory to support the revolver balance of $2,315,001.
The interest rate in effect under the Revolver is based on prime rate plus
2.50% and is payable monthly in arrears. The interest rate in effect on the term
loan at June 30, 1999 was 12.099%.
Payment terms for the term loan are as follows:
July 1, 1999 through June 30, 2000 $455,787
July 1, 2000 through June 30, 2001 $536,000
July 1, 2001 through June 30, 2002 $603,856
July 1, 2002 through October 1, 2002 $909,145
--------
Total $2,504,788
==========
On May 14, 1999 the Company executed an amendment to its agreement with
Transamerica that included a waiver for certain financial covenants the Company
was not in compliance with as of December 31, 1998 and March 31, 1999 and
amended covenants for 1999 and 2000. With the execution of this amendment all
previous financial covenants have been waived. Amended covenants consist of the
following:
o As of June 30, 1999 working capital shall be no less than $8,000,000. The
ratio of current assets to current liabilities shall not be less than 1.50 to
1.00. Tangible net worth shall not be less than $7,000,000.
o As of September 30, 1999 working capital shall be no less than
$6,000,000. The ratio of current assets to current liabilities shall not be less
than 1.50 to 1.00. Tangible net worth shall not be less than $5,000,000.
o As of December 31, 1999 working capital shall be no less than $8,000,000.
The ratio of current assets to current liabilities shall not be less than 1.75
to 1.00. Tangible net worth shall not be less than $6,500,000.
o Gross Profit Margins for the year ending December 31, 1999 shall not be
less than 35%.
o Net losses before taxes for the year ending December 31, 1999 are not to
exceed $10,000,000.
o Net losses before taxes for the year ending December 31, 2000 are not to
exceed $ 0.
As of June 30, 1999 the Company is in compliance with these covenants.
However, due to the uncertainty of attaining future covenants all Transamerica
debt is reflected as a current liability as of June 30, 1999.
4. Segment Data
Segments are comprised of European and North American operations. The
accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies" in Note 1 of the Company's Form
10K. Segment profit includes operating expenses directly attributable to the
segment including administrative, selling, marketing, research and development
costs and taxes. Certain expenses managed outside the reportable segments are
excluded. Costs excluded from segment profit include charges for in-process
technology and costs related to mergers and acquisitions. The Company does not
include intercompany transfers between segments for management reporting
purposes.
On November 23, 1998 the Company acquired all of the outstanding stock of
SCii Telecom, SA, in Paris France. As a result of the acquisition, the Company
now reports segments on a geographic basis. European operations did not qualify
as a reportable segment as of December 31, 1998, therefore, there is no
comparable segment information presented.
Summary information by segment as of and for the three and six months ended
June 30, 1999 is as follows:
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For the three months For the six months ended
NORTH AMERICA: ended June 30, 1999 June 30, 1999
--------------------------- ---------------------------
Revenues from external customers $2,597,740 $5,517,714
Intersegment revenues -0- 5,250
Segment loss (2,729,966) (4,895,067)
Segment assets 17,506,173 17,506,173
EUROPE:
Revenues from external customers $162,281 $306,947
Intersegment revenues -0- -0-
Segment loss (537,970) (1,381,952)
Segment assets 5,724,911 5,724,911
A reconciliation of the Company's segment losses to the corresponding
consolidated amounts for the three and six months ended June 30, 1999 is as
follows:
Segment profit / (loss) ($3,267,936) ($6,277,019)
Profit margins on intersegment revenues -0- 2,275
-------------------------- --------------------------
Net loss ($3,267,936) ($6,274,744)
=========================== ===========================
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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.
Six Months Ended
June 30,
1999 1998
Sales 100% 100%
Cost of goods sold 43 59
----------- ----------
Gross profit 57 41
Expenses
Sales and marketing 54 23
General and administrative 64 29
Research and development 47 36
----------- ----------
Total Operating Expenses 165 89
Loss from operations (108) (48)
Interest Income 5 0
Interest Expense (5) (3)
Other (expense) Income * 1
----------- ----------
Loss before income taxes (108) (50)
Income taxes - -
----------- ----------
Net Loss (108)% (50)%
=========== ==========
o Total is less than 1%
</TABLE>
Three months ended June 30, 1999 as compared to three months ended June 30, 1998
Net Sales
Worldwide sales were $2,760,021 for the three months ended June 30, 1999, a
decrease of $1,351,169 compared to net sales of $4,111,190 for the three months
ended June 30, 1998. Domestic sales were $2,426,820 for the three months ended
June 30, 1999 compared to $3,781,075 for the three months ended June 30, 1998, a
decrease of $1,354,255. Approximately $1.1 million of this decrease is
attributable to a decrease in T1-Modem+ sales to Compaq, a major PC Integrator
customer. Compaq has discontinued its networking group and as a result, the
Company expects 1998 sales to PC integrators to be a significant part of its
1999 sales variances from the previous year. The Company expects to offset the
reduction in sales to PC integrators by sales to Technical Original Equipment
Manufacturers (TOEMs) and Internet Service Providers (ISPs). There can be no
assurance the Corporation will be successful in expanding its sales in these
areas.
International sales were $333,201 for the second quarter of 1999 including
U.S. exports of $170,920 and sales from European operations of $162,281. This as
compared to $330,115 for the second quarter of 1998.
Gross Profit
Gross profit decreased by $12,836 to $1,630,290 for the three months ended
June 30, 1999 from $1,643,126 for the three months ended June 30, 1998. Gross
profit margin was 59% for the three months ended June 30, 1999 compared to 40%
for the three months ended June 30, 1998. The decrease in gross profit was the
result of reduced sales. The increase in gross profit as a percent to sales
resulted from a higher mix of sales to technical original equipment
manufacturers (TOEM) as compared to PC integrators such as Compaq. TOEM's gross
profits are higher as the Company is able to charge premiums for engineering for
specific customer applications.
Sales and marketing
Sales and marketing expenses were $1,630,492 or 59% of sales for the Three
months ended June 30, 1999 compared to $1,320,868 or 32% of sales for the Three
months ended June 30,1998, an increase of $309,624. Salaries and related
expenses increased $101,884 as a result of the addition of a Senior Vice
President of Marketing and the transfer of the former President to the Vice
President of Sales position. These changes occurred in December 1998.
Advertising, marketing research and promotions increased $289,066 over the prior
year as the Company introduced its PowerPopTM concept to Internet Service
Providers (ISP) and continues efforts to penetrate the ISP market. Such
increases were offset by a reduction in commissions of $38,514 due to lower
sales and a reduction in trade show expenses of $49,546 as shows for these new
markets did not occur in the second quarter of 1999.
General and administrative
General and administrative expenses were $1,925,207 for the three months
ended June 30, 1999 compared to $1,681,821 for the three months ended June 30,
1998. The increase of $243,386 is primarily due to the amortization of goodwill
and other intangibles realized in the Company's November 1998 acquisition of
SCii Telecom SA. Amortization charges for the three months ending June 30, 1999
were $250,249. This increase was partially offset by a reduction to wages due to
the departure of the Company's Chief Financial Officer during the second quarter
of 1998.
Research and Development
Research and development expenses were $1,359,278 or 49% of sales for the
three months ended June 30, 1999 compared to $1,922,063 or 47% of sales for the
three months ended June 30, 1998, a decrease of $562,785 or 29%. Expenses
declined by $978,177 from the same period last year due to the sale of the
Company's Communications Systems Group (CSG) to Cabletron in September 1998.
These decreases were offset by an increase in research and development of
$236,187 resulting from investments in products and technologies at the
Company's European subsidiary, SCii Telecom, SA. Additionally, expenses
increased due to bonuses paid to certain engineers in conjunction with
employment contracts of approximately $213,000.
Six Months Ended June 30, 1999 as compared to Six Months Ended June 30, 1998
Net Sales
Worldwide sales were $5,824,661 for the six months ended June 30, 1999, a
decrease of $4,563,147 compared to net sales of $10,387,808 for the six months
ended June 30, 1998. Domestic sales were $5,282,012 for the six months ended
June 30, 1999 compared to $9,534,794 for the six months ended June 30, 1998, a
decrease of $4,252,782. Approximately $3.2 million of this decrease is
attributable to a decrease in sales to Compaq, a major PC Integrator customer.
Compaq has discontinued its networking group and as a result, the Company
expects 1998 sales to PC integrators to be a significant part of its 1999 sales
variances from the previous year. A reduction in T1-Modem+ sales to TOEM
customers accounted for an additional decrease of $1.1 million. The Company
expects to offset the reduction in sales to PC integrators by sales to Technical
Original Equipment Manufacturers (TOEMs) and Internet Service Providers (ISPs).
There can be no assurance the Corporation will be successful in expanding its
sales in these areas.
International sales were $542,649 for the first six months of 1999
including U.S. exports of $234,284 and sales from European operations of
$308,366. This as compared to $853,014 for the same period in 1998. A decrease
in international sales of $310,365 reflects a decrease in sales of T1 Modem+
products to European OEM customers of $618,730. This decrease is partially
offset by sales from the Company's European subsidiaries of $308,366.
Gross Profit
Gross profit decreased by $936,571 or 22% to $3,302,792 for the six months
ended June 30, 1999 from $4,239,363 for the six months ended June 30, 1998.
Gross profit margin was 57% for the six months ended June 30, 1999 compared to
41% for the six months ended June 30, 1998. The increase in gross profit margin
as a percent of sales reflects the continued shift in product mix from lower
margin shipments to PC integrators to shipments to TOEM's customers that carry
higher gross margins.
Sales and marketing
Sales and marketing expenses were $3,155,795 or 54% of sales for the six
months ended June 30, 1999 compared to $2,422,944 or 23% of sales for the six
months ended June 30,1998. The increase of $732,851 reflects an increase in
salaries and related expenses of $222,755 as the Company has added selling and
marketing resources including a Senior Vice President of Marketing and
transferred the former President to the Vice President of Sales position. Other
increases include $431,564 for advertising and marketing programs related to the
Company's ISP and TOEM target markets and $231,127 for European operations. Such
increases were offset by decreases in commissions of $64,537 due to lower sales
and a decrease in trade show expenses of $92,948 related to a shift in markets
from the same period last year.
General and administrative
General and administrative expenses were $3,738,654 for the six months
ended June 30, 1999 compared to $3,037,868 for the six months ended June 30,
1998. The increase of $700,786 is primarily due to the amortization of goodwill
and other intangibles realized in the Company's November 1998 acquisition of
SCii Telecom, SA. Amortization charges for the six months ending June 30, 1999
were $515,928. Additionally, the Company incurred $331,899 in general and
administrative expenses related to its European subsidiaries including costs
related to establishing a wholly owned German subsidiary. Such increases were
partially offset by decreases in domestic administrative wages, benefits and
related taxes of $212,982 related to a reduction in domestic employees.
Research and Development
Research and development expenses were $2,712,961 or 47% of sales for the
six months ended June 30, 1999 compared to $3,771,203 or 36% of sales for the
six months ended June 30, 1998, a decrease of $1,058,242 or 28%. Expenses
declined by $1,864,550 from the same period last year due to the sale of the
Company's Communications Systems Group (CSG) to Cabletron in September 1998.
These decreases were offset by an increase in research and development of
$452,559 resulting from investments in products and technologies at the
Company's European subsidiary, SCii Telecom, SA. Additionally, expenses
increased due to bonuses paid to certain engineers in conjunction with
employment contracts of approximately $426,000.
Liquidity and Capital Resources
The Company maintains a credit facility with Transamerica Business Credit
Corporation's Technology Finance Division, of Farmington, Connecticut. Currently
the Company has a five-year, $3 million term loan and a $4 million revolving
credit facility ("Revolver"). As of June 30, 1999, there was $2,504,788
outstanding under the term loan and $2,315,001 under the Revolver. (See Note 3
to the Financial Statements.)
The Company took down the term loan on June 12, 1997 when it signed the
agreement. 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, 1999, the interest rate in effect was 12.099%.
The Revolver provides for up to $4.0 million in advances based on a formula
of eligible accounts receivable and inventory. Amounts drawn under the Revolver
mature on June 12, 2000. Eligibility is computed monthly and amounts drawn that
are not supported by the formula are to be repaid at that time. Accordingly, the
Revolver balance is reflected as a current liability on the balance sheet. 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.
On May 14, 1999 the Company executed an amendment to its agreement with
Transamerica that included a waiver for certain financial covenants the Company
was not in compliance with as of December 31, 1998 and March 31, 1999 and
amended covenants for 1999 and 2000. With the execution of this amendment all
previous financial covenants have been waived. Amended covenants consist of the
following:
o As of June 30, 1999 working capital shall be no less than $8,000,000. The
ratio of current assets to current liabilities shall not be less than 1.50 to
1.00. Tangible net worth shall not be less than $7,000,000.
o As of September 30, 1999 working capital shall be no less than
$6,000,000. The ratio of current assets to current liabilities shall not be less
than 1.50 to 1.00. Tangible net worth shall not be less than $5,000,000.
o As of December 31, 1999 working capital shall be no less than $8,000,000.
The ratio of current assets to current liabilities shall not be less than 1.75
to 1.00. Tangible net worth shall not be less than $6,500,000.
o Gross Profit Margins for the year ending December 31, 1999 shall not be
less than 35%.
o Net losses before taxes for the year ending December 31, 1999 are not to
exceed $10,000,000.
o Net losses before taxes for the year ending December 31, 2000 are not to
exceed $ 0.
As of June 30, 1999 the Company is in compliance with these covenants.
However, due to the uncertainty of attaining future covenants all Transamerica
debt is reflected as a current liability as of June 30, 1999.
During the six months ended June 30, 1999, there was a net decrease in cash
and cash equivalents of $6,970,008. At June 30, 1999, cash and cash equivalents
amounted to $11,026,567. Working capital amounted to $6,965,583 at June 30, 1999
as computed with all Transamerica debt reflected as a current liability. This as
compared to $12,632,033 at December 31, 1998.
Net cash used in operating activities for the six months ended June 30,
1999 amounted to $6,020,669. The negative cash flows from operations were due,
in part, to the Company's net loss of $6,274,744 which was offset by non-cash
expenditures related to depreciation, amortization, reserves and allowances of
$1,276,984. Other operating cash uses included decreases in accounts payable and
accrued liabilities of $2,820,300 as the Company paid down obligations of its
subsidiary and accrued costs related to the sale of the CSG and executive
bonuses. Such decreases were partially offset by increases in operating cash due
to reduced inventory and accounts receivable of $810,959 and $1,222,171,
respectively.
Net cash used in investing activities for the six months ended June 30,
1999 amounted to $349,366 due to the purchases of computer and peripheral
equipment related to engineering staff and final test and assembly in
manufacturing.
Net cash used in financing activities for the six months ended June 30,
1999 amounted to $575,888, reflecting principal payments on debt including
$184,999 against the Revolver.
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 ISP and TOEM markets. There is no assurance 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, 1999 and will seek to raise such
amounts through a variety of options, including future cash from operations,
borrowings and proceeds from equity financings. In the event the Company is
unable to liquidate its liabilities, planned operations may be scaled back. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Additional funding may not be available when needed or on terms acceptable
to us, which could have a material adverse effect on our business, financial
condition and results of operations. If adequate funds are not available we may
delay or eliminate some expenditures.
Readiness for Year 2000
Until recently, many computer programs were written using two digits as a
space saving measure rather than four digits to define the applicable year in
the twentieth century. Such software may recognize a date using "00" as the year
1900 rather than the year 2000. The Company is in the process of defining,
assessing and converting, or replacing various internal computer programs and
systems to ensure that these Information Technologies will be Year 2000 (Y2k)
compliant. Implementation is expected to be completed before September 30, 1999
at which time the Company expects to have completed its plans to test Y2k
compliance of critical systems. While the estimated Y2k costs of these efforts
are not expected to be material to the Company's financial position or any
year's results of operations, there can be no assurance to this effect.
Non-Information Technology systems, which include embedded technology such
as micro-controllers used in fax machines, photocopiers, telephone switches,
security systems, and other common devices may also be affected by the Y2k
Problem. The Company is currently assessing the potential effect, if any, and
the cost of remediating the Y2k Problem with respect to its office and
facilities equipment.
While the Company continues to test its products, it believes these
products, which do not utilize date codes, are Y2k compliant. However, the fact
that these products interact with other third party vendor products and operate
on computer systems which are not under the Company's control, it is not
possible to be completely certain that all of the Y2k problems have been
foreseen.
In addition, the Company has initiated communications with third party
suppliers to determine that the supplier's operations and the products and
services they provide are Y2k compliant. Where practicable the Company will
attempt to mitigate its risks with respect to the failure of suppliers to be Y2k
ready. A survey of the Company's major suppliers has revealed that 82% have Y2K
compliance programs in place and are, or will be, Y2k compliant in a timely
manner. In the event that these third parties are not Y2k compliant, the Company
will seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on the Company's results of
operations or financial condition.
Recovery under existing insurance policies should be available depending
upon the circumstances of a Y2k related event and the type of facility involved.
Generally, no recovery would be available in the event of an orderly shutdown
which does not result in damage to a facility. Potential recoveries in the event
of facility damage, including business interruption, would be subject to
deductibles in place under these policies.
The above expectations are subject to uncertainties. For example, if we are
unsuccessful in identifying or fixing all Y2k problems in our critical
operations, or if we are affected by the inability of suppliers or major
customers to continue operations due to such a problem, our results of
operations could be materially impacted.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company does not have material exposure to market risk from market risk
sensitive instruments.
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings
------------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Shareholders
------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
a) The Company held its annual meeting of stockholders, through the solicitation
of proxies, on June 23, 1999.
b) Jay H. Atlas, President and Chief Executive Officer was elected as
a director for a term of three years. Messrs. Robert Ranalli,
Edward Horowitz, Harold Paul and Theodore Coburn continued as
directors. Anthony Agnello continued as Chairman.
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
1,700,000 to 2,200,000. Finally, the stockholders voted to ratify
the selection of PricewaterhouseCoopers, LLP as the Company's
auditors for the fiscal year ending December 31, 1999.
The voting totals were as follows:
(i) Election of Jay H. Atlas
For 8,749,444; Against 0; Withheld 458,650;
(ii) Amendment to the 1995 Stock Option Plan
For 2,831,239; Against 724,477; Abstain 63,848; Not Voted 5,588,530
(iii) Proposal to ratify PricewaterhouseCoopers, LLP as
Independent Public Accountants for the Company for the
year ending December 31, 1999
For 9,131,223; Against 52,271; Abstain 24,600;
</TABLE>
Item 5. Other Information
-----------------
None
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.
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
-------------------------
John R. Loprete
Vice President of Finance
and Principal Accounting
Officer
Date: August 13, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000911167
<NAME> Ariel Corporation
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,026,567
<SECURITIES> 0
<RECEIVABLES> 4,127,848
<ALLOWANCES> 1,769,294
<INVENTORY> 2,096,706
<CURRENT-ASSETS> 17,048,100
<PP&E> 5,212,843
<DEPRECIATION> 3,904,630
<TOTAL-ASSETS> 23,231,084
<CURRENT-LIABILITIES> 10,082,517
<BONDS> 0
0
0
<COMMON> 9,760,150
<OTHER-SE> 13,065,328
<TOTAL-LIABILITY-AND-EQUITY> 23,231,084
<SALES> 5,824,661
<TOTAL-REVENUES> 5,824,661
<CGS> 2,521,869
<TOTAL-COSTS> 2,521,869
<OTHER-EXPENSES> 9,607,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 292,051
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,274,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
