<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission
Washington, DC 20549
__________________________________
Form 10-Q
Quarterly Report pursuant to Section 13 or 15(d)
of the securities exchange act of 1934
For the quarterly period ended June 30, 2000 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 13,073,920 shares outstanding
as of June 30, 2000
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, 2000 and December 31, 1999
B. Consolidated statements of operations for the three and six months ended
June 30, 2000 and 1999
C. Consolidated statements of cash flows for the six months ended June 30, 2000 and 1999.
D. Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults on Senior Securities
Items 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>
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
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ARIEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS .............................................. $ 6,749,205 $ 7,088,431
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $1,007,203 IN 2000 AND $1,019,731 IN 1999 ............ 841,053 3,091,362
OTHER RECEIVABLES ...................................................... 336,642 383,676
INVENTORIES, NET ....................................................... 3,074,080 3,303,057
PREPAID EXPENSES ....................................................... 755,091 775,943
------------ ------------
TOTAL CURRENT ASSETS ................................................... 11,756,071 14,642,469
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION .................................................. 1,406,121 1,387,128
GOODWILL, INTANGIBLES AND OTHER ASSETS ........................................ 1,626,807 3,787,475
--------- ---------
TOTAL ASSETS ........................................................... $ 14,788,999 $ 19,817,072
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ....................................................... $ 290,093 $ 1,190,807
ACCRUED EXPENSES ....................................................... 2,248,288 3,510,566
CURRENT PORTION OF LONG-TERM DEBT ...................................... 572,987 1,895,926
CURRENT PORTION OF CAPITAL LEASE ....................................... 126,438 126,438
ROYALTIES PAYABLE ...................................................... 91,210 91,210
------------ ------------
TOTAL CURRENT LIABILITIES .............................................. 3,329,016 6,814,947
LONG-TERM PORTION OF CAPITAL LEASE ..................................... 161,080 215,901
LONG-TERM DEBT ......................................................... 1,528,737 1,788,985
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 - 13,073,920 AT JUNE 30, 2000
AND 10,832,597 AT DECEMBER 31, 1999 .......... 13,074 10,833
ADDITIONAL PAID-IN CAPITAL ............................................. 46,436,668 37,627,809
UNREALIZED GAIN / (LOSS) ON FOREIGN CURRENCY TRANSLATION ............... (933,839) (503,711)
ACCUMULATED DEFICIT .................................................... (35,745,737) (26,137,692)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................. 9,770,166 10,997,239
----------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ............................... 14,788,999 19,817,072
============ ============
The accompanying notes are an integral part of the financial statements
</TABLE>
<PAGE>
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<S> <C> <C> <C> <C>
ARIEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------- ---------- ----------- -----------
SALES ................................................... $ 1,097,211 $ 2,760,021 $ 3,169,432 $ 5,824,661
COST OF GOODS SOLD ...................................... 1,021,382 1,129,731 1,889,756 2,521,869
------------ ------------ ------------ ------------
GROSS PROFIT ..................................... 75,829 1,630,290 1,279,676 3,302,792
EXPENSES:
SALES AND MARKETING ................................ 1,601,702 1,630,492 2,868,535 3,155,795
GENERAL AND ADMINISTRATIVE ......................... 1,526,158 1,925,207 2,994,554 3,738,654
RESEARCH AND DEVELOPMENT ........................... 1,387,654 1,359,278 2,669,280 2,712,961
RESTRUCTURING AND SPECIAL CHARGES .................. 2,356,656 0 2,356,656 0
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ....................... 6,872,170 4,914,977 10,889,025 9,607,410
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............................. (6,796,341) (3,284,687) (9,609,349) (6,304,618)
INTEREST INCOME ......................................... 129,237 132,502 240,155 293,350
INTEREST EXPENSE ........................................ (137,515) (146,550) (247,648) (292,051)
OTHER INCOME, NET ....................................... 19,056 30,799 18,303 28,575
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ......................... (6,785,563) (3,267,936) (9,598,539) (6,274,744)
PROVISION FOR INCOME TAXES ........................ 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS ......................................... ($ 6,785,563) ($ 3,267,936) ($ 9,598,539) ($ 6,274,744)
============ ============ ============ ============
OTHER COMPREHENSIVE LOSS, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS .......... (136,617) (112,215) (283,884) (295,154)
------- -------- -------- --------
COMPREHENSIVE (LOSS) ..... (6,855,941) (3,380,151) (9,744,783) (6,569,898)
========== ========== ========== ==========
Basic and Diluted Per Share Data:
---------------------------------
BASIC LOSS PER SHARE ............................. (0.52) (0.33) (0.78) (0.64)
===== ===== ===== =====
DILUTED LOSS PER SHARE ........................... (0.52) (0.33) (0.78) (0.64)
===== ===== ===== =====
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,073,920 9,760,150 12,376,934 9,760,150
EFFECT OF DILUTIVE OPTIONS ...................... 0 0 0 0
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,073,920 9,760,150 12,376,934 9,760,150
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
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ARIEL CORPORATION
CONDOLIDATED STATEMENTS OF CASH FLOWS
For The Six months Ended June 30,
(Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net Loss ........................................................... ($ 9,598,539) ($ 6,274,744)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 472,740 458,780
Amortization of goodwill & intangibles .................... 466,935 515,930
Amortization of debt issuance costs ....................... 139,493 32,181
Provision for doubtful accounts ........................... 13,207 270,093
Provision for inventory obsolescence ...................... 694,494 (65,321)
Non-Cash compensation expense ............................. 29,939 0
Non-Cash restructuring and special charges ................ 2,050,511 0
(Increase) decrease in assets:
Accounts receivable ....................................... 2,231,052 961,142
Other receivables ......................................... 27,108 261,030
Inventories ............................................... (468,613) 810,959
Other assets .............................................. (186,421) (117,030)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ..................... (2,104,813) (2,820,300)
Royalties payable, related parites ........................ 0 (53,389)
---------- ----------
Net cash used in operating activities ..................... (6,232,907) (6,020,669)
---------- ----------
Cash flows from investing activities:
Purchase of equipment ..................................... (496,082) (349,366)
---------- ----------
Net cash used in investing activities .................... (496,082) (349,366)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligation ............ (54,821) 0
Principal payments on long-term debt ...................... (244,972) (575,888)
Principal payments on short-term debt ..................... (1,329,321) 0
Proceeds from issuance of common stock..................... 8,067,217 0
---------- ----------
Net cash provided by (used in) financing activities ....... 6,438,103 (575,888)
--------- --------
Effect of exchange rate changes on cash ............................ (48,340) (24,085)
Net increase (decrease) in cash .................................... (339,226) (6,970,008)
Cash and cash equivalents, beginning of year .............. 7,088,431 17,996,575
--------- ----------
Cash and cash equivalents, end of period ........................... $ 6,749,205 $ 11,026,567
============ ============
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 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, 1999.
As of June 30, 2000, the Company had working capital of $8,427,055,
including cash and cash equivalents of $6,749,205. The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
into cash. Inventories net of reserves for excess and obsolete material were
$3,074,080 as of June 30, 2000. The Company has incurred substantial operating
losses and has an accumulated deficit of $35,745,737 as of June 30, 2000. It
expects to continue to incur costs and expenses in excess of expected revenues
as it continues to execute its business strategy in the Internet Service
Provider (ISP) and Original Equipment Manufacturer (OEM) markets. If the Company
does not successfully execute its business strategy in the ISP and OEM markets,
there is no assurance that the Company will generate sufficient cash flow from
operations to meet anticipated operating needs and liquidate liabilities as they
come due. If necessary, the Company may delay or eliminate some expenditures and
planned operations in both North America and Europe may be scaled back or the
Company may need to raise additional funds to meet obligations. It would seek to
raise such amounts through a variety of options including borrowings and
proceeds from future equity financing. Additional funding may not be available
when needed or on terms acceptable to the Company, which could have a material
adverse effect on its business, financial condition, and results of operations.
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, 2000 and the results of operations for the three and six months
ended June 30, 2000 and 1999. The results for interim periods are not
necessarily indicative of results for the full year.
2. Restructuring and other charges
In June 2000, the Company recorded restructuring and other charges of
$2,356,656. $1,546,141 reflects the partial impairment of the carrying value of
goodwill recorded with the Company's November 1998 purchase of SCii. The
write-down of goodwill resulted from the Company's June 2000 decision to phase
out SCii's low-end basic rate ISDN (BRI) products and to dismiss certain SCii
employees related to these products and technologies. The decision was based on
reduced sales of BRI products due to the loss of major customers and advances in
competing technologies. Accordingly, future BRI sales forecasts have been
reduced. As a result, the Company has recognized the impairment of goodwill to
the extent that undiscounted future cash flows from operating activities do not
exceed the carrying value of the goodwill.
The Company utilizes an undiscounted cash flows valuation method to measure
the carrying value of goodwill not identified with long lived assets.
In addition, effective May 31, 2000 the Company terminated the employment
of Jay Atlas, its president and Chief Executive Officer, and entered into a
termination and separation agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a restructuring charge of $810,515,
which reflects severance and related employee benefits payments of $306,145 and
an estimated value of $504,370 for the extension of stock options that vested
during Mr. Atlas' employment. As of June 30, 2000, $10,577 of the accrued
severance has been paid.
3. Inventories, net of allowance:
Inventories, net of allowance, consists of the following:
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June 30, December 31,
2000 1999
---- ----
Component Materials......................................... $ 433,354 $ 371,821
Work-in process........................................... 712,971 814,923
Finished Goods.......................................... 1,927,755 2,116,313
--------- ---------
$3,074,080 $3,303,057
========== ==========
</TABLE>
4. Debt
As of June 30, 2000 the Company had total debt of $2,101,724 consisting of
a term note due to Transamerica Business Credit Corporation's Technology Finance
Division of Farmington Connecticut of $2,049,000 and acquired foreign debt of
$52,724.
As of June 30, 2000, under its credit facility with Transamerica,
outstanding debt of $2,049,000 remained on a Term Loan payable quarterly in
arrears over twenty consecutive quarters commencing October 1, 1997. Amounts
previously drawn against a revolving credit line (Revolver), matured on June 12,
2000, and have been paid in full. The interest rate in effect on the term loan
at June 30, 2000 was 12.099%.
The Transamerica 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's ability to meet its obligations.
5. 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.
Summary information by segment as of and for the three and six months ended
June 30:
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NORTH AMERICA: For the three months For the six months
Ended June 30, 2000 Ended June 30, 2000
-------------------- ------------------
Revenues from external customers $1,000,465 $2,955,082
Intersegment revenues 41,360 41,360
Segment profit / (loss) (6,539,567) (9,119,076)
Segment assets 12,403,309 12,403,309
EUROPE:
Revenues from external customers $96,746 $214,350
Intersegment revenues 0 0
Segment profit / (loss) (233,468) (466,935)
Segment assets 2,385,690 2,385,690
A reconciliation of the Company's segment losses to the corresponding consolidated amounts for the three and six
months ended June 30, 2000 is as follows:
Segment profit / (loss) ($6,773,035) ($9,586,011)
Margins on intersegment revenues (12,528) (12,528)
---------------- ---------------
Net loss ($6,785,563) ($9,598,539)
================ ================
</TABLE>
6. Stock Purchase Agreement
On February 24, 2000 the Company entered into an agreement with a number of
investors to sell 2,151,000 shares of our common stock at a purchase price of
$4.00 per share in a private placement. The Company also issued 2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are not exercisable until September 1, 2000. The exercise price of the warrants
will be reset to the average market price for the five trading days preceding
the one year anniversary date of the agreement provided the average price is
less than $6.875. Under the terms of the agreement, the Company filed a
registration statement on April 4, 2000 to register the shares sold and those
underlying the warrants. That registration statement was declared effective on
April 20, 2000.
The agreement also calls for the issuance of additional shares at no cost
to these investors should we sell shares of common stock, or securities
convertible into common stock, at a price less than $4.00 per share within
twenty four months of the this agreement. This provision requires the Company to
issue additional shares such that the average share price of these investors is
equal to the then offered price.
Additionally, these investors have the right of first refusal to
participate in any offer to sell the Company's common stock, or securities
convertible into common stock, within the next twenty four months under the
terms then offered.
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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,
2000 1999
---- ----
Sales .............................................. 100% 100%
Cost of goods sold ................................. 60 43
---- ----
Gross profit .................................. 40 57
Expenses:
Sales and marketing ........................... 91 54
General and administrative .................... 95 64
Research and development ...................... 84 47
Restructuring and special charges ............. 74 *
---- ----
Total operating expenses ........................... 344 165
---- ----
Loss from operations ............................... (304) (108)
Interest income 8 5
Interest expense (8) (5)
Other income / (expense)............................ * *
---- ----
Loss before income taxes ....................... (304) (108)
---- ----
Net Loss .......................... (304)% (108)%
==== ====
o Total is less than 1%
</TABLE>
<PAGE>
Three months ended June 30, 2000 as Compared to three months ended June 30, 1999
Net Sales
Worldwide sales were $1,097,211 for the three months ended June 30, 2000, a
decrease of $1,662,810 compared to net sales of $2,760,021 for the three months
ended June 30, 1999. Domestic sales were $739,663 for the three months ended
June 30, 2000 compared to $2,426,820 for the three months ended June 30, 1999.
In 1998 the Company began a shift from digital signal processing (DSP) to
products and markets for dial-up remote access equipment (RAS). The domestic
sales decrease of $1,687,157 was due to reduced demand for the Company's older
DSP products from original equipment manufacturers (OEMs) resulting from this
shift. Such decreases were partially offset by sales of the Company's RAS
products to Internet Service Providers (ISPs) of approximately $139,874.
International sales were $357,548 for the second quarter of 2000 including U.S.
exports of $260,802 and sales from European operations of $96,746. This as
compared to $333,201 for the second quarter of 1999. The increase of $24,347
over prior year reflects and increase of US exports in the second quarter of
2000 of $89,882, offset by a decrease in sales of Basic Rate ISDN (BRI) products
at international subsidiaries.
Gross Profit
Gross profit decreased by $1,554,461 to $75,829 for the three months ended
June 30, 2000 from $1,630,290 for the three months ended June 30, 1999. Gross
profit was 7% as a percent of sales for the three months ended June 30, 2000
compared to 59% for the three months ended June 30, 1999. Gross profit was
reduced by $548,000 for additional inventory reserves recorded during the
quarter. The Company introduced the RS 4200 in the fall of 1999 which has
improved price and performance over the RS 2000. RS 4200 began shipping in March
of 2000. As a result, on hand quantities of the RS 2000 are expected to be in
excess of future demand and a reserve was recorded to write off $325,000 of
excess RS2000 inventory. Additionally, certain older DSP products are expected
to be in excess of future demand and a reserve of $223,000 was recorded to
write-off excess material. Gross profit percent for the three months ended June
30, 2000 was 57% before giving effect to this write down.
The decrease in gross profit percentage was also impacted by fixed
manufacturing overhead costs on reduced sales volume for the period. The
decrease was partially offset by the shipment of products that had previously
been written down, resulting in higher margins in the current period.
Additionally, higher gross profit rates reflect the effect of OEM price
increases initiated in 1999.
Sales and marketing
Sales and marketing expenses were $1,601,702 for the three months ended
June 30, 2000 compared to $1,630,492 for the three months ended June 30, 1999.
The decrease of $28,790 or 2% includes a decrease in sales commission of
approximately $71,565 due to lower revenues as well as a reduction in wages of
approximately $220,540 resulting from a restructuring of the sales organization
completed in August of 1999. The Company also realized a reduction of
approximately $126,000 in advertising and marketing programs. The reduction is
due to the introduction, during the same period last year, of the Company's
PowerPOP TM architecture. Such decreases were partially offset by increases in
public and investor relations of approximately $128,000 and $158,000 related to
increased participation in trade shows during the second quarter of fiscal year
2000. Additionally, Sales and Marketing expenses of European subsidiaries
increased by approximately $112,000 due to the introduction of RS4200 and RS2000
products to European OEM markets.
General and administrative
General and administrative expenses were $1,526,158 for the three months
ended June 30, 2000 compared to $1,925,207 for the three months ended June 30,
1999. The decrease of $399,049 reflects a reduction in allowances for doubtful
accounts of approximately $50,000 as compared to the second quarter of the prior
year. Other decreases include reduced consulting and recruiting costs of
approximately $87,000 related to the appointment of a new management team in
December 1998. In addition, a reduction in salaries and
depreciation/amortization expense of approximately $53,000 and $46,000,
respectively, contributed to the overall decrease. The Company also reduced
general and administrative costs at its European subsidiaries by approximately
$139,000.
Research and Development
Research and development expenses were $1,387,654 for the three months
ended June 30, 2000 compared to $1,359,278 for the three months ended June 30,
1999. The increase of $28,376 is comprised primarily of decreases in salaries
and related expenses of $102,709 and savings of $112,430 resulting from the
integration of the Company's European research and development projects with
those at its U.S. headquarters. Such decreases were offset by increases of
$26,502 in depreciation of test lab equipment acquired in October 1999, as well
as, labor and material costs of approximately $212,205 for engineers related to
development of Linux related software, the Company's SS7 Gateway enabled remote
access products and the vice-president of engineering appointed in May of 1999.
Restructuring and other charges
In June 2000 the board of directors approved a plan to phase out the
Company's low end products and reduce ongoing investment in these products in
Europe. Accordingly, the Company recorded a special non-recurring charge of
approximately $2,356,000 including the impairment of goodwill of approximately
$1,546,000 associated with the Company's 1998 acquisition of SCii Telecom, S.A.
(see Note 2 to the financial statements).
In addition, effective May 31, 2000 the Company terminated the employment
of Jay Atlas, its President and Chief Executive Officer, and entered into a
termination and separation agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a restructuring charge of $810,515,
which reflects severance and related employee benefits payments of $306,145 and
an estimated value of $504,370 for the extension of stock options that vested
during Mr. Atlas' employment. As of June 30, 2000, $10,577 of the accrued
severance has been paid.
For the foregoing reasons the Company incurred a net loss of $6,785,563 for
the three months ended June 30, 2000 as compared to losses of $3,267,936 for the
three months ended June 30, 1999.
Six months ended June 30, 2000 as Compared to six months ended June 30, 1999
Net Sales
Worldwide sales were $3,169,432 for the six months ended June 30, 2000, a
decrease of $2,655,229 compared to net sales of $5,824,661 for the six months
ended June 30, 1999. Domestic sales were $2,537,570 for the six months ended
June 30, 2000 compared to $5,282,012 for the six months ended June 30, 1999. In
1998 the Company began a shift from digital signal processing (DSP) to products
and markets for dial-up remote access equipment (RAS). The domestic sales
decrease of $2,744,442 was due to reduced demand for the Company's DSP products
from original equipment manufacturers (OEMs) resulting from this shift. Such
increases were partially offset by sales of the Company's RAS products to
Internet Service Providers (ISPs) of approximately $339,874. International sales
were $631,862 for the six months end June 30, 2000 including U.S. exports of
$417,512 and sales from European operations of $214,350. This as compared to
$542,649 for the same period of 1999. The increase of $89,213 over prior year
reflects and increase of US exports in the second quarter of 2000 of RAS
products , offset by a decrease in sales of BRI products at international
subsidiaries.
Gross Profit
Gross profit decreased by $2,023,116 to $1,279,676 for the six months ended
June 30, 2000 from $3,302,792 for the six months ended June 30, 1999. Gross
profit was reduced by $548,000 for additional inventory reserves recorded during
the second quarter. The Company introduced the RS 4200 in the fall of 1999 which
has improved price and performance over the RS 2000. RS 4200 began shipping in
March of 2000. As a result, on hand quantities of the RS 2000 are in expected to
be in excess of future demand and a reserve was recorded to write off $325,000
of excess RS2000 inventory. Additionally, certain older DSP products are
expected to be in excess of future demand and a reserve of $223,000 was recorded
to write-off excess material. Gross profit percent for the three months ended
June 30, 2000 was 57% before giving effect to this write down.
The decrease in gross profit percentage was also impacted by certain fixed
manufacturing overhead costs on reduced sales volume for the period.The decrease
was partially offset by the shipment of products during the period which had
been previously written down, resulting in higher margins on such products for
the current period
Sales and marketing
Sales and marketing expenses were $2,868,535 for the six months ended June
30, 2000 compared to $3,155,795 for the six months ended June 30,1999. The
decrease of $287,260 or 9% includes a decrease in sales commission of
approximately $177,000 due to lower revenues as well as a reduction in wages of
approximately $389,000 resulting from a restructuring of the sales organization
completed in August of 1999. Decreases in European sales and marketing expenses
of approximately $72,000 reflect the integration of sales and marketing
functions at the Company's foreign subsidiaries with the parent company. The
Company also realized a reduction of approximately $145,000 in advertising and
marketing programs as the RS4200 product release was delayed until late in March
2000. Such decreases were partially offset by increases in public and investor
relations of approximately $274,000 and increased participation in trade shows
during the second quarter of fiscal year 2000, of approximately $192,000.
General and administrative
General and administrative expenses were $2,994,554 for the six months
ended June 30, 2000 compared to $3,738,654 for the six months ended June 30,
1999. The decrease of $744,100 reflects a reduction in allowances for doubtful
accounts of approximately $256,000 as compared to the first six months of the
prior year. Other decreases include reduced consulting and recruiting costs of
approximately $184,000 related to the appointment of a new management team in
December 1998; a decrease of approximately $106,000 in amortization and
depreciation, and a reduction in sales and franchise taxes from the six months
ended June 30, 1999 of approximately $50,000. The Company further reduced
general and administrative costs at its European subsidiaries by approximately
$150,000 during the period compared to prior year.
Research and Development
Research and development expenses were $2,669,280 for the six months ended
June 30, 2000 compared to $2,712,961 for the six months ended June 30, 1999.
The decrease of $43,681. is comprised primarily of decreases in salaries and
related expenses of $82,688 and savings of $197,118 resulting from the
integration of the Company's European research and development projects with
those at its U.S. headquarters. Such decreases were offset by increases in
depreciation and maintenance of $64,862 and $33,524, respectively, for test lab
equipment acquired in October 1999, as well as, labor and material costs of
approximately $114,058 for engineers related to development of Linux related
software, the Company's SS7 Gateway enabled remote access products and the
vice-president of engineering appointed in May of 1999.
Restructuring and special charges
In June 2000 the board of directors approved a plan to phase out the
Company's low end products and reduce ongoing investment in these products in
Europe. Accordingly, the Company recorded a special non-recurring charge of
approximately $2,356,000 including the impairment of goodwill of approximately
$1,546,000 associated with the Company's 1998 acquisition of SCii Telecom, S.A.
(see note 2 to the financial statements).
In addition, effective May 31, 2000 the Company terminated the employment
of Jay Atlas, its President and Chief Executive Officer, and entered into a
termination and separation agreement with Mr. Atlas. As a result of Mr. Atlas'
termination agreement, the Company recorded a restructuring charge of $810,515,
which reflects severance and related employee benefits payments of $306,145 and
an estimated value of $504,370 for the extension of stock options that vested
during Mr. Atlas' employment. As of June 30, 2000, $10,577 of the accrued
severance has been paid.
For the foregoing reasons the Company incurred a net loss of $9,598,539 for
the six months ended June 30, 2000 as compared to losses of $6,274,744 for the
six months ended June 30, 1999.
Liquidity and Capital Resources
On February 24, 2000 the Company entered into an agreement with a number of
investors to sell 2,151,000 shares of our common stock at a purchase price of
$4.00 per share in a private placement. The Company also issued 2,151,000
warrants to purchase common stock with an exercise price of $6.875. The warrants
are not exercisable until September 1, 2000. The exercise price of the warrants
will be reset to the average market price for the five trading days preceding
the one year anniversary date of the agreement provided the average price is
less than $6.875. Under the terms of the agreement, the Company filed a
registration statement on April 4, 2000 to register the shares sold and those
underlying the warrants. That registration statement was declared effective on
April 20, 2000.
The agreement also calls for the issuance of additional shares at no cost
to these investors should the Company sell shares of common stock, or securities
convertible into common stock, at a price less than $4.00 per share within
twenty four months of the this agreement. This provision requires the Company to
issue additional shares such that the average share price of these investors is
equal to the then offered price.
Additionally, for twenty-four months from the date of the agreement, these
investors have the right of first refusal to participate in any future sales of
our common stock, or securities convertible into common stock, under the terms
then offered.
As of June 30, 2000, the Company had working capital of $8,427,055,
including cash and cash equivalents of $6,749,205. The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
into cash. Inventories net of reserves for excess and obsolete material were
$3,074,080 as of June 30, 2000. The Company has incurred substantial operating
losses and has an accumulated deficit of $35,745,737 as of June 30, 2000. It
expects to continue to incur costs and expenses in excess of expected revenues
as it continues to execute its business strategy in the Internet Service
Provider (ISP) and Original Equipment Manufacturer (OEM) markets. If the Company
does not successfully execute its business strategy in the ISP and OEM markets,
there is no assurance that the Company will generate sufficient cash flow from
operations to meet anticipated operating needs and liquidate liabilities as they
come due. If necessary, the Company may delay or eliminate some expenditures and
planned operations in both North America and Europe may be scaled back or the
Company may need to raise additional funds to meet obligations. It would seek to
raise such amounts through a variety of options including borrowings and
proceeds from future equity financing. Additional funding may not be available
when needed or on terms acceptable to the Company, which could have a material
adverse effect on its business, financial condition, and results of operations.
As of June 30, 2000 the Company had total debt of $2,101,724 consisting of
a term note due to Transamerica Business Credit Corporation's Technology Finance
Division of Farmington Connecticut of $2,049,000 and acquired foreign debt of
$52,724.
Under its credit facility with Transamerica, outstanding debt of $2,049,000
as of June 30,2000 remains on a Term Loan payable quarterly in arrears over
twenty consecutive quarters commencing October 1, 1997. Amounts previously drawn
against a revolving credit line matured on June 12, 2000 and have been paid in
full. The interest rate in effect on the term loan at June 30, 2000 was 12.099%.
The Transamerica 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's ability to meet its obligations.
During the six months ended June 30, 2000, there was a net decrease in cash
and cash equivalents of $339,226. At June 30, 2000, cash and cash equivalents
amounted to $6,749,205. Working capital amounted to $8,427,055 at June 30, 2000
compared to cash and equivalents of $7,088,431 and working capital of $7,827,522
at December 31, 1999.
Net cash used in operating activities for the six months ended June 30,
2000 amounted to $6,232,907. The negative cash flows from operations were due,
primarily, to the Company's net loss of $9,598,539 reduced by non-cash
expenditures related to depreciation, amortization, reserves and allowances of
$1,816,808 and impairment of goodwill and restructuring charges of $2,050,511.
Other operating cash uses included decreases in accounts payable and accrued
liabilities of $2,104,813 as the Company paid down obligations of its subsidiary
and accrued costs related to fiscal year end bonuses and accrued compensation.
Such cash decreases were partially offset by increases due to reduced accounts
receivable of $2,231,052.
Net cash used in investing activities for the six months ended June 30,
2000 amounted to $496,082 due to the purchases of computer and peripheral
equipment related primarily to engineering equipment for the SS7 Gateway project
and acquisition of trade show booth equipment.
Net cash increases due to financing activities for the six months ended
June 30, 2000 amounted to $6,438,103 which included proceeds of $8,067,217 from
the February 24, 2000 stock purchase agreement net of costs and fees related to
the transaction. The increase was partially offset by principal payments on debt
and capital lease obligations of $1,629,114 during the six month period.
Readiness of Year 2000
As of the date of this filing, we have not experienced any problems with
our internal business systems or products and have not been notified of any
problems by our suppliers.
Qualitative and Quantitative Disclosures About Market Risk
The results of our operations and the valuation of some of our assets and
liabilities are sensitive to changes in the general level of interest rates in
the United States and foreign exchange rate fluctuations.
Interest rate risk. Our interest income is sensitive to changes in the
general level of interest rates in the United States, as our investments are in
United States dollar cash equivalents and short-term instruments.
Our interest expense is sensitive to changes in the general level of
interest rates in the United States, because the computation of interest due on
our debt in the United States is based on key interest rate indicators used in
the United States such as the prime rate.
Foreign exchange risk. We currently have foreign subsidiaries that conduct
and report their operations in local currency. The primary foreign currency is
the French Franc. Other currencies include the British Pound and the German
Deutschmark. On January 1, 1999, eleven member countries (including France and
Germany) of the European Union established fixed conversion rates between their
existing, or local, currencies and one common currency, the euro. The euro
trades on currency exchanges and may be used in business transactions.
Conversion to the euro eliminates currency exchange risk between the
participating member countries.
Due to the limited contribution of our foreign subsidiaries to our results
of operations and the short-term nature of our cash equivalents, investments and
debt, we do not believe we have material market risk exposure.
<PAGE>
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 8, 2000.
b.) Dennis Schneider, President and Chief Executive Officer was elected as a director for a term of three years.
c.) In addition, the stockholders voted to amend the Company's Certificate of Incorporation, increasing the number
of shares authorized from 20,000,000 to 40,000,000.
Finally, the stockholders voted to ratify the selection of
PricewaterhouseCoopers, LLP as the Company's auditors for the fiscal year ending December 31, 2000.
The voting totals were as follows:
(i) Election of Dennis I. Schneider
For: 9,575,125; Against : 0; Withheld: 76,435
(ii) Amendment to the Certificate of Incorporation
For: 9,513,266; Against: 0; Abstain: 21,187
(iii) Proposal to ratify PricewaterhouseCoopers, LLP as Independent Public Accountants for the Company
for the year ending December 31, 2000.
For: 9,584,976; Against: 33,591 Abstain: 32,993
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Exhibit 27 Schedule of Financial Data (Filed Electronically)
b) Reports on Form 8-K - Private Placement.
</TABLE>
<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
Vice President of Finance and
Principal Accounting Officer
Date: August 14, 2000
