<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 September 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 September 30, 2000
Documents Incorporated by Reference: None
</TABLE>
<PAGE>
<TABLE>
<CAPTION> <S> <C>
Ariel Corporation
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
A. Consolidated balance sheets as of September 30, 2000 and December 31, 1999
B. Consolidated statements of operations for the three and nine months ended September 30, 2000 and 1999
C. Consolidated statements of cash flows for the nine months ended September 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
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ARIEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION> <S> <C> <C>
September 30, December 31,
2000 1999
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ........................................................ $ 3,915,528 $ 7,088,431
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $332,867 IN 2000 AND $1,019,731 IN 1999 ........................ 1,465,669 3,091,362
OTHER RECEIVABLES ................................................................ 242,074 383,676
INVENTORIES, NET ................................................................. 2,890,995 3,303,057
PREPAID EXPENSES ................................................................. 725,623 775,943
------- -------
TOTAL CURRENT ASSETS ........................................ 9,239,889 14,642,469
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION ............................................................ 1,269,793 1,387,128
GOODWILL, INTANGIBLE ASSETS AND OTHER, NET .............................................. 1,465,399 3,787,475
--------- ---------
TOTAL ASSETS ..................................................................... $ 11,975,081 $ 19,817,072
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ................................................................. $ 483,342 $ 1,190,807
ACCRUED EXPENSES ................................................................. 2,593,004 3,510,566
CURRENT PORTION OF CAPITAL-LEASE OBLIGATION ...................................... 126,438 126,438
CURRENT PORTION OF LONG-TERM DEBT ................................................ 541,406 1,895,926
ROYALTIES PAYABLE ................................................................ 91,210 91,210
------ ------
TOTAL CURRENT LIABILITIES ................................... 3,835,400 6,814,947
CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION ........................................ 133,303 215,901
LONG-TERM DEBT .......................................................................... 1,400,666 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 SEPTEMBER 30, 2000
AND 10,832,597 AT DECEMBER 31, 1999 .................... 13,074 10,833
ADDITIONAL PAID-IN CAPITAL ....................................................... 46,436,667 37,627,809
UNREALIZED LOSS ON FOREIGN CURRENCY TRANSLATION .................................. (963,309) (503,711)
ACCUMULATED DEFICIT .............................................................. (38,880,720) (26,137,692)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .................................. 6,605,712 10,997,239
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ......................................... $ 11,975,081 $ 19,817,072
========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION> <S> <C> <C> <C> <C>
ARIEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
SALES ..............................................................$ 2,180,597 $ 2,869,593 $ 5,350,029 $ 8,694,254
COST OF GOODS SOLD ................................................... 1,253,346 1,133,081 3,143,102 3,654,950
------------ ------------ ------------ ------------
GROSS PROFIT .................................................. 927,251 1,736,512 2,206,927 5,039,304
EXPENSES:
SALES AND MARKETING ............................................. 1,318,727 1,102,758 4,187,263 4,258,553
GENERAL AND ADMINISTRATIVE ...................................... 1,482,279 1,723,805 4,476,833 5,370,956
RESEARCH AND DEVELOPMENT ........................................ 1,307,543 1,425,861 3,976,823 4,230,325
RESTRUCTURING AND SPECIAL CHARGES ............................... 0 369,528 2,356,656 369,528
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES .................................... 4,108,549 4,621,952 14,997,575 14,229,362
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ..........................................(3,181,298) (2,885,440) (12,790,648) (9,190,058)
INTEREST INCOME ...................................................... 100,952 85,384 341,107 378,734
INTEREST EXPENSE ..................................................... (65,546) (119,899) (313,195) (411,950)
OTHER INCOME, NET .................................................... 1,404 (64,038) 19,708 (35,463)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES .......................................(3,144,488) (2,983,993) (12,743,028) (9,258,737)
PROVISION FOR INCOME TAXES ..................................... 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS .....................................................($ 3,144,488) ($ 2,983,993) ($12,743,028) ($ 9,258,737)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME /(LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS .................... (19,450) 81,807 (303,335) (213,346)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS .......................................... ($ 3,163,938) ($ 2,902,186) ($13,046,363) ($ 9,472,083)
============= ============ ============ ============
BASIC LOSS PER SHARE .................................... $ (0.24) $ (0.31) (1.01) $ (0.95)
============ ============ ============ ============
DILUTED LOSS PER SHARE .................................. $ (0.24) $ (0.31) (1.01) $ (0.95)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ....................... 13,073,920 9,760,150 12,610,958 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 12,610,958 9,760,150
========== ========= ========== =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
ARIEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION> <S> <C> <C>
For The Nine Months Ended September 30,
2000 1999
============ ============
Cash flows from operating activities:
Net Loss ........................................................................................ ($12,743,028) ($ 6,274,744)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................................................ 695,812 458,780
Amortization of goodwill & intangibles ................................................... 515,465 515,930
Amortization of debt issuance costs ...................................................... 209,239 32,181
(Recovery) /Provision for doubtful accounts .............................................. (53,002) 270,093
Provision / (Recovery) for inventory obsolescence ........................................ 737,391 (65,321)
Non-Cash compensation expense ............................................................ 89,817 0
Non-Cash restructuring and special charges ............................................... 2,050,511 0
(Increase) decrease in assets:
Accounts receivable ...................................................................... 1,669,135 961,142
Other receivables ........................................................................ (170,599) 261,030
Inventories .............................................................................. (334,077) 810,959
Other assets ............................................................................. (56,664) (117,030)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses .................................................... (1,381,825) (2,820,300)
Royalties payable, related parites ....................................................... 0 (53,389)
------------ ------------
Net cash used in operating activities .............................................. (8,771,824) (6,020,669)
------------ ------------
Cash flows from investing activities:
Purchase of equipment .................................................................... (588,007) (349,366)
------------ ------------
Net cash used in investing activities .............................................. (588,007) (349,366)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligation ........................................... (82,598) 0
Principal payments on term-note .......................................................... (376,917) (575,888)
Principal payments on revolving credit ................................................... (1,353,108) 0
Proceeds from exercise of common stock options and warrants .............................. 8,067,217 0
------------ ------------
Net cash provided by (used in) financing activities ............................... 6,254,594 (575,888)
------------ ------------
Effect of exchange rate changes on cash ......................................................... (67,666) (24,085)
Net decrease in cash ............................................................................ (3,172,903) (6,970,008)
Cash and cash equivalents, beginning of year ............................................. 7,088,431 17,996,575
------------ ------------
Cash and cash equivalents, end of period ........................................................ $ 3,915,528 $ 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.
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 September 30, 2000 and the results of operations for the three and nine
months ended September 30, 2000 and 1999. The results for interim periods are
not necessarily indicative of results for the full year.
Liquitity and future funding needs
----------------------------------
As of September 30, 2000, the Company had working capital of $5,402,641,
including cash and cash equivalents of $3,915,528. The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
and accounts receivable into cash. Inventories net of reserves for excess and
obsolete material were $2,890,995 as of September 30, 2000. The Company has
incurred substantial operating losses and has an accumulated deficit of
$38,882,567 as of September 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. Based upon the
Company's current backlog and projections, the Company will have sufficient cash
and cash equivalents to meet its operating needs through the end of 2000.
However, without an increase in revenue or a reduction of costs, based on its
current cash utilization, the Company will exhaust its cash in the first quarter
of 2001. Therefore, the Company will be required to implement a cost reduction
plan or raise additional funds in the first quarter of 2001. The Company will
delay or eliminate some expenditures and planned operations in both North
America and Europe will be scaled back or the Company will need to raise
additional funds to meet obligations. It will 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. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
2. Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities on our balance sheet. Changes in the fair values
of derivative instruments will be recognized in either earnings or comprehensive
income, depending on the designated use and effectiveness of the instruments.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives. The Company must adopt SFAS No. 133 no later than January 1, 2001,
however, the Company does not believe that such adoption will have a material
effect on its consolidated results of operations and financial position.
In December 1999, the Securities and Exchange Commission (``SEC'') issued
Staff Accounting Bulletin No. 101(``SAB 101''), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. In June 2000,
the SEC issued Staff Accounting Bulletin No. 101B (``SAB 101B''), Second
Amendment: Revenue Recognition in Financial Statements. SAB 101B delays the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. The Company will adopt SAB 101 as
required in the fourth quarter of 2000; however, the Company does not believe it
will have a material effect on the Company's historical results of operations or
financial position.
3. Restructuring and special 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 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 September 30, 2000, $84,616 of the accrued severance
has been paid.
<TABLE>
<CAPTION> <S> <C> <C>
4. Inventories, net of allowance:
Inventories, net of allowance, consists of the following:
September 30, December 31,
2000 1999
---- ----
Component Materials............................................. $ 488,422 $ 371,821
Work-in process................................................. 757,532 814,923
Finished Goods.................................................. 1,645,041 2,116,313
--------- ---------
$2,890,995 $3,303,057
========== ==========
</TABLE>
<PAGE>
5. Debt
As of September 30, 2000 the Company had total debt of $1,942,072
consisting of a term note due to Transamerica Business Credit Corporation's
Technology Finance Division of Farmington Connecticut of $1,920,929 and acquired
foreign debt of $21,143.
As of September 30, 2000, under its credit facility with Transamerica,
outstanding debt of $1,920,929 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 September 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.
6. 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.
<PAGE>
<TABLE>
<CAPTION> <S> <C> <C>
Summary information by segment as of and for the three and nine months ended September 30:
NORTH AMERICA: For the three months ended For the nine months ended
September 30, 2000 September 30, 2000
Revenues from external customers ................................... $ 2,085,067 $ 5,040,149
Intersegment revenues .............................................. 8,202 49,562
Segment profit / (loss) ............................................ (2,768,767) (9,685,888)
Segment assets ..................................................... $ 10,694,842 $ 10,694,842
EUROPE:
Revenues from external customers ................................... $ 95,530 $ 309,880
Intersegment revenues .............................................. 0 0
Segment profit / (loss)............................................. (382,354) (3,051,243)
Segment assets ..................................................... $ 1,280,240 $ 1,280,240
A reconciliation of the Company's segment losses to the corresponding consolidated amounts for the three and nine
months ended September 30, 2000 is as follows:
Segment profit / (loss) ............................................ ($3,151,121) ($12,737,131)
Profit/(loss) on intersegment revenues ............................ 6,633 (5,897)
----- ------
Net loss ............................................................. ($ 3,144,488) ($12,743,028)
============ ============
</TABLE>
<PAGE>
7. 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 exercisable as of 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 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.
<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.
<TABLE>
<CAPTION> <S> <C> <C>
Nine months ended
September 30,
2000 1999
---- ----
Sales ................................................................... 100 100
Cost of goods sold ...................................................... 59 42
---- ----
Gross profit ....................................................... 41 58
Expenses
Sales and marketing ................................................ 78 49
General and administrative ......................................... 84 62
Research and development ........................................... 74 49
Restructuring and other charges .................................... 44 4
---- ----
Total Operating Expenses ........................................... 280 164
Loss from operations .................................................... (239) (106)
Interest Income ......................................................... 6 4
Interest Expense ........................................................ (6) (4)
Other (expense) Income .................................................. * *
---- ----
Loss before income taxes ............................................ (239) (107)
Income taxes ........................................................ - -
---- ----
Net Loss ............................................... (239)% (107)%
==== ====
o Total is less than 1%
</TABLE>
<PAGE>
Three months ended September 30, 2000 as Compared to three months
ended September 30, 1999
Net Sales
Worldwide sales were $2,180,597 for the three months ended September 30,
2000, a decrease of $688,996 compared to net sales of $2,869,593 for the three
months ended September 30, 1999. Domestic sales were $2,035,550 for the three
months ended September 30, 2000 compared to $2,776,644 for the three months
ended September 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). Initially the Company pursued the RAS market through sales to
manufacturers that focused primarily on selling remote access equipment to
business enterprises. During 1999 the Company shifted its sales and marketing
efforts to focus mostly on Internet service providers (ISPs) who account for an
increasing amount of RAS equipment purchases. The domestic sales decrease of
$741,094 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 and BypaSS7
products to ISPs. International sales were $145,047 for the third quarter of
2000 including U.S. exports of $49,517 and sales from European operations of
$95,530. This as compared to $92,949 for the third quarter of 1999. The increase
of $52,098 over prior year reflects an increase of US exports of RAS products,
offset by a decrease in sales of BRI products at international subsidiaries.
Gross Profit
Gross profit decreased by $809,261 to $927,251 for the three months ended
September 30, 2000 from $1,736,512 for the three months ended September 30,
1999. Gross profit was reduced by $395,000 for additional inventory reserves
recorded during the period. The Company introduced the RS4200 in the fall of
1999 which has improved price and performance over the RS2000. As a result,
on-hand quantities of the RS2000, are in excess of expected demand,
consequently, the Company reduced the carrying value of this product by taking
an additional inventory write-down of $395,000 in the three month period ended
September 30, 2000. The remaining value of RS2000's in inventory is
approximately $350,000 at September 30, 2000. The Company will continue to
review expected demand and adjust the carrying value of inventory as necessary.
Gross profit percent for the three months ended September 30, 2000 was 61%
before giving effect to this write down. This percentage includes approximately
$287,000 of revenue for products which had been previously written down,
resulting in higher gross margins rates.
Sales and marketing
Sales and marketing expenses were $1,318,727 for the three months ended
September 30, 2000 compared to $1,102,758 for the three months ended September
30, 1999. The increase of $215,969 is due to increases in public relations and
investor relations of approximately $132,000 and increased salaries of
approximately $78,000 related to the addition of a new VP of sales, as well as,
the addition of three new sales representatives. Additionally, expenses incurred
for consulting services added approximately $69,000 to the overall increase for
the period. Such increases were offset by reduced participation in trade shows
during the third quarter of 2000 versus the same period last year.
General and administrative
General and administrative expenses were $1,482,279 for the three months
ended September 30, 2000 compared to $1,723,805 for the three months ended
September 30, 1999. The decrease of $241,526 reflects a reduction in
amortization expense of approximately $200,000 for the three months ended
September 30, 2000 as compared to the same period last year . Such decreases
were due to the June 30, 2000 write-down of goodwill related to the Company's
French subsidiary. Additionally, cost incurred for recruiting were approximately
$100,000 less for the three months ended September 30, 2000 versus the same
period last year. The Company further reduced costs related to its European
operations, which contributed approximately $210,000 to the overall decrease in
general and administrative expenses. Such decreases were partially offset by
increases in expenses of approximately $140,000 for legal and accounting fees
and other outside professionals, as well as, an increase in compensation expense
of approximately $105,000 related to the appointment of a new President and CEO.
Research and Development
Research and development expenses were $1,307,543 for the three months
ended September 30, 2000 compared to $1,425,861 for the three months ended
September 30, 1999. The decrease of $118,318 is comprised primarily of decreases
in salaries and related expenses of $241,284. Such decreases were offset by
increases in contract labor and material costs of approximately $102,152 for
engineers related to the development of Linux related software and the Company's
SS7 Gateway enabled remote access products. Variances in research and
development labor costs reflect a trend in the engineering job market of
acquiring engineering resources through independent contractors rather than full
time employees.
For the foregoing reasons the Company incurred a net loss of $3,144,488 for
the three months ended September 30, 2000 as compared to losses of $2,983,993
for the three months ended September 30, 1999.
<PAGE>
Nine months ended September 30, 2000 as Compared to Nine months
ended September 30, 1999
Net Sales
Worldwide sales were $5,350,029 for the Nine months ended September 30,
2000, a decrease of $3,344,225 compared to net sales of $8,694,254 for the nine
months ended September 30, 1999. Domestic sales were $4,614,244 for the nine
months ended September 30, 2000 compared to $7,826,462 for the nine months ended
September 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). Initially the Company pursued the RAS market though sales to
manufacturers that focused primarily on selling remote access equipment to
business enterprises. During 1999 the Company shifted its sales and marketing
efforts to focus mostly on Internet service providers (ISPs) who account for an
increasing amount of RAS equipment purchases. The domestic sales decrease of
$3,212,218 was due to reduced demand for the Company's 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 ISPs.
International sales were $735,785 for the nine months ended September 30, 2000
including U.S. exports of $425,905 and sales from European operations of
$309,880. This as compared to $340,981 for the same period of 1999. The increase
of $394,804 over prior year reflects and increase of US exports of RAS products,
offset by a decrease in sales of BRI products at international subsidiaries.
Gross Profit
Gross profit decreased by $2,832,377 to $2,206,927 for the nine months
ended September 30, 2000 from $5,039,304 for the nine months ended September 30,
1999. Gross profit was reduced by $943,548 for additional inventory reserves
recorded during the period. The Company introduced the RS4200 in the fall of
1999, which has improved price and performance over the RS2000. The RS4200 began
shipping in March of 2000. As a result, on hand quantities of the RS2000 are in
excess of future demand and reserves to write off approximately $720,000 of
excess RS2000 inventory have been recorded through the nine months ended
September 30, 2000. The remaining value of RS2000's in inventory is
approximately $350,000 at September 30, 2000. The Company will continue to
review expected demand and adjust the carrying value of inventory as necessary.
Additionally, certain older DSP products are expected to be in excess of future
demand and a reserve of $223,000 was recorded during the nine months ended
September 30, 2000 to write-off excess material. Gross profit percent for the
nine months ended September 30, 2000 was 59% before giving effect to these write
downs. 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 approximately $533,000 during the period, for
products which had previously been written down, resulting in higher gross
margins rates.
Sales and marketing
Sales and marketing expenses were $4,187,263 for the nine months ended
September 30, 2000 compared to $4,258,553 for the nine months ended September
30,1999. The decrease of $71,290 includes a decrease in sales commission of
approximately $194,000 due to lower revenues as well as a reduction in wages of
approximately $311,000 resulting from a restructuring of the sales organization
completed in August of 1999. Such decreases were partially offset by increases
in public relations and investor relations of approximately $417,000.
General and administrative
General and administrative expenses were $4,476,833 for the nine months
ended September 30, 2000 compared to $5,370,956 for the nine months ended
September 30, 1999. The decrease of $894,123 reflects a reduction in
amortization expense of approximately $250,000 for the nine months ended
September 30, 2000 as compared to the year ago period. Such decreases were due
to the write-down of goodwill related to the Company's French subsidiary, taken
in the second quarter of 2000. Additionally, reserves for uncollectible accounts
decreased by $285,000 year over year and cost incurred for recruiting and
investor relations were approximately $139,000 and $114,000 less, respectively,
for the nine months ended September 30, 2000 versus the same period last year.
During the first nine months of fiscal year 2000, the Company further reduced
costs related to its European operations, which contributed approximately
$269,000 to the overall decrease in general and administrative expenses over the
prior year period. Such decreases were partially offset by approximately
$160,000 related to the amortization of non-cash financing cost.
Research and Development
Research and development expenses were $3,976,823 for the nine months ended
September 30, 2000 compared to $4,230,325 for the nine months ended September
30, 1999. The decrease of $253,502 is comprised primarily of decreases in
salaries and related expenses of $261,281, as well as, a reduction in cost for
recruiting and consulting of approximately $63,000 and $109,000, respectively.
<PAGE>
During the first nine months of fiscal year 2000, the Company further
reduced costs related to its European operations, which contributed
approximately $224,000 to the overall decrease in research and development
expenses over the prior year period. Such decreases were offset by increases in
depreciation and maintenance of approximately $65,000 for test lab equipment
acquired in October 1999, as well as, labor and material costs of approximately
$325,000 for engineers related to the development of Linux related software and
the Company's SS7 Gateway enabled remote access products. Variances in research
and developement labor costs reflect a trend in the engineering job market of
acquiring engineering resources through independent contractors rather than full
time employees.
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 3 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 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 September 30, 2000, $84,616 of the accrued severance
has been paid.
For the foregoing reasons the Company incurred a net loss of $12,743,028
for the nine months ended September 30, 2000 as compared to losses of $9,258,737
for the nine months ended September 30, 1999.
<PAGE>
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 exercisable as of 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 September 30, 2000, the Company had working capital of $5,402,641,
including cash and cash equivalents of $3,915,528. The Company's use of working
capital may be negatively impacted by its ability to convert current inventories
and accounts receivable into cash. Inventories net of reserves for excess and
obsolete material were $2,890,995 as of September 30, 2000. The Company has
incurred substantial operating losses and has an accumulated deficit of
$38,882,567 as of September 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. Based upon the
Company's current backlog and projections, the Company will have sufficient cash
and cash equivalents to meet its operating needs through the end of 2000.
However, without an increase in revenue or a reduction of costs, based on its
current cash utilization, the Company will exhaust its cash in the first quarter
of 2001. Therefore, the Company will be required to implement a cost reduction
plan or raise additional funds in the first quarter of 2001. The Company will
delay or eliminate some expenditures and planned operations in both North
America and Europe will be scaled back or the Company will need to raise
additional funds to meet obligations. It will 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. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
As of September 30, 2000 the Company had total debt of $1,942,072
consisting of a term note due to Transamerica Business Credit Corporation's
Technology Finance Division of Farmington Connecticut of $1,920,929 and acquired
foreign debt of $21,143.
Under its credit facility with Transamerica, outstanding debt of $1,920,929
as of September 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 September 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 nine months ended September 30, 2000, there was a net decrease
in cash and cash equivalents of $3,172,903. At September 30, 2000, cash and cash
equivalents amounted to $3,915,528. Working capital amounted to $5,402,641 at
September 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 nine months ended September
30, 2000 amounted to $8,771,824. The negative cash flows from operations were
due, primarily, to the Company's net loss of $12,743,028 reduced by non-cash
expenditures related to depreciation, amortization, reserves and allowances of
$2,194,722 and impairment of goodwill and restructuring charges of $2,050,511.
Other operating cash uses included decreases in accounts payable and accrued
liabilities of $1,381,825 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 the conversion of
accounts receivable to cash of $1,669,135.
Net cash used in investing activities for the nine months ended September
30, 2000 amounted to $588,007 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 nine months ended
September 30, 2000 amounted to $6,254,594 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 $1,812,623 during the
nine-month period.
<PAGE>
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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits-Exhibit 27 Schedule of Financial Data (Filed Electronically)
<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: November 13, 2000
<PAGE>
