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Ariel Corp – ‘S-4/A’ on 7/26/01

On:  Thursday, 7/26/01, at 5:08pm ET   ·   Accession #:  898430-1-501464   ·   File #:  333-61736

Previous ‘S-4’:  ‘S-4’ on 5/25/01   ·   Latest ‘S-4’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/26/01  Ariel Corp                        S-4/A                  3:1.2M                                   Donnelley R R & S..05/FA

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Amendment No. 1 to Form S-4                          348   1.80M 
 2: EX-23.1     Consent of Pricewaterhousecoopers LLP                  1      5K 
 3: EX-23.3     Consent of Deloitte & Touche LLP                       1      5K 


S-4/A   —   Amendment No. 1 to Form S-4
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
5MAYAN Networks Corporation
6Table of Contents
10Questions and Answers About the Merger
12Summary
20Bridge Loan
22Ariel Selected Consolidated Historical Financial Data
23Mayan Selected Historical Financial Data
25Summary Unaudited Pro Forma Combined Condensed Financial Information
27Risk Factors
"Risks Related to the Merger
"Products
33Risks Related to MAYAN
42Risks Related to MAYAN's Industry
44Risks Related to Ariel
50Risks Relating to Ariel's Industry
51Risks Related to the Exchange Offer
53Ariel Special Meeting
"General
"Date, Time and Place
"Matters to be Considered at the Special Meeting
"Record Date
"Voting of Proxies
54Votes Required
"Quorum; Abstentions and Broker Non-Votes
"Solicitation of Proxies and Expenses
55Board Recommendations
56Mayan Special Meeting
57Quorum and Abstentions
59The Merger
"Background of the Merger
63Recommendation of the Ariel Board of Directors and Ariel's Reasons for the Merger
65Opinion of Ariel's Financial Advisor
67Accretion/Dilution Analysis
68Selected Transaction Analysis
69Recommendation of the MAYAN Board of Directors and MAYAN's Reasons for the Merger
72Opinion of MAYAN's Financial Advisor
79Interests of MAYAN's Management in the Merger and Potential Conflicts of Interest
"Interests of Ariel's Management in the Merger and Potential Conflicts of Interest
80Closing
"Ariel Name Change
81Conversion of MAYAN Stock in the Merger
"MAYAN Stock Options and Warrants
82MAYAN Convertible Subordinated Promissory Notes and Exchange Offer
83The Exchange Agent
"Exchange of MAYAN Stock Certificates for Ariel Stock Certificates
84Transfer of Ownership; Distributions with Respect to Unexchanged Shares
"Representations and Warranties
85Ariel's and MAYAN's Conduct of Business Before Completion of the Merger
87No Solicitation of Transactions
88Conditions to Completing the Merger
90Extension, Waiver and Amendment of the Merger Agreement
"Termination of the Merger Agreement
91Payment of Fees and Expenses
"Material Federal Income Tax Considerations
92Accounting Treatment
93Stockholders' Dissenters' Rights of Appraisal
"Director and Officer Indemnification and Insurance
"Voting Agreements
"Market Stand-Off Agreements
94Ariel Rights Plan
"2001 Stock Incentive Plan
"Listing of Ariel Common Stock to be Issued in the Merger and Common Stock of Combined Company
"Restrictions on Sale of Shares By Affiliates of Ariel and MAYAN
95Management Following the Merger
"Operations Following the Merger
96Unaudited Pro Forma Combined Condensed Financial Information
102Common Stock
106Description of Capital Stock and Comparison of Stockholder Rights
"Description of Ariel Capital Stock
"Options
107Description Of MAYAN Capital Stock
109Comparison of Rights of Ariel Stockholders and MAYAN Shareholders
112Proposal to Approve the Amendment to Ariel's Restated Certificate of Incorporation
113Reverse Stock Split
115Proposal to Approve the Implementation of Ariel's 2001 Stock Incentive Plan
121General Provisions
"Acceleration
124Vote Required
125Proposal to Elect Ariel's Current Board of Directors
126Market Price Information
"Ariel Market Price Data
"MAYAN Market Price Data
"Recent Closing Prices
"Dividend Information
127Information About Ariel
"Ariel's Corporate History
128Industry Overview
129Ariel's Approach
131Research and Development
"Manufacturing and Quality Control
132Sales and Marketing
"Technical Support
133Customers
"Competition
"Intellectual Property and Other Proprietary Rights
134Backlog
"Employees
"Properties
"Legal Proceedings
135Directors and Executive Officers
136Committees of Ariel's Board of Directors
137Compensation Committee Interlocks and Insider Participation
138Executive Compensation
"Compensation Committee Report On Executive Compensation
140Directors' Compensation
"Option Grants During the Year Ended December 31, 2000
141Option Exercises During the Year Ended December 31, 2000 and Aggregate Fiscal Year-End Option Value
"Employment Agreements
143The 1992 Stock Option and Restricted Stock Plan
"The 1994 Stock Option Plan
1441995 Stock Option Plan
145Non-Plan Options
"1996 Directors Plan
"Report on Repricing of Stock Options
"Security Ownership of Certain Beneficial Owners and Management
146Certain Relationships and Related Transactions
147Sales Consulting Services
148Management's Discussion and Analysis of Financial Condition and Results of Operations of Ariel
"Overview
149Results of Operations
154Liquidity and Capital Resources
157Qualitative and Quantitative Disclosures About Market Risk
"Recent Pronouncements
159Information About Mayan
"Industry Background
160MAYAN's Product and Services
"MAYAN's Strategy
161Architecture
162Patents and Intellectual Property
163Manufacturing
"Facilities
164Management of MAYAN
"Executive Officers and Directors
166Board Committees
"Compensation of Directors
168Option Grants in Last Fiscal Year
169Option Exercises in Last Fiscal Year
"Benefit Plans
170Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements
"Limitation of Liability and Indemnification
172Certain Relationships and Related Transactions of Mayan
175Principal Shareholders of MAYAN
178Management's Discussion and Analysis of Financial Condition and Results of Operations of MAYAN
180Amortization of deferred stock compensation
184Recent Accounting Pronouncements
185Experts
"Legal Matters
186Where You Can Find More Information
187Index to Financial Statements
188Report of Independent Accountants
189Consolidated Balance Sheets
191Consolidated Statements of Stockholders' Equity
193Notes to Consolidated Financial Statements
196Comprehensive Income
212Stock Options
216Consolidated Statements of Cash Flows
234Net loss
247Article I Definitions
"Section 1.01 Certain Defined Terms
252Article Ii the Merger
"Section 2.01 The Merger
"Section 2.02 Closing
"Section 2.03 Effective Time
"Section 2.04 Effect of the Merger
253Section 2.05 Certificate of Incorporation; Bylaws; Directors and Officers of Surviving Corporation and Directors and Officers of Parent
"Section 2.06 Charter Amendments
"Article Iii Conversion of Securities; Exchange of Certificates
"Section 3.01 Conversion of Shares
254Section 3.02 Exchange of Shares Other than Treasury Shares
255Section 3.03 Stock Transfer Books
"Section 3.04 No Fractional Share Certificates
"Section 3.05 Options to Purchase Company Common Stock
256Section 3.06 Certain Adjustments
"Section 3.07 Lost, Stolen or Destroyed Certificates
"Section 3.08 Taking of Necessary Action; Further Action
257Section 4.01 Organization and Qualification; Subsidiaries
"Section 4.02 Articles of Incorporation and Bylaws
"Section 4.03 Capitalization
258Section 4.04 Authority Relative to this Agreement
"Section 4.05 No Conflict; Required Filings and Consents
"Section 4.06 Permits; Compliance with Laws
259Section 4.07 Financial Statements
"Section 4.08 Certain Tax Matters
"Section 4.09 Litigation
"Section 4.10 Affiliates
"Section 4.11 Brokers
260Section 4.12 Information Supplied
"Section 5.01 Organization and Qualification; Subsidiaries
"Section 5.02 Certificate of Incorporation and Bylaws
261Section 5.03 Capitalization
262Section 5.04 Authority Relative to this Agreement
"Section 5.05 No Conflict; Required Filings and Consents
"Section 5.06 Permits; Compliance with Laws
263Section 5.07 SEC Filings; Financial Statements
264Section 5.08 Certain Tax Matters
"Section 5.09 Litigation
"Section 5.10 Absence of Certain Changes or Events
265Section 5.11 Employee Benefit Plans
266Section 5.12 Employment and Labor Matters
267Section 5.13 Contracts
268Section 5.14 Business Relationships
"Section 5.15 Environmental Matters
"Section 5.16 Intellectual Property
269Section 5.17 Taxes
270Section 5.18 Insurance
"Section 5.19 Properties
"Section 5.20 Employees
"Section 5.21 Parent Rights Plan
271Section 5.22 Certain Business Practices
"Section 5.23 Books and Records
"Section 5.24 Opinion of Financial Advisor
"Section 5.25 Affiliates
"Section 5.26 Brokers
"Section 5.27 Information Supplied
272Section 6.01 Conduct of Parent Pending the Closing
273Section 6.02 Conduct of Company Pending the Closing
"Section 6.03 Notices of Certain Events
274Section 6.04 Access to Information; Confidentiality
"Section 6.05 Reorganization
"Section 6.06 Further Action; Consents; Filings
275Section 6.07 Additional Reports
"Article Vii Additional Agreements
"Section 7.01 Joint Proxy Statement/Prospectus
277Section 7.02 Shareholders' Meetings
"Section 7.03 Directors' and Officers' Indemnification and Insurance
278Section 7.04 Public Announcements
"Section 7.05 Voting Agreements
"Section 7.06 Employment Agreements
"Section 7.07 Market Standoff Agreements
"Section 7.08 Market Standoff Agreements
"Section 7.09 NNM Listing
279Section 7.10 Blue Sky
"Section 7.11 Reservation of Shares
"Section 7.12 2001 Stock Incentive Plan
"Section 7.14 Registration Statements on Form S-8
"Section 7.15 Employee Matters
280Section 7.16 Parent Rights Plan
"Section 7.17 Filing of Reports Necessary for Use of Rule 145
"Section 7.18 Resignations of Officers and Directors
"Section 7.19 No Solicitation
281Section 7.20 Notice of Merger
"Section 7.21 Registration Statement for Convertible Subordinated Promissory Notes, Exchange Notes and Underlying Conversion Shares
282Section 7.22 Compensation Committee Ratification
"Section 7.23 Bridge Loan
"Article Viii Conditions to the Merger
283Section 8.02 Conditions to the Obligations of Company
285Section 8.03 Conditions to the Obligations of Parent
286Article Ix Termination, Amendment and Waiver
"Section 9.01 Termination
287Section 9.02 Effect of Termination
"Section 9.03 Amendment
"Section 9.04 Waiver
288Section 9.05 Termination Fee; Expenses
"Article X General Provisions
"Section 10.01 Non-Survival of Representations and Warranties
"Section 10.02 Notices
289Section 10.03 Severability
"Section 10.04 Assignment; Binding Effect; Benefit
"Section 10.05 Incorporation of Annexes
"Section 10.06 Governing Law
"Section 10.07 Jurisdiction; Waiver of Jury Trial
290Section 10.08 Headings; Interpretation
"Section 10.09 Counterparts
"Section 10.10 Entire Agreement
294Parent Voting Agreement
302Company Voting Agreement
306Shareholder
345Item 20. Indemnification of Directors and Officers
"Item 21. Exhibits and Financial Statement Schedules
346Item 22. Undertakings
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As filed with the Securities and Exchange Commission on July 26, 2001 Registration No. 333-61736 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT Under the Securities Act of 1933 --------------- ARIEL CORPORATION (Exact Name of Registrant as Specified in its Charter) [Download Table] Delaware 3571 13-3137699 (State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code) Identification Number) 2540 Route 130 Cranbury, New Jersey 08512 (609) 860-2900 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- Mr. Dennis Schneider Chief Executive Officer Ariel Corporation 2540 Route 130 Cranbury, New Jersey 08512 (609) 860-2900 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) --------------- Copies to: [Download Table] Harold W. Paul, Esq. David A. Makarechian, Esq. Paul & Rosen LLP Anna R. Rothbart, Esq. 420 Lexington Avenue Brobeck, Phleger & Harrison LLP New York, New York 10017 Two Embarcadero Place, 2200 Geng Road (212) 661-2727 Palo Alto, California 94303 (650) 424-0160 --------------- Approximate date of commencement of proposed sale to the public: At the effective time of the merger of MAYAN Networks Corporation with and into the Registrant, which shall occur as soon as practicable after the effective date of this Registration Statement and the satisfaction or waiver of all conditions to the closing of such merger. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] --------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
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[ARIEL CORPORATION LETTERHEAD] , 2001 Dear Ariel Corporation Stockholder: I am writing you today about our proposed merger with MAYAN Networks Corporation. As a result of the merger, MAYAN will merge with and into Ariel and shareholders of MAYAN will become stockholders of Ariel. If we complete the merger as proposed, each share of MAYAN common stock will be exchanged for shares of Ariel common stock. We will issue approximately 8,373,167 shares in the merger to MAYAN shareholders, option holders and warrant holders after giving effect to the one for 20 reverse stock split of outstanding shares of Ariel common stock. We will determine the number of shares of Ariel common stock for which each share of MAYAN common stock will be exchanged immediately prior to the completion of the merger in accordance with formulas specified in the merger agreement and described in the attached materials. Ariel common stock is traded on the Nasdaq National Market under the symbol "ADSP." The closing price for Ariel common stock reported on the Nasdaq National Market on , 2001, was $ per share. You will be asked to approve the merger agreement by and between Ariel and MAYAN at a special meeting of Ariel stockholders to be held on , 2001 beginning at a.m., local time, at . For the merger to go forward, the holders of a majority of the outstanding shares of Ariel common stock entitled to vote at the special meeting must approve the merger agreement. The terms of the merger agreement provide that if the merger is approved and effected, Ariel's name will automatically be changed to "MAYAN Networks Corporation." By voting to approve the merger agreement, you are voting to approve this change in Ariel's name along with all other transactions or actions contemplated by the merger agreement. At the special meeting, you will also be asked to consider and vote upon amending Ariel's certificate of incorporation to increase the number of authorized shares of Ariel common stock and effect a reverse stock split approving the implementation of the 2001 Stock Incentive Plan under which 15,659,762 shares of Ariel common stock will initially be reserved for issuance and electing Ariel's current board of directors. We are very excited by the opportunities we envision for the combined company. The disinterested members of your board of directors have determined that the merger and all transactions contemplated by the merger agreement, including the change of Ariel's name to "MAYAN Networks Corporation" and the issuance of Ariel common stock in connection with the merger, are in the best interests of Ariel and its stockholders, and unanimously recommend that you approve the merger agreement. Your board of directors has obtained an opinion from Needham & Company, Inc., to the effect that, at the date of the opinion and based upon and subject to the qualifications, assumptions and limitations in the opinion, the exchange ratio set forth in the merger agreement is fair to Ariel from a financial point of view. Holders of Ariel common stock are urged to, and should read the opinion in its entirety. The disinterested members of your board of directors have also determined that the proposals to amend Ariel's certificate of incorporation, approve the implementation of the 2001 Stock Incentive Plan and elect Ariel's current board of directors are also in the best interest of Ariel and its stockholders, and unanimously recommend that you approve these proposals. You should carefully consider the discussion in the section entitled "Risk Factors" beginning on page 18 of the joint proxy statement/prospectus. Sincerely, Dennis Schneider President, Chief Executive Officer and Director Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of this transaction or the securities of Ariel to be issued in the merger, or determined if this joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense. This joint proxy statement/prospectus is dated , 2001, and was first mailed to Ariel stockholders on or about , 2001.
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ARIEL CORPORATION 2540 Route 130 Cranbury, New Jersey 08512 (609) 860-2900 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To be held on , 2001 We will hold a special meeting of stockholders of Ariel Corporation beginning at a.m., local time, on , 2001 at for the following purposes: 1. To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of March 28, 2001, by and between Ariel Corporation and MAYAN Networks Corporation, under which MAYAN will merge with and into Ariel with Ariel surviving the closing and Ariel will change its name to MAYAN Networks Corporation; 2. To consider and vote upon a proposal to amend Ariel's certificate of incorporation to: . increase the number of authorized shares of common stock from 2,000,000 shares to 12,500,000 shares, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger; and . effect a reverse split of the common stock of Ariel, to be effective immediately prior to the effective time of the merger, in which each 20 outstanding shares of Ariel common stock will be combined into one share of Ariel common stock; 3. To consider and vote upon a proposal to approve the implementation of the 2001 Stock Incentive Plan under which 15,659,762 shares of Ariel common stock will initially be reserved for issuance; 4. To consider and vote upon a proposal to elect Ariel's current board of directors; and 5. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. We describe the merger, merger agreement, the proposed amendment to Ariel's certificate of incorporation and the proposed 2001 Stock Incentive Plan more fully in this joint proxy statement/prospectus, which we urge you to read carefully in its entirety. Only Ariel stockholders of record at the close of business on , 2001 are entitled to notice of and to vote at the special meeting or any adjournment or postponement of the special meeting. Your vote is important. To assure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy and mail it promptly in the postage-paid envelope provided, or call the toll- free telephone number or use the Internet by following the instructions included with your proxy card, whether or not you plan to attend the special meeting in person. You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. You may vote in person at the special meeting even if you have returned a proxy. By Order of the Board of Directors _____________________________________ Secretary Cranbury, New Jersey , 2001
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[MAYAN LETTERHEAD] , 2001 Dear MAYAN Networks Corporation Shareholder: I am writing you today about our proposed merger with Ariel Corporation. As a result of the merger, MAYAN will merge with and into Ariel and you will become stockholders of Ariel. If we complete the merger as proposed, Ariel will issue approximately 167,463,342 shares in the merger to MAYAN shareholders, option holders and warrant holders or 8,373,167 shares after giving effect to the one for 20 reverse stock split of outstanding shares of Ariel common stock, which will occur immediately prior to the effective time of the merger. The number of shares of Ariel common stock to be issued in the merger may be increased to the extent Ariel's third party transaction expenses exceed specified thresholds. We will determine the number of shares of Ariel common stock for which each share of MAYAN common stock will be exchanged immediately prior to the completion of the merger in accordance with formulas specified in the merger agreement and described in this joint proxy statement/prospectus. Ariel common stock is traded on the Nasdaq National Market under the symbol "ADSP." The closing price for Ariel common stock reported on the Nasdaq National Market on , 2001, was $ per share. You will be asked to vote upon the merger agreement at a special meeting of MAYAN shareholders to be held on , 2001 beginning at a.m., local time, at . For the merger to be approved, the holders of a majority of the outstanding shares of MAYAN common stock and the holders of a majority of the outstanding shares of MAYAN preferred stock must approve the merger agreement. Only shareholders who hold shares of MAYAN common stock and preferred stock at the close of business on , 2001 will be entitled to vote at the special meeting. In addition, holders of MAYAN preferred stock are also being asked to convert their stock into MAYAN common stock pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation, which would result in the waiver of liquidation preferences in the merger and to terminate the Amended and Restated Investors' Rights Agreement dated as of November 1, 1999, the Amended and Restated Right of First Refusal and Co-Sale Agreement dated as of October 21, 1999 and the Amended and Restated Voting Agreement dated as of October 21, 1999, immediately prior to the closing of the Merger. We are very excited by the opportunities we envision for the combined company. The disinterested members of your board of directors have determined that the terms and conditions of the merger are advisable and in the best interests of MAYAN and you, and unanimously recommend that you approve the merger agreement and the merger, and if you are a holder of MAYAN preferred stock, that you convert your preferred stock into common stock as required in the merger agreement. Your board of directors obtained an opinion from Robertson Stephens, Inc., to the effect that, as of the date of such opinion and based upon and subject to the qualifications and limitations in the opinion, the shares of Ariel common stock to be received by the MAYAN Shareholders in exchange for each outstanding share of MAYAN common stock are fair to MAYAN's shareholders from a financial point of view. You should carefully consider the discussion in the section entitled "Risk Factors" beginning on page 18 of the joint proxy statement/prospectus. Sincerely, John Tingleff Chief Financial Officer Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of this transaction or the securities of Ariel to be issued in the merger, or determined if this joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense. This joint proxy statement/prospectus is dated , 2001, and was first mailed to MAYAN shareholders on or about , 2001.
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MAYAN NETWORKS CORPORATION 2115 O'Nel Drive San Jose, California 95131 (408) 392-9900 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To be held on , 2001 ---------------- We will hold a special meeting of shareholders of MAYAN Networks Corporation at a.m., local time, on , 2001 at for the following purposes: 1. For the holders of MAYAN common stock, voting as a class, and the holders of MAYAN preferred stock, voting separately as a class, to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of March 28, 2001, by and between Ariel Corporation and MAYAN Networks Corporation, under which MAYAN will merge with and into Ariel, and each outstanding share of MAYAN common stock will be converted into the right to receive shares of Ariel common stock; and 2. For the holders of MAYAN preferred stock, voting separately by series of preferred stock, to cause the voluntary conversion of the preferred stock held by them into the common stock of MAYAN immediately prior to the effective time of the merger pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation. The disinterested members of your board of directors have determined that the merger is advisable and in the best interests of MAYAN and its shareholders, and unanimously recommend that you vote to adopt the merger agreement and approve the merger, and to approve the voluntary conversion of MAYAN's preferred stock into MAYAN common stock immediately prior to the merger. We describe the merger more fully in this joint proxy statement/prospectus, which we urge you to read carefully in its entirety. Only MAYAN shareholders of record at the close of business on , 2001 are entitled to notice of and to vote at the special meeting or any adjournment or postponement of the special meeting. Your vote is important. To assure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy and mail it promptly in the postage-paid envelope provided, or call the toll- free number or use the Internet by following the instructions enclosed with your proxy, whether or not you plan to attend the special meeting in person. You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. You may vote in person at the special meeting even if you have returned a proxy. By Order of the Board of Directors _____________________________________ Secretary San Jose, California , 2001
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TABLE OF CONTENTS [Download Table] Page ---- QUESTIONS AND ANSWERS ABOUT THE MERGER................................... 1 SUMMARY.................................................................. 3 ARIEL SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA.................... 13 MAYAN SELECTED HISTORICAL FINANCIAL DATA................................. 14 SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION..... 16 RISK FACTORS............................................................. 18 Risks Related to the Merger.............................................. 18 Risks Related to MAYAN................................................... 24 Risks Related to MAYAN's Industry........................................ 33 Risks Related to Ariel................................................... 35 Risks Relating to Ariel's Industry....................................... 41 Risks Related to the Exchange Offer...................................... 42 ARIEL SPECIAL MEETING.................................................... 44 General.................................................................. 44 Date, Time and Place..................................................... 44 Matters to be Considered at the Special Meeting.......................... 44 Record Date.............................................................. 44 Voting of Proxies........................................................ 44 Votes Required........................................................... 45 Quorum; Abstentions and Broker Non-Votes................................. 45 Solicitation of Proxies and Expenses..................................... 45 Board Recommendations.................................................... 46 MAYAN SPECIAL MEETING.................................................... 47 General.................................................................. 47 Date, Time and Place..................................................... 47 Matters to be Considered at the Special Meeting.......................... 47 Record Date.............................................................. 47 Voting of Proxies........................................................ 47 Votes Required........................................................... 47 Quorum and Abstentions................................................... 48 Solicitation of Proxies and Expenses..................................... 48 Board Recommendations.................................................... 49 THE MERGER............................................................... 50 Background of the Merger................................................. 50 Recommendation of the Ariel Board of Directors and Ariel's Reasons for the Merger.............................................................. 54 Opinion of Ariel's Financial Advisor..................................... 56 Recommendation of the MAYAN Board of Directors and MAYAN's Reasons for the Merger.............................................................. 60 Opinion of MAYAN's Financial Advisor..................................... 63 Interests of MAYAN's Management in the Merger and Potential Conflicts of Interest................................................................ 70 Interests of Ariel's Management in the Merger and Potential Conflicts of Interest................................................................ 70 The Merger............................................................... 71 Closing.................................................................. 71 Ariel Name Change........................................................ 71 Conversion of MAYAN Stock in the Merger.................................. 72 MAYAN Stock Options and Warrants......................................... 72 i
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TABLE OF CONTENTS--(Continued) [Download Table] MAYAN Convertible Subordinated Promissory Notes and Exchange Offer........ 73 The Exchange Agent........................................................ 74 Exchange of MAYAN Stock Certificates for Ariel Stock Certificates......... 74 Transfer of Ownership; Distributions with Respect to Unexchanged Shares... 75 Representations and Warranties............................................ 75 Ariel's and MAYAN's Conduct of Business Before Completion of the Merger... 76 No Solicitation of Transactions........................................... 78 Conditions to Completing the Merger....................................... 79 Extension, Waiver and Amendment of the Merger Agreement................... 81 Termination of the Merger Agreement....................................... 81 Payment of Fees and Expenses.............................................. 82 Material Federal Income Tax Considerations................................ 82 Accounting Treatment...................................................... 83 Stockholders' Dissenters' Rights of Appraisal............................. 84 Director and Officer Indemnification and Insurance........................ 84 Voting Agreements......................................................... 84 Market Stand-Off Agreements............................................... 84 Bridge Loan............................................................... 84 Ariel Rights Plan......................................................... 85 2001 Stock Incentive Plan................................................. 85 Listing of Ariel Common Stock to be Issued in the Merger and Common Stock of Combined Company...................................................... 85 Restrictions on Sale of Shares By Affiliates of Ariel and MAYAN........... 85 Management Following the Merger........................................... 86 Operations Following the Merger........................................... 86 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 87 DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS......... 97 Description of Ariel Capital Stock........................................ 97 Description Of MAYAN Capital Stock........................................ 98 Comparison of Rights of Ariel Stockholders and MAYAN Shareholders......... 100 PROPOSAL TO APPROVE THE AMENDMENT TO ARIEL'S RESTATED CERTIFICATE OF INCORPORATION............................................................ 103 PROPOSAL TO APPROVE THE IMPLEMENTATION OF ARIEL'S 2001 STOCK INCENTIVE PLAN..................................................................... 106 PROPOSAL TO ELECT ARIEL'S CURRENT BOARD OF DIRECTORS...................... 116 MARKET PRICE INFORMATION.................................................. 117 Ariel Market Price Data................................................... 117 MAYAN Market Price Data................................................... 117 Recent Closing Prices..................................................... 117 Dividend Information...................................................... 117 INFORMATION ABOUT ARIEL................................................... 118 General................................................................... 118 Ariel's Corporate History................................................. 118 Industry Overview......................................................... 119 Ariel's Approach.......................................................... 120 Products.................................................................. 121 Research and Development.................................................. 122 Manufacturing and Quality Control......................................... 122 Sales and Marketing....................................................... 123 ii
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TABLE OF CONTENTS--(Continued) [Download Table] Technical Support......................................................... 123 Customers................................................................. 124 Competition............................................................... 124 Intellectual Property and Other Proprietary Rights........................ 124 Backlog................................................................... 125 Employees................................................................. 125 Properties................................................................ 125 Legal Proceedings......................................................... 125 Directors and Executive Officers.......................................... 126 Committees of Ariel's Board of Directors.................................. 127 Compensation Committee Interlocks and Insider Participation............... 128 Executive Compensation.................................................... 129 Compensation Committee Report On Executive Compensation................... 129 Directors' Compensation................................................... 131 Option Grants During the Year Ended December 31, 2000..................... 131 Option Exercises During the Year Ended December 31, 2000 and Aggregate Fiscal Year-End Option Value............................................. 132 Employment Agreements..................................................... 132 The 1992 Stock Option and Restricted Stock Plan........................... 134 The 1994 Stock Option Plan................................................ 134 1995 Stock Option Plan.................................................... 135 Non-Plan Options.......................................................... 136 1996 Directors Plan....................................................... 136 Report on Repricing of Stock Options...................................... 136 Security Ownership of Certain Beneficial Owners and Management............ 136 Certain Relationships and Related Transactions............................ 137 Sales Consulting Services................................................. 138 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ARIEL...................................................... 139 Overview.................................................................. 139 Results of Operations..................................................... 140 Liquidity and Capital Resources........................................... 145 Qualitative and Quantitative Disclosures About Market Risk................ 148 Recent Pronouncements..................................................... 148 INFORMATION ABOUT MAYAN................................................... 150 Industry Background....................................................... 150 MAYAN's Product and Services.............................................. 151 MAYAN's Strategy.......................................................... 151 Architecture.............................................................. 152 Products.................................................................. 152 Customers................................................................. 152 Sales and Marketing....................................................... 153 Competition............................................................... 153 Research and Development.................................................. 153 Patents and Intellectual Property......................................... 153 Manufacturing............................................................. 154 Employees................................................................. 154 Facilities................................................................ 154 Legal Proceedings......................................................... 154 iii
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TABLE OF CONTENTS--(Continued) [Download Table] MANAGEMENT OF MAYAN....................................................... 155 Executive Officers and Directors.......................................... 155 Board Committees.......................................................... 157 Compensation of Directors................................................. 157 Compensation Committee Interlocks and Insider Participation............... 158 Executive Compensation.................................................... 158 Option Grants in Last Fiscal Year......................................... 159 Option Exercises in Last Fiscal Year...................................... 160 Benefit Plans............................................................. 160 Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements..................................................... 161 Limitation of Liability and Indemnification............................... 161 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF MAYAN................... 163 PRINCIPAL SHAREHOLDERS OF MAYAN........................................... 166 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MAYAN...................................................... 169 Overview.................................................................. 169 Results of Operations..................................................... 170 Liquidity and Capital Resources........................................... 172 Qualitative and Quantitative Disclosure about Market Risk................. 174 Recent Accounting Pronouncements.......................................... 175 EXPERTS................................................................... 176 LEGAL MATTERS............................................................. 176 WHERE YOU CAN FIND MORE INFORMATION....................................... 177 INDEX TO FINANCIAL STATEMENTS............................................. F-1 [Enlarge/Download Table] APPENDICES APPENDIX I -- Agreement and Plan of Merger APPENDIX II -- Form of Ariel Voting Agreement APPENDIX III -- Form of MAYAN Voting Agreement APPENDIX IV -- Form of Employment Agreement APPENDIX V -- Form of Market Standoff Agreement APPENDIX VI -- Form of 2001 Stock Incentive Plan APPENDIX VII -- Opinion of Needham & Company, Inc., financial advisor to Ariel Corporation APPENDIX VIII -- Opinion of Robertson Stephens, Inc., financial advisor to MAYAN Networks Corporation APPENDIX IX -- Form of Ariel Proxy Card APPENDIX X -- Form of MAYAN Proxy Card iv
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QUESTIONS AND ANSWERS ABOUT THE MERGER Q: What will MAYAN shareholders receive in the merger? A: If the merger is completed, Ariel will issue approximately 8,373,167 shares of its common stock (after giving effect to a one for 20 reverse stock split of the Ariel common stock) in the merger to MAYAN shareholders, option holders and warrant holders. The number of shares of Ariel common stock for which each share of MAYAN common stock will be exchanged is approximately 3.13. The exact number will be determined immediately prior to the completion of the merger in accordance with formulas specified in the merger agreement and described in this document. MAYAN shareholders will not receive fractional shares of Ariel common stock. Instead, MAYAN shareholders will receive cash, without interest, for any fractional share of Ariel common stock you might otherwise have been entitled to receive. Q: When do you expect to complete the merger? A: We are working to complete the merger in the third calendar quarter of 2001. Because the merger is subject to various conditions, however, we cannot predict the exact timing. Q: When will the reverse split of the Ariel common stock occur? A: We expect the reverse stock split to occur immediately prior to the effective time of the merger. Q: When will Ariel's name change to MAYAN Networks Corporation occur? A: We expect Ariel's name will be changed to MAYAN Networks Corporation upon completion of the merger. Q: Should MAYAN shareholders send in their stock certificates now? A: No. After we complete the merger, Ariel will send instructions to MAYAN shareholders explaining how to exchange their shares of MAYAN common stock for the appropriate number of shares of Ariel common stock. Q: Should Ariel stockholders send in their stock certificates? A: No. Although Ariel stockholders will continue to own their shares of Ariel common stock after the merger, the reverse split will cause each certificate to represent one-twentieth of the number of shares represented on the certificate. Ariel will send instructions to Ariel shareholders explaining how to exchange their certificates for new certificates. Q: How do I vote? A: Mail your signed proxy card in the enclosed return envelope or grant your proxy by telephone or the Internet as soon as possible so that your shares may be represented at the special stockholders meetings. You may also attend the meeting in person instead of submitting a proxy. If your shares are held in "street name" by your broker, your broker will vote your shares only if you provide instructions on how to vote. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Q: Can I change my vote after mailing my proxy? A: Yes. You may change your vote by delivering a signed notice of revocation or a later-dated, signed proxy card to the corporate secretary of Ariel or MAYAN, as applicable, before the applicable stockholder meeting, or by attending the stockholder meeting and voting in person. 1
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Q: Whom can I call with questions? A: If you are a Ariel stockholder with questions about the merger, please call Ariel Investor Relations at (609) 860-2900. If you are a MAYAN shareholder with questions about the merger, please call MAYAN Investor Relations at (408) 392-9900. 2
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SUMMARY The following summary highlights selected information from this joint proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire document, including the appendices, and the other documents we refer you to for a more complete understanding of the merger. The Companies ARIEL CORPORATION 2540 Route 130 Cranbury, New Jersey 08512 www.Ariel.com (609) 860-2900 Ariel Corporation designs and manufactures printed circuit boards that enable users to remotely access computer networks. Ariel's remote access equipment is compatible with computers running Windows NT or Linux operating system software. Ariel sells its products to businesses that provide their clients with the ability to connect to the Internet, referred to as Internet Service Providers, or ISPs. Ariel's products enable ISPs to build reliable, scalable and easy to manage networks at a cost that is below other available alternatives. Ariel's stock is traded on the Nasdaq National Market under the symbol "ADSP." Ariel's web site is not part of or incorporated by reference in this document. MAYAN NETWORKS CORPORATION 2115 O'Nel Drive San Jose, California 95131 www.mayannetworks.com (408) 392-9900 MAYAN focuses on telecommunications networking solutions for service providers. MAYAN historically developed hardware solutions. Recently, MAYAN has begun to transition to a business based primarily on software and services for networks at the metropolitan edge. The Combined Company If the merger is consummated, the combined company, which will be named "MAYAN Networks Corporation," will be headquartered in San Jose, California. It is expected that the combined company would continue to focus on developing networking hardware and software solutions for service providers at the metropolitan edge. The combined company would leverage Ariel's engineering core competencies and hardware expertise, and MAYAN's existing complementary technologies and experience with telecommunications networks. In addition, if the merger is consummated, MAYAN expects to continue to transition the business of the combined company to include a services offering in order to provide a broad range of solutions for its customers. The Merger (See page 50) Ariel and MAYAN have entered into a merger agreement that provides for the merger of MAYAN and Ariel. As a result, shareholders of MAYAN will become stockholders of Ariel, and holders of MAYAN common stock, options, warrants and other rights to purchase common stock (except for MAYAN's convertible promissory notes, discussed below) will own approximately 90% of the issued and outstanding equity securities of the combined company. Ariel stockholders, option holders and warrant holders will retain control of 3
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approximately 10% of the combined company. These percentages assume that all outstanding options and warrants will be exercised and converted. To the extent that some or all of the options or warrants are not exercised and converted, these percentages may be materially different. We urge you to read the merger agreement, which is included as Appendix I, carefully in its entirety. The number of shares of Ariel common stock for which each share of MAYAN common stock will be exchanged is approximately 0.157 after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. The exact number will be determined immediately prior to the completion of the merger per formulas specified in the merger agreement and described under "The Merger--Conversion of MAYAN Stock in the Merger." We have assumed that the holders of MAYAN Series A, B, C and D preferred stock will voluntarily convert their shares into MAYAN common stock pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation immediately prior to the effective time of the merger. The articles of incorporation of MAYAN provide that the outstanding shares of each series of MAYAN preferred stock will automatically convert into common stock if holders of at least a majority of that series consent to the conversion. It is a condition to the merger that the conversion of preferred stock occur immediately prior to the closing of the merger. In connection with the merger, Ariel is required to amend its certificate of incorporation to (1) increase the number of authorized shares of Ariel common stock and (2) effect a reverse split of the common stock of Ariel, to be effective immediately prior to the effective time of the merger, in which each 20 outstanding shares of Ariel common stock will be combined into one share of Ariel common stock, and Ariel is required to adopt the implementation of the 2001 Stock Incentive Plan under which 15,659,762 shares of Ariel common stock will initially be reserved for issuance. Ariel is seeking approval of its stockholders for each of these proposals. Additionally, Ariel will assume the convertible subordinated promissory notes of MAYAN, and these notes will be convertible into Ariel common stock, as described under "The Merger--MAYAN Convertible Subordinated Promissory Notes and Exchange Offer." Stockholder Approvals (See pages 47 and 48) Ariel Stockholders The holders of a majority of the shares of Ariel common stock outstanding and entitled to vote at the special meeting of Ariel's stockholders must approve the merger agreement, and such approval shall include approval of all the actions and transactions contemplated by the merger agreement, including the change of Ariel's name to "MAYAN Networks Corporation." In addition, Ariel stockholders will be asked at the special meeting to: . approve an amendment to Ariel's certificate of incorporation to: . increase the number of authorized shares of Ariel's common stock, and . effect a one for 20 reverse stock split; . approve the implementation of the 2001 Stock Incentive Plan under which 15,659,762 shares of Ariel common stock will initially be reserved for issuance, and . elect Ariel's current board of directors to serve until the earlier of (i) the closing of the merger or (ii) until their successors are duly elected and qualified. The holders of a majority of Ariel's outstanding common stock outstanding and entitled to vote at the Ariel special meeting must approve the amendment to Ariel's certificate of incorporation. The holders of a majority of the shares of Ariel's common stock that are present or represented by proxy at the Ariel special meeting must approve the implementation of the 2001 Stock Incentive Plan, and a plurality of the votes cast in 4
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person or by proxy by holders of shares of Ariel common stock is required to elect directors. Ariel stockholders are entitled to cast one vote per share of Ariel common stock owned at the close of business on , 2001. Ariel's directors and officers owning beneficially approximately 12.1% of Ariel's common stock outstanding as of March 28, 2001, including options which have vested or will vest within 60 days of that date, have agreed to vote all of their shares of Ariel common stock for approval of the Ariel proposals. See Appendix II. Additionally, Ariel's directors and officers will agree not to sell, transfer or otherwise dispose of any Ariel common stock (or other securities) held by them for a period of one year following the closing of the merger. See Appendix IV. MAYAN Shareholders For the merger to be approved, the holders of a majority of the outstanding shares of MAYAN common stock and the holders of a majority of the outstanding shares of MAYAN preferred stock must approve the merger agreement. Additionally, the holders of MAYAN preferred stock must voluntarily convert their stock into MAYAN common stock pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation immediately prior to the closing of the merger. MAYAN shareholders are entitled to cast one vote per share of MAYAN common stock and MAYAN preferred stock owned at the close of business on , 2001. MAYAN's directors and executive officers owning beneficially approximately 55.2% of MAYAN's common stock and preferred stock outstanding as of June 30, 2001, including options, have agreed to vote all of their shares of MAYAN common stock and preferred stock for approval of the merger agreement. See Appendix III. Additionally, MAYAN's directors and executive officers will agree not to sell, transfer or otherwise dispose of any Ariel common stock (or other securities) to be held by them after the merger for a period of one year following the closing of the merger. See Appendix IV. Recommendations of the Boards of Directors (See pages 54 and 60) The MAYAN and Ariel boards of directors have each determined that the merger is in the best interests of their respective stockholders. The disinterested members of the MAYAN board of directors unanimously recommend that MAYAN shareholders vote FOR approval of the merger agreement and the conversion of MAYAN preferred stock into MAYAN common stock immediately prior to the merger. The disinterested members of the Ariel board of directors unanimously recommend that Ariel stockholders vote FOR approval of the merger agreement, the amendment of Ariel's certificate of incorporation and the approval of the implementation of the 2001 Stock Incentive Plan. Opinions of Financial Advisors (See pages 56 and 63) In deciding to approve the merger, each of the MAYAN and Ariel boards of directors considered opinions from their respective financial advisors, among various other factors described at pages 59 and 66. On March 28, 2001, Needham & Company, Inc., Ariel's financial advisor, delivered its written opinion to the Ariel board that, as of that date, the exchange ratio was fair from a financial point of view to Ariel. The full text of the written opinion of Needham & Company, Inc., which sets forth the assumptions made, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix VII. You should read this opinion carefully in its entirety. Needham & Company, Inc.'s opinion is directed to the Ariel board of directors and addresses only the fairness of the exchange ratio pursuant to the merger agreement from a financial point of view to Ariel as of the date of the opinion, and does not constitute a recommendation to any stockholder as to how to vote on any matter relating to the merger. 5
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On March 28, 2001, MAYAN's financial advisor, Robertson Stephens, Inc., delivered its oral opinion to the MAYAN board of directors that, as of that date, the exchange ratio was fair from a financial point of view to MAYAN's shareholders. Robertson Stephens subsequently confirmed its oral opinion by delivery of its written opinion dated March 28, 2001. The full text of Robertson Stephens' written opinion is attached to this document as Appendix VIII. We encourage you to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken. Robertson Stephens' opinion is directed to the MAYAN board of directors and does not constitute a recommendation to any shareholder as to how to vote on any matter relating to the merger. Interests of Certain Persons in the Merger (See page 70) When considering the recommendation of the MAYAN board, you should be aware that some directors and officers of MAYAN have the following interests in the merger that are different from, or in addition to, yours: . Ariel agreed to cause the combined company in the merger to indemnify each present and former MAYAN officer and director against liabilities arising out of service as an officer or director. The combined company in the merger will maintain officers' and directors' liability insurance to cover those liabilities for the next six years. . Ariel agreed that Esmond Goei, Chief Executive Officer and a director of MAYAN, and John Tingleff, Chief Financial Officer of MAYAN, will join Ariel as the Chief Executive Officer and Chief Financial Officer, respectively, of Ariel following the merger. . Ariel agreed to use its best efforts to appoint Esmond Goei, Thomas Edrington, Steven Krausz, Jim Mongiello and Peter Morris, all members of the board of directors of MAYAN, to Ariel's board of directors effective at the effective time of the merger. It is anticipated that the terms of service of these new board members will be staggered as follows: Mr. Goei will have a term expiring after the first year of service, which we expect will be in 2002, Messrs. Mongiello and Edringon will have terms expiring after their second year of service, which we expect will be in 2003, and Messrs. Morris and Krausz will have terms expiring after their third year of service, which we expect will be in 2004. . As of June 30, 2001, the executive officers and directors of MAYAN and their affiliates owned 3,520,500 shares of MAYAN common stock and 20,015,143 shares of MAYAN preferred stock. Additionally, as of June 30, 2001, the executive officers and directors of MAYAN held options to purchase 2,303,170 shares of MAYAN common stock. Additionally, Esmond Goei is currently serving as Vice-Chairman of Ariel's board of directors and beneficially owns, or has the right to acquire, 3,250 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split, and 1,835,670 shares of MAYAN capital stock. Due to the conflict of interest arising from Mr. Goei's dual representation on the boards of directors of Ariel and MAYAN, Mr. Goei has abstained from voting on all proposals with respect to the merger. As a result, these directors and officers may be more likely to vote to approve the merger and voluntarily convert any shares of MAYAN preferred stock they may hold than MAYAN shareholders generally. Interests of Ariel's Management in the Merger As a condition to completion of the merger, executive officers and key employees of Ariel are required to sign employment agreements with the combined company, effective only upon completion of the merger, that include compensation and proposed options to purchase shares of Ariel common stock. Under the employment agreements, the executive officers and key employees agree to waive the acceleration benefits under their existing employment or severance agreements with Ariel and refrain from competing with the combined company for a 6
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period of one year following termination of employment, and will, upon termination without cause, receive three to six months of severance pay as well as an additional one to two years of vesting of the shares of Ariel common stock issuable upon exercise of Ariel stock options, based upon the date of the termination. Additionally, Dennis Schneider, President, Chief Executive Officer and director of Ariel has agreed to enter into an employment agreement with the combined company pursuant to which Mr. Schneider will become the Senior Vice President of Marketing of the combined company following the merger. Under Mr. Schneider's employment agreement, Mr. Schneider agrees to waive the acceleration benefits (with respect to this merger only) under his existing employment agreement with Ariel and refrain from competing with the combined company for a period of one year following termination of employment. Additionally, upon an involuntary termination without cause, Mr. Schneider will receive six months of severance pay. Anthony Agnello, Chairman of the Ariel board of directors, will maintain a board seat on the board of directors of the combined company. Mr. Agnello beneficially owns, or has the right to acquire, 36,300 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. As a result of these arrangements, the executive officers of Ariel may be more likely to approve the merger, the amendment of Ariel's certificate of incorporation and the 2001 Stock Incentive Plan than Ariel stockholders generally. No Solicitation of Transactions (See page 78) Subject to limited exceptions, the merger agreement prohibits Ariel from soliciting or participating in discussions with third parties about alternative transactions that may prevent consummation of the merger. In addition, Ariel is obligated to provide MAYAN with information concerning any alternative transactions, and five business days' notice before any termination of the merger agreement takes effect. The restrictions, however, do not prohibit Ariel's board of directors from taking actions necessary to fulfill its fiduciary duties to Ariel stockholders under applicable law. Conditions to Completing the Merger (See page 79) Whether we complete the merger depends on a number of conditions being satisfied in addition to Ariel stockholders' approval of the merger agreement and MAYAN shareholders' approval of the merger agreement. However, either Ariel or MAYAN may choose to complete the merger even though one or more of these conditions has not been satisfied, as permitted by applicable law. We cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed. The conditions must be satisfied or waived before the merger can be completed. The material conditions include the following: . the shares of Ariel common stock to be issued in exchange for MAYAN common stock must have been registered with the SEC under the Securities Act of 1933 the registration statement must have become effective and the registration statement must not be the subject of any stop order or proceedings seeking a stop order; . the shares of Ariel common stock to be issued in the merger must be authorized for listing on the Nasdaq National Market; . the combined company following the merger must qualify for listing on the Nasdaq National Market; . the one for 20 reverse split of Ariel's common stock must be effective; . each share of MAYAN preferred stock outstanding immediately prior to the merger must have been converted into shares of MAYAN common stock pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation; 7
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. the Ariel board of directors and the Ariel stockholders must have approved the certificate of amendment to Ariel's certificate of incorporation and the Ariel reverse stock split, and the certificate of amendment to the certificate of incorporation shall have been filed with the Delaware Secretary of State; . the Ariel board of directors and the Ariel stockholders must have approved the adoption of the 2001 Stock Incentive Plan; . each of the current officers and directors of Ariel must have resigned from his or her officer or director position, as the case may be, at Ariel, except for Anthony Agnello and Esmond Goei, who shall remain on the board of directors of the combined company and Dennis Schneider, who will be the Senior Vice President of Marketing of the combined company; and . each holder of Ariel stock options who is entitled to accelerated vesting as a result of the merger must have waived the acceleration of vesting with respect to his or her options. Termination of the Merger Agreement (See page 81) Ariel and MAYAN can agree at any time prior to completing the merger to terminate the merger agreement. Also, either of us can decide, without the other's consent, to terminate the merger agreement if the merger has not been completed on or before August 31, 2001, provided the terminating party has not caused the merger not to be completed, if the other company has breached the merger agreement, if either party receives a superior proposal, or for other reasons. Additionally, MAYAN can terminate the merger agreement if Ariel's common stock is delisted from the Nasdaq National Market or if the common stock of the combined company does not qualify for listing on the Nasdaq National Market. Termination Fee and Expenses (See page 82) Each party has agreed to reimburse the other party for all expenses reasonably incurred by that party if the merger agreement is terminated by reason of a superior proposal. Otherwise, each party shall bear its own expenses in connection with the merger. Governmental Approvals and Regulatory Requirements Other than compliance with applicable federal and state securities laws in connection with the issuance of Ariel common stock pursuant to the merger, compliance with applicable provisions of the Delaware General Corporation Law and the California Corporations Code, no federal or state regulatory requirements must be complied with and no governmental approval must be obtained in connection with the merger. Material Federal Income Tax Considerations (See page 82) The merger has been structured so as to qualify as a reorganization within the meaning of the Internal Revenue Code. If the merger qualifies as a reorganization, MAYAN shareholders generally will not recognize gain or loss for United States federal income tax purposes in the merger. It is a condition to completion of the merger that each of MAYAN and Ariel obtain a legal opinion from outside counsel that the merger will constitute a reorganization within the meaning of the Internal Revenue Code. Anticipated Accounting Treatment of the Merger (See page 83) We intend to treat the merger as a purchase for accounting and financial reporting purposes, which means that MAYAN will be treated as a separate entity for periods prior to the closing. Because MAYAN will own approximately 90% of the common stock of Ariel (on a diluted basis) after the merger, the merger will be accounted for as a reverse acquisition which results in MAYAN being the acquirer of Ariel for accounting purposes. 8
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Restrictions on the Ability to Sell Ariel Stock (See page 85) All shares of Ariel common stock that MAYAN shareholders receive in connection with the merger will be freely transferable unless the holder is considered an "affiliate" of either Ariel or MAYAN for purposes of the Securities Act or the holder executes a market standoff agreement. Shares of Ariel common stock held by affiliates may be sold only pursuant to an effective registration statement or an exemption from registration under the Securities Act and shares of Ariel common stock subject to the market standoff agreements may only be sold after the expiration of one year following the closing of the merger. Comparison of Rights of Shareholders (See page 100) If the merger is completed, MAYAN shareholders will become stockholders of Ariel and the rights of the MAYAN shareholders will be governed by Delaware law and Ariel's certificate of incorporation and bylaws, rather than California law and the MAYAN articles of incorporation and bylaws. The rights of a shareholder of MAYAN will differ from the rights of a stockholder of Ariel. To review these differences in more detail, see "Description of Capital Stock and Comparison of Stockholder Rights--Comparison of Rights of Ariel Stockholders and MAYAN Shareholders." Stockholders' Dissenters' Rights of Appraisal (see page 84) Under Delaware law and California law, neither the Ariel stockholders nor the MAYAN shareholders, respectively, are entitled to dissenters' rights of appraisal in connection with the merger. Proposal to Approve the Amendment to Ariel's Restated Certificate of Incorporation (see page 103) Ariel is presenting a proposal to its stockholders to approve an amendment to Ariel's certificate of incorporation to increase the number of authorized common shares from 2,000,000 shares to 12,500,000 shares, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. Ariel's board of directors believes that it is advisable to increase the number of authorized shares of common stock in order to provide Ariel with sufficient shares to: . complete the exchange of Ariel shares for the outstanding shares of MAYAN common stock in connection with the merger; . issue upon exercise of any of MAYAN's outstanding options or warrants; . issue upon conversion of MAYAN's outstanding convertible subordinated promissory notes; and . provide for a reserve of shares available for issuance in connection with possible future actions. In order to decrease the number of shares that would be outstanding following the merger, increase Ariel's stock price in order to maintain the listing of Ariel's common stock on the Nasdaq National Market and increase Ariel's stock price to generate investor interest and attract and retain employees and other service providers, Ariel is presenting a proposal to its stockholders to approve an amendment to Ariel's certificate of incorporation to effect a one for 20 reverse stock split of the common stock of Ariel, to be effective immediately prior to the effective time of the merger. Approval of this proposal requires the favorable vote of a majority of the outstanding Ariel shares entitled to vote on the record date. The members of the Ariel board of directors unanimously recommend that Ariel stockholders vote to approve the foregoing proposal. 9
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Proposal to Approve the Implementation of Ariel's Stock Incentive Plan (see page 106) Ariel is presenting a proposal to its stockholders to approve the implementation of the 2001 Stock Incentive Plan under which shares of Ariel common stock will initially be reserved for issuance. The 2001 plan is designed to allow Ariel to continue to utilize equity incentives to attract and retain the services of key individuals essential to Ariel's long-term growth and financial success. Approval of this proposal requires the favorable vote of a majority of the outstanding Ariel shares entitled to vote on the record date. The members of the Ariel board of directors unanimously recommend that Ariel stockholders vote to approve the foregoing proposal. Proposal to Elect Ariel's Current Board of Directors (see page 106) Ariel is presenting a proposal to its stockholders to elect Ariel's current board of directors to serve until the earlier of the closing of the merger or until their successors are duly elected and qualified. On or about March 1, 2001, Ariel's charter was voided because of the inadvertent failure to file its annual report for the years 2000 and 1999 with Delaware and pay the annual franchise taxes due to the state of Delaware. Ariel's corporate charter was revived on March 21, 2001. Pursuant to Delaware law, a full board of directors must be elected by the stockholders of a company following the revival of its corporate charter. Approval of this proposal requires the favorable vote of a majority of the outstanding Ariel shares entitled to vote on the record date. The disinterested members of the Ariel board of directors unanimously recommend that Ariel stockholders vote to approve the foregoing proposal. Exchange Offer relating to Convertible Subordinated Promissory Notes (see page 73) On May 22, 2001 MAYAN commenced an offering of up to $50.0 million in aggregate principal amount of new Convertible Subordinated Notes, or exchange notes, for up to $75.0 million in aggregate principal amount of existing Convertible Subordinated Notes to approximately 15 holders. The offer will remain open until July 27, 2001. A summary of the terms to this Exchange Offer are as follows: . MAYAN is offering to exchange $2,000 in principal amount of exchange notes for each $3,000 in principal amount of existing notes. . Holders may tender all, some or none of their existing notes. . Before the closing of the merger with Ariel (or alternative mergers), the exchange notes will be convertible into shares of MAYAN's common stock, at an initial closing price of $5.00 per share of MAYAN common stock subject to adjustments. . If the merger with Ariel closes, the outstanding exchange notes will, upon the closing of the merger with Ariel, become convertible at any time thereafter into shares of Ariel common stock, at an initial conversion price per share equal to $31.95 as adjusted for Ariel's reverse stock split subject to certain other adjustments. . If an alternative merger closes, the outstanding exchange notes will, upon such closing, become convertible at any time thereafter into whatever consideration the converting holders would have received in the alternative merger if they had converted their exchange notes immediately before the consummation of the alternative merger, subject to adjustments. 10
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. In the event of a change in control of Ariel after the merger with MAYAN or a delisting of Ariel's common stock (after the merger with MAYAN), the holders of the exchange notes may require Ariel after the merger with MAYAN to repurchase the exchange notes at 105% of the principal amount plus accrued and unpaid interest. . Prior to the earlier of (i) 90 days following the effective date of a shelf registration statement covering a resale of the exchange notes and common stock into which the exchange notes are convertible following the merger with Ariel, (ii) the closing of an alternative merger or (iii) January 10, 2002, if at the close of business on December 31, 2001 MAYAN has not closed the merger with Ariel, the holders of the exchange notes may require the repurchase of the exchange notes at 37.5% of the principal amount plus accrued and unpaid interest. This repurchase option could require MAYAN, or Ariel after the merger with MAYAN, to make a cash payment of up to approximately $18,750,000 to repay the exchange notes and will result in the exchange notes being classified as a current liability on MAYAN's balance sheet (or Ariel's balance sheet after the merger with MAYAN) until this repurchase option expires. . If MAYAN has not closed the merger with Ariel by Dec. 31, 2001, the holders of the exchange notes will have the option to change the terms of the exchange notes to terms that are consistent with the existing $75,000,000 convertible subordinated promissory notes. Bridge Loan At the time of the signing of the merger agreement, MAYAN agreed that for so long as the merger agreement has not been terminated, MAYAN will advance to Ariel, on an as-needed-basis, bridge loans of up to an aggregate of $2,000,000 for the purpose of financing operating expenses incurred in the ordinary course of business. In June 2001, MAYAN increased the amount to $4,000,000. The loans will be advanced on the terms set forth in the form of bridge loan attached to the merger agreement. Each advance of all or any portion of the bridge loan is subject to the following conditions: (i) the representations and warranties of Ariel set forth in the merger agreement must be true and correct in all material respects as of the time of that advance, (ii) Ariel must not have breached in any material respect any covenant contained in the merger agreement, and (iii) Ariel must have given MAYAN at least three (3) days' written notice requesting that advance and affirming that the conditions described in (i) and (ii) above have been satisfied. As of July 23, 2001, MAYAN has made eight advances to Ariel in the aggregate amount of $3,700,000. See "The Merger--Bridge Loan." Trademarks Ariel(R) is a registered trademark and the Ariel logo is a trademark of Ariel Corporation. "Any Protocol to any Port," "Everylayer Everywhere," "MAYAN," "MAYAN Networks," "Smarter Metro Edge," "Unifier," "Unifier SMT" and "Unifier SMX" are trademarks of MAYAN Networks Corporation. This document contains other trade names, trademarks and service marks of Ariel, MAYAN and of other companies. Dividend Information (see page 117) Neither Ariel nor MAYAN has ever paid any cash dividends on its stock, and Ariel anticipates that, following the merger, it will continue to retain any earnings for the foreseeable future for use in the operation of its business. 11
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Forward-Looking Statements in this Document This document contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 with respect to Ariel's financial condition, results of operations and business and the expected impact of the merger on Ariel's financial performance. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions indicate forward-looking statements. These forward- looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. In evaluating the merger, you should carefully consider the discussion of risks and uncertainties in the section entitled "Risk Factors" beginning on page 18. You are cautioned not to place undue reliance on these forward looking statements, which reflect the views and predictions of Ariel's management only as of the date of this prospectus. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. 12
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ARIEL SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA The information in the following selected consolidated financial data has been derived from Ariel's consolidated financial statements. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Ariel's financial statements and the notes to those financial statements appearing elsewhere in this document. Consolidated balance sheets as of March 31, 2001 and the related consolidated statements of income and cash flow for each of the three months ended March 31, 2001 and 2000 were not audited. Consolidated balance sheets as of December 31, 1999 and 2000 and the related consolidated statements of income for each of the three years in the period ended December 31, 2000 were audited by PricewaterhouseCoopers LLP independent accountants, and are included elsewhere in this joint proxy statement prospectus. The report of PricewaterhouseCoopers LLP which is included in this document contains an explanatory paragraph relating to Ariel's ability to continue as a going concern as described in Note 1 to such financial statements. [Enlarge/Download Table] Three Months Ended Year Ended December 31, March 31, ------------------------------------------------------------------- ------------------------ 1996 1997 1998 1999 2000 2000 2001 ----------- ------------ ------------ ------------ ------------ ----------- ----------- (unaudited) Consolidated Statements of Operations Data: Sales................... $13,030,637 $ 13,201,916 $ 17,445,829 $ 11,626,546 $ 8,007,074 $ 2,072,221 $ 881,656 Cost of goods sold...... 6,482,147 7,180,241 11,965,220 5,096,014 4,497,804 868,374 625,508 ----------- ------------ ------------ ------------ ------------ ----------- ----------- Gross profit........... 6,548,490 6,021,675 5,480,609 6,530,532 3,509,270 1,203,847 256,148 Operating Expenses: Selling and marketing.. 3,952,723 4,400,786 5,265,542 5,634,070 5,683,349 1,266,834 1,064,854 General and administrative........ 6,383,192 6,145,088 9,710,275 7,312,680 6,277,270 1,468,396 1,935,011 Research and development net....... 5,758,413 8,182,584 6,722,905 5,688,414 5,321,127 1,281,626 1,090,516 Restructuring charge... -- 379,454 -- 369,528 2,356,656 -- -- ----------- ------------ ------------ ------------ ------------ ----------- ----------- Total operating expenses.............. 16,094,328 19,107,912 21,698,722 19,004,692 19,638,402 4,016,856 4,090,380 Loss from operations.... (9,545,838) (13,086,237) (16,218,113) (12,474,160) (16,129,132) (2,813,009) (3,834,232) Gain on sale of assets.. -- -- 29,537,896 -- -- -- -- Total other income (expense).............. 744,381 324,838 (874,645) (25,655) 57,142 32 14,602 Income/(loss) before income taxes........... (8,801,457) (12,761,399) 12,445,138 (12,499,815) (16,071,990) (2,812,977) (3,848,834) Income tax expense (benefit)............. -- -- 368,632 -- (423,938) -- -- ----------- ------------ ------------ ------------ ------------ ----------- ----------- Net income/(loss)...... $(8,801,457) $(12,761,399) $ 12,076,506 $(12,499,815) $(15,648,052) $(2,812,977) $(3,848,834) =========== ============ ============ ============ ============ =========== =========== Earnings/(loss) per share: Basic.................. $ (1.10) $ (1.39) $ 1.25 $ (1.27) $ (1.23) $ (0.24) $ (0.29) Diluted................ $ (1.10) $ (1.39) $ 1.11 $ (1.27) $ (1.23) $ (0.24) $ (0.29) Weighted average number of common shares outstanding: Basic.................. 7,979,249 9,161,758 9,652,664 9,843,402 12,726,382 11,703,359 13,073,920 ----------- ------------ ------------ ------------ ------------ ----------- ----------- Diluted................ 7,979,249 9,161,758 10,843,215 9,843,402 12,726,382 11,703,359 13,073,920 ----------- ------------ ------------ ------------ ------------ ----------- ----------- [Enlarge/Download Table] December 31, ---------------------------------------------------------- March 31, 1996 1997 1998 1999 2000 2001 ----------- ----------- ----------- ----------- ---------- ---------- (unaudited) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities............. $10,625,960 $ 2,645,864 $17,996,575 $ 7,088,431 $1,129,246 $ 423,477 Working capital (deficiency)........... 13,795,614 4,329,018 12,632,033 7,827,522 2,385,855 (732,648) Equipment, net.......... 2,036,897 2,382,645 1,365,354 1,387,128 1,261,112 1,058,656 Total assets............ 20,103,064 11,121,667 33,682,380 19,817,072 9,208,051 5,549,845 Long-term debt and capital leases......... -- 2,367,147 332,834 2,004,886 1,373,687 1,142,981 Stockholders equity (deficiency)........... 16,198,896 5,133,213 19,705,497 10,997,239 3,718,191 (143,082) 13
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MAYAN SELECTED HISTORICAL FINANCIAL DATA The following selected financial data of MAYAN should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of MAYAN" and its financial statements and notes thereto included elsewhere in this joint proxy statement/prospectus. MAYAN derived its statement of operations data for the period from July 30, 1997 (inception) through June 30, 1998 and for the years ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 1999 and 2000 from its audited financial statements that have been included elsewhere in this joint proxy statement/prospectus. The balance sheet data as of June 30, 1998 are derived from MAYAN's audited financial statements not included in this joint proxy statement/prospectus. The statement of operations data for the nine months ended March 31, 2000 and 2001 and the period from July 30, 1997 (inception) to March 31, 2001 (cumulative) and the balance sheet data as of March 31, 2001 is derived from MAYAN's unaudited financial statements included elsewhere in this joint proxy statement/prospectus. Historical results are not necessarily indicative of the results to be expected in the future. [Enlarge/Download Table] Period from July 30, 1997 Period from Year Ended Nine Months (Inception) July 30, 1997 June 30, Ended March 31, through March (Inception) to ------------------ ------------------ 31, 2001 June 30, 1998 1999 2000 2000 2001 (Cumulative) -------------- -------- -------- -------- -------- --------------- (as restated**) (as restated**) (in thousands) Statement of Operations Data: Operating expenses: Research and development (exclusive of noncash compensation expense).............. $ 292 $ 10,676 $ 35,442 $ 18,641 $ 25,769 $ 72,179 Sales and marketing (exclusive of noncash compensation expense).............. 115 395 4,165 2,183 7,920 12,595 General and administrative (exclusive of noncash compensation expense).............. 206 1,509 2,483 1,333 5,287 9,485 Amortization of deferred stock compensation*......... -- -- 1,112 363 4,066 5,178 ------ -------- -------- -------- -------- -------- Total operating expenses............. 613 12,580 43,202 22,520 43,042 99,437 Interest income......... (9) (409) (2,508) (1,750) (2,795) (5,721) Interest expense including accretion of redemption premium..... -- 34 163 124 5,889 6,086 ------ -------- -------- -------- -------- -------- Net loss.............. $ (604) $(12,205) $(40,857) $(20,894) $(46,136) $(99,802) ====== ======== ======== ======== ======== ======== Basic and diluted net loss per share......... $(1.65) $ (5.46) $ (10.00) $ (5.79) $ (6.90) $ (31.37) ====== ======== ======== ======== ======== ======== Shares used in calculating basic and diluted net loss per share.................. 367 2,236 4,085 3,608 6,685 3,181 ====== ======== ======== ======== ======== ======== Research and development........... $ -- $ -- $ 454 $ 110 $ 2,683 $ 3,137 Sales and marketing.... -- -- 269 79 273 542 General and administrative........ -- -- 389 174 1,110 1,499 ------ -------- -------- -------- -------- -------- $ -- $ -- $ 1,112 $ 363 $ 4,066 $ 5,178 ====== ======== ======== ======== ======== ======== -------- * Amortization of deferred stock compensation: 14
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[Download Table] June 30, -------------------------- March 31, 1998 1999 2000 2001 ------ -------- -------- ----------- (as restated**) (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments.......................... $1,035 $ 17,481 $ 38,693 $ 67,285 Working capital....................... 889 16,004 31,887 61,027 Total assets.......................... 1,071 18,445 45,030 81,365 Long-term debt obligations............ -- 799 523 78,498 Convertible preferred stock........... 1,509 28,757 88,726 88,726 Shareholders' equity (deficiency)..... (586) (12,708) (52,004) (93,504) -------- ** See Note 12 to MAYAN's financial statements included elsewhere in this joint proxy statement/prospectus. 15
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SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The summary pro forma combined condensed financial information is derived from the unaudited pro forma combined condensed financial information, which give effect to the merger as a purchase and should be read in conjunction with such unaudited pro forma combined condensed financial information and the notes thereto included in this joint proxy statement/prospectus. Ariel's fiscal year ends on December 31. For the purposes of the pro forma information, MAYAN's statement of operations for the year ended June 30, 2000 has been combined with Ariel's unaudited consolidated statement of operations for the twelve months ended June 30, 2000, MAYAN's unaudited statement of operations for the nine months ended March 31, 2001 has been combined with Ariel's unaudited consolidated statement of operations for the nine months ended March 31, 2001 and MAYAN's unaudited balance sheet as of March 31, 2001 has been combined with Ariel's unaudited consolidated balance sheet as of March 31, 2001. The unaudited pro forma combined condensed statements of operations give effect to the Ariel Merger as if it had occurred on July 1, 1999. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the future financial position or future results of operations of MAYAN after the merger or of the financial position or results of operations of MAYAN that would have actually occurred had the merger been effected as of the dates described above. The allocation of the purchase price reflected in the unaudited pro forma combined condensed financial information is preliminary. The actual purchase price allocation to reflect the fair values of assets acquired and liabilities assumed will be based upon management's evaluation of such assets and liabilities after the merger. Accordingly, the adjustments included here will change based upon the final allocation of the total purchase price, as adjusted to reflect stock values. That allocation may differ significantly from the preliminary allocation included in this statement. The unaudited pro forma combined condensed financial information should be read in conjunction with the audited consolidated financial statements and related notes of Ariel, and the audited financial statements of MAYAN, Ariel's Management Discussion and Analysis of Financial Condition and Results of Operations and MAYAN's Management Discussion and Analysis of Financial Condition and Results of Operations included in this joint proxy statement/prospectus. See the unaudited pro forma combined condensed financial information elsewhere in this joint proxy statement/prospectus. 16
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SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (In thousands, except per share amounts) [Download Table] Year Ended Nine Months June 30, Ended 2000 March 31, 2001 -------- -------------- (As restated*) Pro Forma Combined Condensed Statement of Operations Data: Total revenues....................................... $ 8,971 $ 5,719 Amortization of intangibles.......................... 2,500 1,875 Amortization of deferred stock compensation.......... 1,233 4,156 Operating loss....................................... (61,602) (55,361) Net loss............................................. (59,302) (58,000) Historical MAYAN basic and diluted net loss per share**............................................. $ (10.00) $ (6.90) Shares used in calculating historical MAYAN basic and diluted net loss per share**........................ 4,085 6,685 Historical Ariel basic and diluted net loss per share............................................... $ (1.42) $ (0.76) Shares used in calculating historical Ariel basic and diluted net loss per share.......................... 11,157 13,074 Pro forma basic and diluted net loss per share....... $ (9.71) $ (7.88) Shares used in calculating pro forma basic and diluted net loss per share.......................... 6,109 7,356 [Download Table] As of March 31, 2001 --------------- (As restated**) Pro Forma Combined Condensed Balance Sheet Data: Cash, cash equivalents and short-term investments............... $ 67,708 Working capital................................................. 57,027 Total assets.................................................... 110,849 Long-term debt obligations...................................... 78,574 Shareholders' equity............................................ 16,813 [Download Table] As of ------------------ June 30, March 31, 2000 2001 -------- --------- Pro Forma Combined Condensed Book Value Per Share: Historical MAYAN**........................................... $(5.34) $(8.82) Historical Ariel............................................. 0.75 (0.01) Combined Pro Forma per share................................. 2.11 The historical book value per share is computed by dividing shareholders' deficiency by the number of shares of common stock outstanding at June 30, 2000 and March 31, 2001. The combined proforma book value per share is calculated by dividing the pro forma shareholders' equity by the pro forma number of shares of MAYAN common stock outstanding as of March 31, 2001 assuming the merger had occurred as of March 31, 2001. -------- * See Note 12 to MAYAN's financial statements included elsewhere in this joint proxy statement/prospectus. ** Subsequent to the merger, the share and per share information previously reported by MAYAN prior to the merger will be adjusted to reflect the exchange ratio of 0.157. 17
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RISK FACTORS By voting in favor of the merger, MAYAN shareholders will be choosing to invest in Ariel common stock. An investment in Ariel common stock involves a high degree of risk. By voting in favor of the merger, Ariel stockholders will be choosing to become equityholders in the surviving company, which could expose the stockholders to a high degree of risk. In addition to the other information contained in this proxy statement/ prospectus, you should carefully consider the following risk factors in deciding whether to vote for the merger. If any of the following risks actually occur, the business and prospects of MAYAN or Ariel may be seriously harmed. In such case, the trading price of Ariel common stock would decline, and you may lose all or part of your investment. Risks Related to the Merger The market value of the Ariel common stock received by MAYAN's shareholders may decrease from the market value of the stock at the time of the shareholder vote on the merger Upon the merger's completion, each share of MAYAN common stock will be exchanged for a fixed number of shares of Ariel common stock. There will be no adjustment after the shareholder vote for changes in the market price of Ariel common stock. In addition, neither MAYAN nor Ariel may terminate the merger agreement or "walk away" from the merger or resolicit the vote of its stockholders solely because of changes in the market price of Ariel common stock. Accordingly, the dollar value of Ariel common stock that MAYAN shareholders will receive upon the merger's completion will depend on the market value of Ariel common stock when the merger is completed and may decrease from the date MAYAN shareholders submit their proxy. The share price of Ariel common stock is by nature subject to the general price fluctuations in the market for publicly traded equity securities and has experienced significant volatility. In addition, the stock market has experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. These fluctuations may continue to affect the stock prices of technology companies, such as Ariel, in particular. MAYAN and Ariel urge you to obtain recent market quotations for Ariel common stock. Ariel cannot predict or give any assurances as to the market price of Ariel common stock at any time before or after the completion of the merger. If MAYAN and Ariel are unable to successfully integrate the two companies, they may not achieve the benefits they expect from the merger and the existing businesses of the two companies may be significantly harmed MAYAN and Ariel entered into the merger agreement with the expectation that the merger will result in certain benefits. Achieving the benefits of the merger depends on the timely, efficient and successful integration of the operations, personnel and products of the two companies. The successful execution of these post-merger events will involve considerable risk and may not be successful. In addition, the attention and effort devoted to the integration of the two companies will significantly divert management's attention from other important issues, and could seriously harm the combined company. Operations and personnel. Each of MAYAN and Ariel has very limited experience in the other's business. Furthermore, MAYAN's principal offices are located in San Jose, California, while Ariel's principal offices are located in Cranbury, New Jersey. In order for the merger to be successful, MAYAN and Ariel must successfully integrate MAYAN's operations and personnel with Ariel's operations and personnel. Failure to complete the integration successfully could result in the loss of key personnel and customers. Products. Each company initially intends to offer its respective products to customers of the other company. There can be no assurance that either company's customers will have any interest in the other company's products. The failure of these cross-marketing efforts would diminish the anticipated cost savings from this merger. 18
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In addition, MAYAN intends after the merger to develop new products that combine the assets of both the Ariel and MAYAN businesses. To date, the companies have not thoroughly investigated the obstacles, technological, market-driven or otherwise, to developing and marketing these new products in a timely and efficient way. There can be no assurance that MAYAN will be able to overcome these obstacles, or that there will be a market for new products and services developed by MAYAN after the merger. The departure of key personnel or the failure to attract qualified employees may negatively impact the business of the combined company The ability of the combined company to maintain its competitive position will depend, in large part, on its ability to attract and retain highly qualified development and managerial personnel. Competition for these personnel is intense. While the merger will increase the combined company's human resources in this area, there is always a risk of departure of key employees due to the combination process. The announcement of the proposed merger may impede the combined company's ability to attract and retain personnel before and after these transactions. The loss of a significant group of key personnel would hinder the combined company's product development efforts. The merger could adversely affect combined financial results If and when the merger is completed, the combined company will incur a charge for in-process research and development, which we currently estimate will be approximately $0.5 million. The actual charge the combined company incurs could be greater than this estimate, which could have a material adverse effect on its financial results. The combined company will also succeed to all of the liabilities of Ariel, whether now known or discovered in the future. Additionally, if the benefits of the merger do not exceed the costs associated with the merger, including any dilution to Ariel's stockholders resulting from the issuance of shares in connection with the merger, the financial position of the combined company could be weakened. Further, an estimated $25.7 million of goodwill and intangible assets will be recorded in connection with the merger. The goodwill will not be amortized and the intangible assets will be amortized over three years after the merger. These assets may become impaired if we do not successfully integrate the two companies after the merger. The debt that Ariel will assume in connection with the merger may limit the combined company's financing options in the future and could weaken its business MAYAN has $75.0 million of existing notes outstanding, some or all of which may be exchanged into up to $50.0 million of exchange notes in the exchange offer. MAYAN's debt will become the obligation of the combined company after the merger. The effect of this debt could be to: . limit the combined company's ability to obtain additional financing in the future; . limit the combined company's flexibility to plan for, or react to, changes in its business; . require the combined company to use a substantial portion of its cash flow from operations or utilize a significant portion of cash on hand to repay the debt when due, rather than for other purposes, such as product development, marketing or capital expenditures; . make the combined company more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and . make the combined company more vulnerable to a downturn in its business or the economy generally. Additionally, if the holders of the existing notes or exchange notes convert their notes into the combined company's common stock, Ariel would have to issue a significant number of shares of additional common stock. Such an issuance of common stock would dilute Ariel's existing common stock. The increase in common stock outstanding could increase Ariel's difficulties in raising money through the sale of common stock in the future. 19
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The lack of a public market for the MAYAN common stock makes it difficult to evaluate the fairness of the exchange ratio The common stock of MAYAN is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of MAYAN's common stock. Since the exchange ratio was determined based on negotiations between the parties, it is possible that either the Ariel or the MAYAN shareholders will receive consideration in the merger that is below the fair market value of the common stock they currently hold. The future market price of the shares of common stock of the combined company may decline from the market price of the stock at the time of the merger It is impossible to predict how the stock of the combined company will trade following the merger. MAYAN cannot determine whether an active trading market will develop for the stock of the combined company. Moreover, there can be no assurance that the stock of the combined company will continue to trade in the Nasdaq National Market. Even if an active trading market does develop for the common stock of the combined company, there can be no assurance that the market will be sustained or that the market price of the common stock of the combined company will not decline in value. The market price of Ariel's common stock may decline as a result of the merger The market price of Ariel's common stock may decline as a result of the merger if, among other things: . the integration of Ariel and MAYAN is unsuccessful; . the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or investors; or . the effect of the merger on Ariel's financial results is not consistent with the expectations of financial or industry analysts or investors. The market price of the Ariel common stock could also decline as a result of factors related to the merger which may currently be unforeseen. A decline in the market price of the Ariel common stock could materially affect the combined company. Ariel's and MAYAN's officers and directors have conflicts of interest that may influence them to support or approve the merger The directors and officers of MAYAN participate in arrangements and have continuing indemnification against liabilities that provide them with interests in the merger that are different from, or in addition to, yours, including the following: . Esmond Goei is the Chief Executive Officer and a director of MAYAN, and is currently Vice-Chairman of Ariel's board of directors. He beneficially owns, or has the right to acquire, 3,250 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, and 1,835,670 shares of MAYAN capital stock. . Dennis Schneider, Chief Executive Officer of Ariel, has agreed to be the Senior Vice President of Marketing of the combined company and may have a conflict of interest because he will continue to be employed following the merger. . Ariel has agreed to cause the combined company in the merger to indemnify each present and former MAYAN officer and director against liabilities arising out of that person's services as an officer or director. Ariel will cause the combined company to maintain officers' and directors' liability insurance to cover any such liabilities for the next six years. 20
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. Ariel has agreed that Esmond Goei and John Tingleff, Chief Financial Officer of MAYAN, will join Ariel as Chief Executive Officer and Chief Financial Officer, respectively, of Ariel following the merger. . Ariel has agreed that Esmond Goei, Thomas Edrington, Steven Krausz, Jim Mongiello and Peter Morris, all members of the board of directors of MAYAN, will join Ariel's board of directors following the merger. . As of June 30, 2001, the executive officers and directors of MAYAN and their affiliates owned an aggregate of 3,520,000 shares of MAYAN common stock and 20,015,143 shares of MAYAN preferred stock. Additionally, as of March 31, 2001, the executive officers and directors of MAYAN held options to purchase an aggregate of 2,303,170 shares of MAYAN common stock, which will be assumed by Ariel and be converted into options to purchase Ariel common stock. For the above reasons, the directors and officers of Ariel and MAYAN could be more likely to vote to approve the merger agreement than if they did not hold these interests. Ariel and MAYAN stockholders should consider whether these interests may have influenced these directors and officers to support or recommend the merger. Failure to complete the merger could cause Ariel's stock price to decline, adversely effect the future business and operations and could result in the delisting of Ariel's stock from the Nasdaq National Market If the merger is not completed for any reason, Ariel may be subject to a number of material risks, including the following: . Ariel has limited financial resources available to support its ongoing operations, fund product development programs and market new competitive technology, and pay its obligations as they become due. Additionally, Ariel has experienced negative cash flows from operations for a substantial period. These factors raise substantial doubt concerning Ariel's ability to independently continue as a going concern if the merger is not completed; . Ariel's continued operations would depend upon cash flows from operations, if any, and the availability of additional equity or debt financing. In light of Ariel's current cash and working capital positions, and the cash requirements of marketing expenditures which would be necessary in order to position Ariel to operate on a positive cash-flow basis, it is uncertain that Ariel would be able to generate sufficient cash flow from operations to fund its short-term capital needs. Ariel does not currently have sufficient working capital to effectively operate; . Ariel does not presently satisfy Nasdaq's maintenance requirements and as a result may have its common stock delisted from the Nasdaq National Market. Ariel can make no prediction as to whether, if it were to continue as an independent business and not consummate the merger, it could maintain a continued listing of its common stock on the Nasdaq National Market or any other national securities exchange; . Ariel would be required to repay any amounts advanced to Ariel by MAYAN under the bridge loan which the parties executed in connection with the merger. If Ariel is unable to repay those amounts, MAYAN may have a security interest in all of Ariel's assets, including its intellectual property, and MAYAN may be able to foreclose on those assets (subject to Transamerica Business Credit Corporation's senior security interest in those assets). See "The Merger--Bridge Loan;" . the price of Ariel common stock may decline to the extent that the current market price of Ariel common stock reflects a market assumption that the merger will be completed; . Ariel may be required, if it terminates the merger agreement under limited circumstances, to pay the reasonable expenses of MAYAN incurred in connection with the merger; and . costs incurred by Ariel related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. 21
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In addition, Ariel customers and suppliers, in response to the announcement of the merger, may delay or defer decisions concerning Ariel. Any delay or deferral in those decisions by Ariel customers or suppliers could have a material adverse effect on Ariel's business, regardless of whether the merger is ultimately completed. Similarly, current and prospective Ariel employees may experience uncertainty about their future roles with the combined company until the combined company's strategies with regard to Ariel are announced or executed. This may adversely affect Ariel's ability to attract and retain key management, sales, marketing and technical personnel. Further, if the merger is terminated and Ariel's board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to pay an equivalent or more attractive price than the price to be paid in the merger. In addition, while the merger agreement is in effect and other than very narrowly defined exceptions, Ariel is prohibited from soliciting, initiating or encouraging or entering into extraordinary transactions, such as a merger, sale of assets or other business combination, with any party other than MAYAN. If the common stock of the combined company is not authorized for listing on the Nasdaq National Market, MAYAN may refuse to consummate the merger In approving the merger, you should note that the common stock of the combined company may not be traded on the Nasdaq National Market. MAYAN and Ariel will apply for a conditional listing on the Nasdaq National Market on behalf of the combined company, which is expected to take effect on official notice of issuance following the closing of the merger. Although it is expected that after giving effect to the merger and the reverse split of the Ariel common stock the combined company will satisfy the minimum requirements for listing on the Nasdaq National Market, there can be no assurance that the combined company's common stock will be accepted for listing. It is a condition to the obligations of both MAYAN and Ariel under the merger agreement that the combined company's common stock be approved for listing on the Nasdaq National Market. If the combined company's common stock is not approved for listing, the merger may not be consummated unless the condition is waived by MAYAN. If MAYAN's board of directors waives this condition you will not have an opportunity to re-vote on the merger. If the combined company's common stock is not traded on the Nasdaq National Market, you should expect fewer investors will participate in the secondary trading market for the combined company's common stock and it will be harder for you to sell your shares of the combined company's common stock. If you do sell your shares of MAYAN and Ariel common stock when it is not traded on the Nasdaq National Market, MAYAN and Ariel expect that the inter-dealer determination of trading prices will be less efficient, resulting in larger differences between the available bid and ask prices, than prevails in the market for Nasdaq National Market securities. In addition, the merger would qualify as a change of control, but would not qualify as a complying public equity offering. In such a situation, the change of control would give the note holders the right to require the combined company to repurchase the notes. Neither MAYAN nor Ariel can assure you that the combined company's common stock will be traded on the Nasdaq National Market after the merger is completed, and you should carefully consider that fact before you vote on the merger. After the merger, the combined company will be a publicly traded company with Securities Exchange Act of 1934 reporting obligations which require significant disclosure and which may cause a significant increase in expenses to satisfy those disclosure requirements. The combined company will also face the risk of increased exposure to shareholder litigation The Securities Exchange Act of 1934 will require that the combined company provide information about its business and financial results. The preparation of this information is time consuming and costly and it will require the assistance of legal counsel and accountants. Therefore, the costs of legal counsel and accountants will increase dramatically. In addition, because the combined company's stock will be publicly traded, the company will be required to expand its investor relations department to accommodate the needs of a much larger number of shareholders. Furthermore, as a result of the public market for its stock and the increase in the 22
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number of shareholders, the exposure to, and risk of, shareholder suits against the combined company or its officers and directors will increase. The combined company expects its stock price to be volatile and this volatility may cause the market price of the stock to decrease significantly The price at which the combined company's common stock will trade after the merger is likely to be highly volatile and may fluctuate substantially due to many factors, some of which are: . actual or anticipated fluctuations in its results of operations; . changes in securities analysts' expectations or its failure to meet those expectations; . announcements of technological innovations or content relationships by the combined company or its competitors; . introduction of new products by the combined company or its competitors; . additions or departures of key personnel; . commencement of litigation; . developments with respect to intellectual property rights; . conditions and trends in technology industries; . changes in the estimation of the future size and growth rate of its markets; . general market conditions; and . future sales of its common stock. In addition, the stock market has experienced significant price and volume fluctuations that affected the market price for the common stock of many technology and telecommunications companies. These market fluctuations were sometimes unrelated or disproportionate to the operating performance of these companies. Any significant stock market fluctuations in the future, whether due to its actual performance or prospects or not, could result in a significant decline in the market price of its common stock. Anti-takeover provisions in the combined company's charter documents, in its 2001 Stock Incentive Plan and in Delaware law could prevent or delay a change in control and, as a result, negatively impact its stockholders Provisions of the combined company's certificate of incorporation and bylaws following the merger may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for its common stock at a premium over the market price. These provisions include: . the Ariel Stockholder Rights Plan, as described under the section entitled "The Merger--Ariel Rights Plan"; . the ability of its board of directors to alter its bylaws without shareholder approval; . the restriction on the ability of stockholders to call special meetings; . the prohibition on the ability of stockholders to act by written consent; . the establishment of advance notice requirements for nominations for election to its board of directors or for proposing matters that can be acted on by stockholders at stockholders meetings; and . the establishment of a classified board of directors with staggered, three-year terms, which prevents a majority of the board from being elected at one time. 23
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Provisions in the combined company's 2001 Stock Incentive Plan following the merger will cause unvested shares in the plan to immediately vest, under certain circumstances, in the event of a change of control. See "Proposal to Approve the Implementation of Ariel's 2001 Stock Incentive Plan--General Provisions--Acceleration." This acceleration of vesting may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of the combined company. In addition, the combined company is subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested shareholder for a period of three years following the date that person became an interested shareholder, unless prior approval of its board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with the combined company without obtaining the prior approval of its board of directors, which may cause the market price of MAYAN's common stock to decline. Risks Related to MAYAN MAYAN is a development stage company and its limited operating history makes it difficult to evaluate its business and prospects MAYAN was incorporated in July 1997, has sold only trial quantities of its products and has not realized any revenues. MAYAN's business and ability to generate revenues or realize earnings is unproven. MAYAN has only a limited operating history and limited historical financial data upon which you may evaluate its business and prospects. To date, MAYAN has focused its efforts on conducting research and development of the Unifier SMX, its principal product. After MAYAN sells its existing inventory of the Unifier SMX, the Unifier SMX is not expected to be a significant part of MAYAN's business going forward and this makes it even more difficult to evaluate MAYAN's business and prospects. The risks and difficulties frequently encountered by development stage companies, particularly companies in the rapidly evolving telecommunications network infrastructure market, make MAYAN's prospects difficult to predict and they may change rapidly and without warning. MAYAN is currently undergoing a business transition that may adversely affect its business MAYAN is in the process of transitioning to a business based primarily in software and services, rather than based solely on hardware. MAYAN's change in strategic direction may disrupt its employees, partners, distributors, shareholders and potential customers and may create a prolonged period of uncertainty, which could reduce any revenues and have a material adverse effect on its business, prospects and financial condition. Furthermore, MAYAN intends to transfer development and sales of the Unifier SMX to a foreign subsidiary and to market the Unifier SMX primarily in foreign markets. MAYAN's change in strategy has resulted in substantial changes including, among other things, the substantial reduction of its workforce, a change in its potential product offerings and a need to seek a new strategic focus. Many factors may impact MAYAN's ability to implement a new strategic direction for its business including the ability to locate strategic partners, finalize agreements with other companies, manage the implementation internally in an effective manner, retain, as well as sustain the productivity of, its workforce, reduce operating expenses and quickly respond to and recover from unforeseen events associated with the business transition. As a result of this business transition, it will be difficult to forecast MAYAN's financial performance. MAYAN has a history of significant losses, expects to continue to incur additional losses and may never achieve profitability From MAYAN's inception through March 31, 2001, MAYAN incurred cumulative net losses of approximately $99.8 million. Due to the fact that MAYAN has no customers and will not have customers until it develops a new product which it is able to sell, MAYAN expects to continue to incur substantial operating losses and to experience substantial negative cash flow as it expands its business and changes its strategic direction. MAYAN cannot be certain that it will ever generate sufficient revenues to achieve and sustain profitability or continue as a going concern. 24
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MAYAN's limited operating history makes it difficult to budget for upcoming expenses and for investors to accurately assess management's abilities to project financial needs MAYAN will need to make decisions in the immediate future regarding resource allocations for research and development and sales and marketing. It does not have the benefit of meaningful historical financial data from which to plan these expenditures. If MAYAN's forecasts of future operating expenses turn out to be inaccurate, MAYAN may not make the best use of its resources and may forego better opportunities. MAYAN's limited operating history makes it difficult for investors to gauge its capability in making these resource allocation decisions. MAYAN's quarterly results are not a good indicator of comparable quarterly results in the future MAYAN's revenues, if any, and operating results are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, including the following, many of which are outside of its control: .its ability to identify and exploit markets for its products; .new product introductions and product enhancements by it or its competitors; . the ability to control expenses and manufacturing costs; . changes in key personnel; . the extent of international expansion; . changes in and regulation of the telecommunications and related industries; and . costs related to acquisitions of technology or businesses. Due to the foregoing factors, MAYAN believes that quarter-to-quarter comparisons of MAYAN's operating results are not a good indication of future performance. After the merger, goodwill and intangible assets will represent 23% of combined company's total assets and the combined company's earnings will be reduced by amortization of the intangible assets After the completion of the merger, goodwill and intangible assets will represent approximately 23% of the total assets of the combined company. This amount of goodwill and intangible assets may result in the following risks: . the combined company may not have sufficient tangible assets in the event of a liquidation; . the high level of goodwill may adversely impact the level of return on assets and return on investments for stockholders; . amortization of intangible assets would lower the earnings per share of the combined company, thus resulting in a less attractive stock price and possibly yielding lower returns on equity investments; and . goodwill and intangible assets may become impaired and may be reduced to their fair values which may have an adverse impact on total assets and earnings of the combined company. The Unifier SMX is currently MAYAN's only product and MAYAN does not expect to realize any significant revenues from this product MAYAN has not completed development of the Unifier SMX, has only tested it on a limited basis, and has sold only trial quantities of this product. Tests have not been favorable because the product performs slower than industry standards. In addition, MAYAN has decided to cease further development of the Unifier SMX and does not expect to realize significant revenues from sales of this product. 25
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The Unifier SMX and MAYAN's future products may not achieve market acceptance There are only a small number of prospective customers for the Unifier SMX and similar hardware products. MAYAN cannot be certain that there will be a demand for its product once it is available, or that the demand will grow. Demand for MAYAN's products will depend on the continued growth of data traffic volume and its prospective customers' need to expand the capacity of existing fiber optic telecommunications networks in metropolitan areas. MAYAN's ability to attract customers could also be affected by: . unwillingness of potential customers to adopt its future products; . introductions of new products by MAYAN or its competitors; . other competitive factors such as aggressive pricing or financing by its competitors; and . changes in technology, including the rapid adoption of optical technologies at the edge of the network that are not based on the standard for fiber-optic transmission called synchronous optical network, Because MAYAN's products are complex and are deployed in complex environments, they may have errors or defects that are detected only after full deployment, which could seriously harm MAYAN's business The Unifier SMX and MAYAN's future products are expected to be highly intricate products designed to be deployed in large and complex networks. The Unifier SMX can only be fully tested when deployed in these networks with high amounts of traffic over a significant period of time. MAYAN cannot simulate that environment to the extent required to fully test its product. Consequently, MAYAN or its customers may discover errors or defects in the Unifier SMX or other hardware or software only after they have been deployed. If those errors or defects are significant, MAYAN may be required to pay monetary damages or to post bonds in anticipation of these damages. If MAYAN is unable to quickly fix defects or other problems that may be identified upon full deployment, it could experience: . loss of or delay in realizing revenues and loss of market share; . significant harm to its reputation and loss of customers; . diversion of development resources; . increased service and warranty costs; . legal actions by its customers; and . increased insurance costs. A product liability claim, whether successful or not, could seriously impact MAYAN's capital reserves, harm its reputation and direct the attention of key personnel away from its operations, any of which could harm its financial condition and/or limit its growth. If MAYAN's products do not operate properly with other equipment in its customers' networks, MAYAN may suffer product installation delays, order cancellations or product returns, and its reputation could be harmed MAYAN's products are designed to interface and interoperate with its customers' existing networks, each of which has its own specifications and is based on various industry standards. Many of its customers' networks contain multiple generations of products designed for various different protocols that were added as their networks grew and evolved. MAYAN's products must interoperate with all existing and future products within these networks. When interoperability problems occur, it may be difficult to identify their source and fix the problem. Whether or not these problems are due to MAYAN's products, it may incur warranty, support and repair costs, need to divert the attention of its engineering personnel from its product development efforts and suffer customer relations problems. If its products cannot support all widely used modes of adequate network 26
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access or if its products do not interoperate with its customers' networks, product installations could be delayed, orders for its products could be cancelled or MAYAN's products could be returned, any of which could seriously harm MAYAN's business, financial condition, results of operations, reputation and relationships with customers. MAYAN's future success depends on its ability to develop innovative new products, product enhancements and services that gain market acceptance The market for communications networking equipment and services is marked by rapid innovation and evolution. MAYAN may not be able to develop new products or product enhancements or new services in a cost effective and timely manner, or at all. Even if MAYAN is able to successfully develop and introduce new products and services, they may be inferior to similar products or services developed by competitors and may fail to achieve broad market acceptance. If future products or enhancements fail to achieve widespread market acceptance, its business would be seriously harmed. MAYAN's success in developing new and enhanced products and systems as well as related software and services will depend upon a variety of factors, including the ability to: . develop products, including related software, to integrate the wide variety of protocols and transmission rates found at the metro edge; . integrate various components of complex and constantly evolving technology; . complete system designs and testing in a timely and efficient manner; . coordinate with third-party manufacturers to implement manufacturing, assembly, quality testing and fulfillment processes in a timely and efficient manner; . reduce costs; . achieve high system performance; . achieve a high degree of quality and reliability in its products and systems; and . develop and introduce products, software and systems that have better functionality and features and that are less expensive than those of its competitors. Any acquisitions MAYAN makes could disrupt its business and harm its financial condition and operations In an effort to effectively compete in the communications networking equipment market where increasing competition and industry consolidation prevail, MAYAN may acquire complementary businesses, products, technologies or services in the future. In the event of any future acquisitions, it could: . issue additional stock that would dilute its current shareholders' percentage ownership; . incur debt and assume liabilities; . incur amortization expenses related to goodwill and other intangible assets; or . incur large and immediate write-offs. These acquisitions also involve numerous risks, including: . problems integrating the purchased operations, products, technologies or services with its own; . unanticipated costs and other liabilities; . diversion of management's attention from its core business; . adverse effects on existing business relationships with suppliers and customers; 27
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. risks associated with entering markets in which MAYAN has no or limited prior experience; and . potential loss of key employees, particularly those of the acquired organizations. If MAYAN does not substantially expand its service and support organization and its direct sales force, it will be unable to significantly increase sales Because MAYAN's products are complex, it must hire highly trained service and support personnel. MAYAN currently has a small service and support organization and will need to increase its staff substantially to support the expanding needs of prospective customers, some of which could require significantly greater amounts of attention than it can provide. In particular, it is essential to its customers that its products do not result in network disruption. Hiring service and support personnel is extremely competitive in the telecommunications industry due to the limited number of people available with the necessary technical skills and understanding of optical networking. If MAYAN is unable to expand its customer service and support organization, it will be unable to significantly increase the sales of its products, which would impair its ability to grow its business. In addition, if MAYAN is unable to expand its direct sales force, it may not be able to increase market awareness and sales of its products, which may prevent it from achieving and maintaining profitability. MAYAN's products and services require a technical sales effort targeted at several key people within each of its prospective customers' organizations. Its sales efforts require the attention of sales personnel and specialized system engineers with extensive experience in optical networking technologies. Competition for these individuals is intense, and MAYAN may not be able to hire sufficient numbers of qualified sales personnel and specialized system engineers. Even if MAYAN is successful in expanding its sales force, it cannot assure you that it will be able to achieve or increase sales. If its sales force is unsuccessful, MAYAN will not achieve significant revenue growth. The companies to which MAYAN intends to market the Unifier SMX and its other products and services may have financial constraints which may limit their ability to purchase new products such as the Unifier SMX and may limit MAYAN's ability to collect on its sales Telecommunications service providers make considerable capital expenditures to expand their networks and to purchase, install and maintain their equipment. If some of these service providers are unable to secure financing for these expenditures, they may not have the funds necessary to make hardware expenditures or to purchase the related products and services. Budgetary constraints or cycles may also impact when or if a prospective customer will purchase these products and services. In addition, financial constraints recently experienced by some service providers, in particular some competitive local exchange carriers may reduce their ability or willingness to purchase new products and services. MAYAN's success will depend on its ability to manage customer relationships MAYAN's ability to achieve revenues in the future will depend on its ability to obtain and fill orders from customers, and maintain relationships with and provide support to these customers. In order to effectively manage customer relationships, MAYAN will need to satisfy stringent customer performance and delivery requirements. Customer relationships in its industry are typically structured around detailed, heavily negotiated contracts. As these relationships evolve over time, adjustments to product specifications, anticipated costs, laboratory and field testing plans, price, customer forecasts and delivery timetables, and installation and field support requirements may be needed in order to meet customer demands and expectations. MAYAN's inability to manage customer relationships would seriously harm its business. 28
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The cessation of the operations of MAYAN's application service provider (ASP), may harm MAYAN's business if MAYAN is unable to transition to a new ASP MAYAN had been engaged with AristaSoft Corporation for the management of its business applications, including finance, distribution, procurement, customer service, service contract and direct sales interfaces such as sales order management and systems configuration. However, AristaSoft has informed MAYAN that it will cease all of its operations. AristaSoft expects to be able to provide ASP services to MAYAN for the next 90 days while MAYAN evaluates its transition options. If AristaSoft is unable to provide its services to MAYAN for 90 days, MAYAN may lose these services if the transition to another ASP has not been completed. Declining average selling prices for MAYAN's products and services may have a material adverse effect on its margins MAYAN anticipates that if it is able to sell products and services, the average selling prices and gross margins may decline. In addition, as competition intensifies, MAYAN believes it will have to reduce its selling prices in order to compete effectively in its industry. To offset any decline, MAYAN believes that it must introduce and sell new products and services at higher average selling prices with higher gross margins and reduce the costs of its then existing products and services through lower costs, and cost reduction. If MAYAN is unable to increase selling prices or reduce other costs, MAYAN will not be able to recover the costs associated with selling its products and services, and, as a result, its revenues may decline and its operating results will suffer. Due to the expected long sales cycle for MAYAN's products and services, the timing of revenue and expenses will be difficult to predict and may cause its operating results to fluctuate unexpectedly The sales and deployment cycle for MAYAN's products and services is expected to be lengthy. It expects that the period of time between initial customer contact and an actual purchase order or contract by some customers may span a year or more. The length of MAYAN's sales cycle may cause its revenue, expenses and operating results to vary unexpectedly from quarter to quarter. A customer's decision to purchase MAYAN's products involves a significant commitment of MAYAN's resources and a lengthy evaluation and qualification process. Consequently, MAYAN may incur substantial expenses and devote senior management's attention to potential customers without achieving significant sales to those potential customers and causing MAYAN to miss other sales opportunities. In addition, MAYAN's customers are likely to have internal budgeting procedures which may affect the timing of their purchases. Its lengthy sales cycle makes it difficult to predict the quarter in which MAYAN may recognize revenue from any sale. If MAYAN fails to manage its geographically diverse locations or its growth effectively, its business, financial condition and results of operations could be seriously harmed MAYAN's ability to successfully offer its products and implement its business plan in a rapidly evolving market requires an effective planning and management process, as well as the implementation of appropriate control systems. Its operations currently are primarily conducted in San Jose, California. In the future, MAYAN may also conduct significant operations in other locations, including international locations. MAYAN intends to open an Indian development facility and to headquarter its Asian operations in Singapore. MAYAN may not be successful in managing operations in diverse locations or coordinating and integrating engineering and other efforts conducted in its various offices. MAYAN's failure to successfully manage operations in its various offices could delay its product development efforts, result in duplicative effort and expenses and consume substantial management time and attention. MAYAN expects that it will need to continue to improve its financial and managerial controls, reporting systems and procedures, and will need to continue to train and manage its workforce. MAYAN may not be able to install adequate control systems in an efficient and timely manner. Delays in the implementation of new systems, or operational disruptions when MAYAN transitions to new systems, would impair its ability to accurately forecast sales demand, manage its product inventory and record and report financial and management information on a timely and accurate basis, all of which would seriously harm its business. 29
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MAYAN faces risks associated with its potential international operations that could limit its sales and add to its cost of operations MAYAN intends to market and sell its products and services internationally. In addition, MAYAN intends to maintain a development center in India and a facility in Singapore. This effort will require significant management attention and financial resources. MAYAN may not be able to develop international market demand for its products. MAYAN has limited experience in marketing and distributing its products internationally. International operations are subject to inherent risks, including: . tariffs, export controls and other trade barriers; . technology barriers and incompatibility problems; . political and economic instability; . longer accounts receivable payment cycles and difficulties in the collection of accounts receivable; . currency devaluation due to the fact that MAYAN expects that its international customers will pay it in U.S. dollars and are therefore subject to foreign exchange rate risk which may inhibit their ability to pay if their local currency is weak against the dollar; . difficulties and costs of staffing and managing foreign operations; . unexpected changes in regulatory results and certification requirements with which it may be unfamiliar; and . reduced protection for intellectual property rights in some countries. MAYAN's significant workforce reduction may adversely affect MAYAN's long term viability and may result in increased costs, the departure of additional employees and/or difficulty in hiring new employees In connection with MAYAN's effort to refocus its business, streamline operations, reduce costs and bring staffing and structure in line with industry standards, it restructured in the first and second calendar quarters of 2001. MAYAN reduced its workforce to a total of 46 employees, 12 of whom are involved in research and development as of June 30, 2001. There may be future costs associated with the workforce reduction related to severance and other employee-related costs, and the restructuring plan may yield unanticipated consequences, such as attrition beyond the planned reduction in workforce. In addition, the decline in fair market value of MAYAN's common stock has decreased the value of the stock options granted to employees. As a result of these factors, MAYAN's remaining personnel may seek employment with larger, more established companies or companies they perceive as having less volatile stock prices. MAYAN's long term viability depends on its ability to attract and retain qualified personnel. MAYAN has recently replaced many of its officers, which may disrupt its business MAYAN has appointed a new chief executive officer, a new vice president of operations and a new vice president of worldwide sales, and the integration of these officers may interfere with its operations. In March 2001, MAYAN announced the appointment of Esmond Goei, the chairman of the board, as chief executive officer, replacing Daniel Gatti, and the appointments of Sullivan Bookataub as Vice President-Operations, replacing Robert Hernandez, and Jim Linkous as Senior Vice President-Worldwide Sales replacing Andrew Lovit. The transitions of Messrs. Goei, Bookataub and Linkous have resulted and will continue to result in disruption to ongoing operations, and these transitions may materially harm MAYAN's reputation and the way that the market perceives MAYAN and the value of its common stock and the price of the combined company's common stock after the merger. 30
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If MAYAN loses key personnel or is unable to hire additional qualified personnel as necessary, its business may be harmed MAYAN's success depends to a significant degree upon the continued contributions of its key management, engineering, sales and marketing, and finance personnel, many of whom would be difficult to replace, including Esmond T. Goei, its chief executive officer. MAYAN believes its future success will also depend in large part upon its ability to identify, attract and retain highly skilled managerial, engineering, sales and marketing and finance personnel. Competition for these individuals is intense in the telecommunications industry, especially in the geographic areas in which MAYAN operates, and MAYAN may have difficulty hiring employees in the timeframe it desires, particularly qualified engineers and sales personnel. MAYAN may not succeed in identifying, attracting and retaining qualified personnel. Further, competitors, potential customers and other entities have attempted, and may in the future attempt, to recruit its employees. The loss of the services of any of its key personnel or the inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel, particularly engineers and sales personnel, could make it difficult for it to manage its business and meet key objectives, including timely product introductions. If MAYAN becomes subject to unfair hiring claims it could incur substantial defense costs and damages Companies in the telecommunications industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. MAYAN has received claims of this kind in the past and cannot assure you that it will not receive claims of this kind in the future as it seeks to hire qualified personnel or that those claims will not result in material litigation. These claims, regardless of their merits, could cause MAYAN to incur substantial defense costs and damages, could prevent it from hiring potential employees and could divert the attention of its management away from its operations, any of which could seriously harm its business. It is possible that no patents will be issued from MAYAN's currently pending or future patent applications; any patents it receives may not provide it with any competitive advantages over, or may be challenged by, third parties MAYAN believes its success will depend in large part on the strength of its current and future patent position. Although MAYAN has filed three patent applications, its patent position is highly uncertain because the patents have not been issued. The process to get these patents issued involves complex legal and factual questions. Claims made under its patent applications may be denied or significantly narrowed, and patents issued to it may not provide significant commercial protection. Its patents may be challenged and they may not be confirmed valid if challenged. MAYAN could incur substantial costs in proceedings before the United States Patent Office, including interference proceedings. These proceedings could also result in adverse decisions as to the priority of its licensed or assigned inventions. The steps MAYAN has taken to protect its intellectual property may be inadequate. Any of its patents, if issued, may be invalidated, circumvented or challenged. Competitors may develop equivalent or superior products or software or duplicate its products or software. In addition, effective patent, trademark, copyright and trade secret protection may not be available in some countries in which its products may be distributed. MAYAN's business could be adversely affected if it is unable to protect its intellectual property rights from third-party challenges MAYAN relies on a combination of patent, copyright, trademark and trade secret laws to protect its intellectual property rights. MAYAN also enters into confidentiality or license agreements with its employees, consultants and corporate partners, and control access to and distribution of its software, documentation and other proprietary information. Despite its efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology. Monitoring unauthorized use of its products is difficult and MAYAN cannot be certain that the steps it has taken or may take will prevent unauthorized use of its 31
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technology, particularly in foreign countries where the laws may not protect its proprietary rights as fully as in the United States, if at all. MAYAN's future success will depend in part on its ability to protect its proprietary rights and the technologies used in its principal products. If MAYAN is unable to enforce and protect its intellectual property, its business and its competitive position would be materially adversely affected. MAYAN could become subject to litigation regarding intellectual property rights which could seriously harm its business There are a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights in the telecommunications industry. In particular, many established companies in the telecommunications networking industry, including MAYAN's competitors, have extensive patent portfolios. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to MAYAN's business. Third parties may assert claims or initiate litigation against MAYAN or its manufacturer, suppliers or customers alleging infringement of their proprietary rights with respect to MAYAN's existing or future products or components of its products. Any of these claims and any resulting lawsuit, if successful, could subject MAYAN to significant liability for damages or hinder or prevent the manufacture, sale and use of its products. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force MAYAN to do one or more of the following: . stop selling or using its products that use the challenged intellectual property; . obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or . redesign those products that use that technology. If MAYAN is forced to take any of these actions, its business may be seriously harmed. Although MAYAN carries general liability insurance, its insurance may not cover potential claims of this type or may not be adequate to indemnify it for all liability that may be imposed. Necessary licenses of third-party technology may not be available to MAYAN or may be very expensive From time to time MAYAN may be required to license technology from third parties to develop new products or product enhancements. While MAYAN has been able to license third-party software to date, in the future third-party licenses may not be available to MAYAN on commercially reasonable terms or at all. The inability to obtain any third-party license required to develop new products and product enhancements could require MAYAN to obtain substitute technology of lower quality or performance standards or at greater cost, any of which could seriously harm its business or results of operations. MAYAN may not be able to raise additional capital to fund its future operations The development and marketing of new products and the expansion of its direct sales operation and associated support personnel is expected to require a significant commitment of resources. MAYAN intends to expand its sales and marketing activities and other operations faster than increases in actual or forecasted revenue. If MAYAN achieves its growth targets, its working capital needs will increase, so it may need to raise additional capital in order to fund expansion. MAYAN may also need additional capital in order to develop new services or products, or to acquire complementary businesses, products, technologies or services. Product development and acquisition activities are particularly capital-intensive in the telecommunications industry. MAYAN may incur significant operating losses and/or utilize significant amounts of capital if: . the market for its products develops more slowly than anticipated; . it fails to establish significant market share and realize significant revenues; 32
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. it is required to finance its manufacturing on unfavorable terms; . its capital expenditure forecasts increase or prove inaccurate; or . it needs to respond to unforeseen challenges or take advantage of unanticipated opportunities. As a result, MAYAN may need to raise substantial additional capital. To the extent that it raises additional capital through the sale of equity or securities convertible into equity, the issuance of the securities could result in dilution to its existing shareholders. If additional funds are raised through the issuance of senior debt securities, these securities would have rights, preferences and privileges senior to holders of its convertible notes and its common stock. These securities could also have rights, preferences and privileges senior to the holders of other outstanding debt and the terms of that debt could impose restrictions on its operations. Additional capital, if required, may not be available on acceptable terms, or at all. If MAYAN is unable to obtain additional capital, it may be required to reduce the scope of its planned product development and marketing and sales efforts, which would harm its business and competitive position. MAYAN's officers and directors will continue to have substantial control over MAYAN and could delay or prevent a change in corporate control MAYAN's executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 48.23% of its outstanding common stock as of June 30, 2001 and will own approximately 14.35% of the combined company after the merger. These shareholders, if acting together, would be able to influence significantly all matters requiring approval by its shareholders, including the election of directors and the approval of mergers or other changes in corporate control. Risks Related to MAYAN's Industry Uncertainties in telecommunications service providers' purchasing programs may affect MAYAN's future operating results Telecommunications service providers typically purchase network equipment and related services pursuant to multi-year purchasing programs that may increase or decrease annually as the service providers adjust their capital equipment budgets and purchasing priorities. These uncertainties substantially complicate MAYAN's manufacturing planning and the ability to sell its products and services. In addition, MAYAN may commit to pricing and cost structures well in advance of commercial introduction of its systems. To the extent actual prices and costs are materially different from the estimates and commitments, MAYAN's margins could be reduced. Its customers' curtailment or termination of purchasing programs, decreases in capital budgets or reduction in the purchasing priority assigned to equipment, particularly if significant and unanticipated, could materially and adversely affect MAYAN's revenues and business prospects. If the market for broadband and other data communications services does not continue to expand, demand for MAYAN's products and services may decline significantly MAYAN's future success depends on the continued growth in the demand for broadband and other data communications services and the ability of its customers and prospective customers to sell those services. If this demand does not continue to grow as anticipated, the demand for its products could decline significantly, which would materially and adversely affect its revenues and business prospects. The decline in the number of competitive local exchange carriers, may also cause a decrease in the demand for products in MAYAN's industry. Due to the fact that established large telecommunications service providers have longer, more established relationships with their current capital equipment suppliers, many equipment manufacturers in the industry, such as MAYAN, targeted competitive local exchange carriers as potential customers. However, many competitive local exchange carriers are having increasing difficulties 33
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surviving in the recent market environment and are consolidating or filing for bankruptcy and, as a result, the capital spending by competitive local exchange carriers has decreased from what was anticipated or has terminated altogether. This puts increasing pressure on MAYAN and its competitors to target these large telecommunications service providers in order to sell its products. MAYAN's markets are highly competitive and dominated by large participants and it may not be able to compete effectively Competition in the communications networking equipment market is intense and MAYAN expects competition to increase. The market for networking equipment is dominated primarily by manufacturers of legacy synchronous optical network equipment, such as Nortel Networks Corporation, Lucent Technologies Inc. and Fujitsu Microelectronics, Inc. Each of these companies has announced products that may compete with the Unifier SMX. In addition, other companies, such as Cisco Systems, Inc., Siara Systems, which was recently acquired by Redback Networks, Inc., and a number of emerging companies, have developed or are developing products that may compete with MAYAN's products. Many of MAYAN's competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources than MAYAN has and may have a substantial advantage over MAYAN in developing or acquiring new products and technologies and in creating market awareness for those products, services and technologies. Further, many of MAYAN's competitors have built long-standing relationships with some of MAYAN's potential customers and have the ability to provide financing to them and may, therefore, have an inherent advantage in selling network equipment products to these customers. MAYAN expects its competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. To be competitive, MAYAN must continue to invest significant resources in research and development, sales, marketing and customer support. MAYAN may not have sufficient resources to make these investments, make the technological advances necessary to be competitive, or be able to effectively sell its products to carriers who have prior relationships with its competitors. In addition, MAYAN's recent reduction of its research and development staff will make it even more difficult for MAYAN to compete effectively. If MAYAN cannot compete successfully against its competitors, it could result in: . significant reductions in demand for any of its products; . delays or cancellations of future customer orders; . reductions of the prices on any of its products; or . increases in its expenses. The telecommunications industry is subject to government regulations which could harm MAYAN's business The Federal Communications Commission, or FCC, has jurisdiction over the entire telecommunications industry and, as a result, MAYAN's products, and those of its customers, are subject to FCC rules and regulations. Current and future FCC rules and regulations affecting communications services, MAYAN's products or its customers' businesses or products could negatively affect its business. In addition, international regulatory standards could impair its ability to develop products for international carriers in the future. Delays caused by MAYAN's compliance with regulatory requirements could result in postponements or cancellations of product orders, which would harm its business and increase its costs. Further, MAYAN cannot be certain that it will be successful in obtaining or maintaining any regulatory approvals that may, in the future, be required to operate its business. The regulatory environment for the telecommunications industry has historically been subject to significant changes as a result of political, economic and technical factors. Those regulatory processes, including the direct regulation of its potential products, could significantly impact MAYAN's operations by restricting its development efforts and those of its prospective customers, making its potential products obsolete or increasing 34
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the opportunity for additional competition. MAYAN might deem it necessary or advisable to modify its products to operate in compliance with these regulations. These modifications could be expensive and time consuming and delay product introduction. Risks Related to Ariel Ariel has incurred substantial operating losses and an accumulated deficit. It expects to continue to have operating losses and a growing accumulated deficit in the future. Ariel has received an opinion from its auditors for its most recently completed fiscal year, which raises substantial doubt as to its ability to continue as a going concern Ariel's business operations have generated operating losses since 1993. For the year ended December 31, 2000, its business operations generated operating losses of $16,129,132. For the three months ended March 31, 2001, its business operations generated operating losses of $3,834,232. It had an accumulated deficit of $45,634,578 at March 31, 2001. Ariel expects to continue to generate net operating losses while it continues to launch new products and penetrate the ISP market. Ariel can give no assurance that it will obtain a customer base sufficient to support the costs of its operations. Absent this merger, Ariel has very limited, if any, financial resources available to support its ongoing operations, fund product development programs to develop and market new competitive remote access technology and pay its obligations as they become due. These factors raise substantial doubt concerning Ariel's ability to continue as a going concern. Ariel's ability to continue as a going concern is dependent upon the consummation of the merger, the ongoing support of its stockholders, creditors, and key customers, and/or its ability to successfully develop and market its remote access products and technology at economically feasible levels in a highly competitive and rapidly changing technology environment. Ariel has debt and debt service requirements and this may adversely affect its financial and operating flexibility Ariel has a significant amount of indebtedness. At March 31, 2001, Ariel had $1,653,048 million of outstanding indebtedness under its credit agreement with Transamerica and $3,700,000 under a promissory note to MAYAN at July 23, 2001. The amount of indebtedness Ariel has could have important consequences to its stockholders. For example, it could: . make it more difficult for it to meet its obligations; . increase its vulnerability and limit its ability to react to general adverse economic and industry conditions; . limit its ability to use operating cash flow to fund operating expenses, working capital, research and development and other general corporate purposes because Ariel must dedicate a substantial portion of its cash flow to make payments on its debt; . place Ariel at a competitive disadvantage compared to some of its competitors that have less debt; and . limit its ability to borrow additional funds. Ariel's ability to pay interest under its credit agreement or to refinance its indebtedness and to satisfy its other debt obligations will depend upon its future operating performance, which in turn depends upon the successful implementation of its new business strategy and upon financial, competitive, regulatory, technical and other factors, many of which are beyond its control. 35
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If Ariel is not able to generate sufficient cash from operations to make payments under its credit agreement or to meet any other debt service obligations, it will need to refinance its indebtedness. If that refinancing is not possible, Ariel could be forced to dispose of assets at unfavorable prices or default on its debt obligations. Even if it obtains new financing, Ariel cannot assure you that it would be on terms that are favorable to Ariel. Ariel has recently changed its business strategy to focus on a new class of products for the ISP market. If Ariel is not successful in this new market, its revenues will decrease and its stock price may decline Ariel's ability to successfully execute its new business strategy is critical to the future performance of its business. During the second quarter of 1999, Ariel changed its business strategy to focus on the ISP market following the decline of the enterprise remote access market. Historically, Ariel has derived, and expects to continue to derive in the near term, substantially all of its revenues from product sales to original equipment manufacturers and PC manufacturers. As it focuses its efforts on the ISP market, Ariel expects sales to original equipment manufacturers to represent a declining percentage of its total revenue in the future if its new business strategy is successful. Because the ISP market is a new market for Ariel and the equipment it has developed for that market has only recently been introduced, it has had limited experience in selling its products. Currently, approximately 150 ISPs have purchased its products. Successful execution of Ariel's new business strategy will depend on its ability to: . penetrate the ISP market; . achieve market acceptance of its products; . successfully develop and introduce new products; . identify, recruit and retain qualified engineers and sales personnel; . provide adequate customer care and technical support; . manage its growth; and . secure adequate financing. Ariel cannot assure you that it will be successful in executing its new business strategy, and if it is not, its business, financial condition and results of operations could be adversely affected and the price of its common stock will likely decline. Ariel's PowerPOP architecture is new and may not be accepted by its target market The market success of Ariel's ISP products depends significantly upon the acceptance of its PowerPOP architecture by the small to mid-sized ISPs it is targeting. The PowerPOP architecture represents a different approach to addressing ISP remote access equipment needs. Ariel's approach uses a standard PC system running Windows NT or Linux to build remote access server concentrators, in contrast to traditional products that are custom-built for this purpose. ISPs may not be willing to use Ariel's approach which would significantly hinder Ariel's growth potential and would negatively affect its business. Ariel's original equipment manufacturer customers comprise a majority of its sales and are concentrated among a small number of customers Ariel's sales are concentrated among a small number of original equipment manufacturer customers. For the year ended December 31, 2000, approximately 83% of its revenue was generated by original equipment manufacturer customers with three of those customers accounting for 38% of its revenue. The loss of any of these customers would negatively impact Ariel's revenues. Until Ariel is able to penetrate the ISP market, it expects that a small number of original equipment manufacturer customers will continue to account for a substantial portion of its revenue. 36
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Ariel has discontinued certain products which accounted for 57% of its sales in fiscal year 2000. If Ariel's new products are not successful, its revenues will decline significantly In June 2000, Ariel notified its customers that it would no longer offer certain older digital signal processing, or DSP, products due to the lack of availability of component parts and the prohibitive cost of production, testing and technical support for these older products. Therefore, these products are no longer generally available after December 31, 2000 and Ariel anticipates no future revenues from these products. In June 2000 Ariel made a decision to phase out low-end basic rate ISDN (BRI) products of its European subsidiary, SCii. The decision was based on reduced sales of BRI products due to the loss of major customers and advances in competing technologies. Accordingly, Ariel anticipates no future revenues from sale of BRI products. In the twelve months ending December 31, 2000 older DSP and BRI products accounted for approximately 57% of its sales. If Ariel fails to establish and maintain strategic distribution, marketing or other collaborative relationships with industry-leading companies, it may not be able to build its ISP customer base Ariel's success depends on its ability to continue to establish and maintain strategic distribution, marketing and other collaborative relationships with industry-leading hardware manufacturers, distributors, software vendors and enterprise solutions providers. These relationships allow Ariel to offer its products and services to a much larger customer base than it would otherwise be able to through its direct sales and marketing efforts. Most of its existing relationships can be terminated on short notice by any party. Ariel cannot assure you that it will be able to maintain these relationships or replace them on attractive terms. In addition, Ariel's existing strategic relationships do not, and any future strategic relationships may not, afford it any exclusive marketing or distribution rights. As a result, the companies with which Ariel has strategic relationships are free to pursue alternative technologies and to develop alternative products and services in addition to or in lieu of Ariel's products and services, either on their own or in collaboration with others, including Ariel's competitors. Moreover, Ariel cannot guarantee that the companies with which it has strategic relationships will distribute its products effectively or continue to devote the resources necessary to provide it with effective sales, marketing and distribution. If there is unexpected fluctuation in demand for its products, Ariel may incur inventory write-downs, excessive operating costs or lose product revenues Ariel must forecast and place purchase orders for components of its products several months before it receives purchase orders from its own customers. This forecasting and order lead time requirements limit its ability to react to unexpected fluctuations in demand for its products. These fluctuations can be unexpected and may cause Ariel to have excess inventory, or a shortage, of a particular product. In the event that Ariel's forecasts are inaccurate, it may need to write down excess inventory. For example, Ariel was required to write down inventory of approximately $2.0 million in 1998 in connection with the termination of its sales to Compaq and a reduction in sales to other original equipment manufacturers customers. Significant write-downs of excess inventory or declines in inventory value in the future could adversely affect Ariel's financial results. Similarly, if Ariel fails to purchase sufficient supplies on a timely basis, it may incur additional rush charges or it may lose product revenues if it is not able to meet a purchase order. These failures could also adversely affect its customer relations. Undetected errors or defects found in Ariel's products may result in loss of customers or delay in market acceptance of its products Despite testing by Ariel and by its customers, errors may be found in new products after commencement of commercial shipments resulting in loss of customers, delay in market acceptance of its products and damage to its reputation. Although Ariel has not experienced significant errors or defects in its products to date, if 37
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errors are discovered, Ariel may have to spend a significant amount of money to eliminate them and yet may not be able to successfully correct them in a timely manner, or at all. Failures in Ariel's products may also cause system failures for its customers who could then assert warranty and other claims for damages against Ariel. Although Ariel's customer agreements typically contain provisions designed to limit its exposure to potential product liability' claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. Ariel's insurance policies may not adequately limit its exposure to this type of claim. These claims, even if unsuccessful, could be costly and time consuming to defend and could divert management's attention from Ariel's business. Ariel cannot assure you that the occurrence of any of these events would not have a material adverse effect on its business, financial condition and results of operations. Average selling prices of Ariel's products may decrease which could hurt its operating results The average selling prices for Ariel's products may be lower than expected as a result of competitive pricing pressures, technological advances, promotional programs and customers who negotiate price reductions. The pricing of products depends on the specific features and functions of the product, the extent to which the product can be integrated within ISPs' and original equipment manufacturers' existing hardware and software operating systems, purchase volumes and the level of sales and service support. Historically, the trend in Ariel's industry has been for prices to decrease as technological innovations become widespread. Ariel expects this trend and price competition to continue and possibly increase in the future, both in the original equipment manufacturers and the ISP remote access equipment markets, and anticipates that the average selling prices of its current products will decrease. Ariel cannot assure you that it will be successful in developing and introducing on a timely basis new products with enhanced features that can be sold at its projected selling prices. Ariel depends on a limited number of third-party suppliers, some of which are the sole suppliers of the product Ariel purchases from them. If Ariel is unable to maintain its cooperative relationships, especially with its suppliers, Ariel may not be able to produce its products Ariel purchases digital signal processing chips and certain other components from Texas Instruments, Conexant Systems, Lucent Technologies and Analog Devices, each of which manufactures and is the sole supplier of the digital signal processing chips upon which Ariel's products have been developed. Ariel does not have long-term agreements with any of these suppliers. Any reduction or interruption in supply or manufacturing from these third party contractors would adversely affect Ariel's ability to continue to deliver its products. Ariel also depends upon development, supply, marketing, licensing and other relationships with third parties for complementary technologies incorporated in its products. These cooperative relationships, many of which have been in place for a number of years, are with hardware and software developers pursuant to which each company makes available its technology to the other for the purpose of achieving compatible products. Some of these relationships are based upon annually renewable license agreements under which Ariel obtains technology necessary to produce its products. These relationships are generally non- exclusive and terminable, in some cases on short notice or at any time, and there can be no assurance that Ariel will be able to maintain these relationships or to initiate similar additional relationships. The loss of certain cooperative relationships, particularly with any of the digital signal processing chip suppliers, may limit Ariel's sales prospects. The market for remote access equipment is highly competitive and Ariel competes with large, well established companies. If Ariel is unable to compete effectively, the demand for, or prices of, its products may be reduced The remote access equipment market is intensely competitive. Ariel may not be able to compete successfully against current or potential competitors and its failure to do so could seriously harm its business, operating results and financial condition. 38
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In the ISP market, Ariel competes directly with other small companies that sell remote access equipment as well as large well-established companies such as Ascend/Lucent, Cisco, and 3Com. These and many of Ariel's current and potential competitors have significantly greater financial, selling and marketing, technical, manufacturing and other resources than Ariel has. As a result, these competitors may be able to devote greater resources toward the development, promotion, sale and support of their products than Ariel can. These companies may introduce additional products that compete with Ariel's products or enter into strategic relationships to offer complete solutions which Ariel currently does not offer. In addition, Ariel recently introduced its PowerPOP architecture to the market and it has not had enough experience selling the product to fully assess its competitiveness. If Ariel finds that its new products are not competitive, its business could be materially harmed. Further, the development of new, technologically advanced products is a complex and uncertain process requiring the accurate anticipation of technological and market trends. The introduction of new or enhanced products also requires Ariel to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Ariel cannot assure you that it will be able to successfully develop, introduce or manage the transition to new products. Ariel's financial results may fluctuate from period to period as a result of several factors which could adversely affect its stock price Because of the change in Ariel's business strategy, the loss of a major original equipment manufacturer customer, the sale of its communications systems group and other factors, Ariel believes that period to period comparisons of its operating results may not be a good indication of its future performance. It is possible that in some future periods Ariel's operating results may be below the expectations of public market analysts and investors. In this event, the price of Ariel's common stock may fall. In the past, Ariel has experienced fluctuations in its revenue and operating results and its revenue and operating results may continue to vary significantly from period to period due to a number of factors, many of which are beyond its control. These factors include: . fluctuations in demand for its products and services; . variations in the timing of orders and shipments of its products; . the timing of new product and service introductions by Ariel or its competitors; . the mix of products sold and the mix of distribution channels through which they are sold; . its ability to obtain sufficient supplies of sole or limited sourced components for its products; . unfavorable changes in the prices of the components Ariel purchases; . its ability to achieve cost reductions; . its ability to maintain quality levels for its products; . its ability to integrate new technologies Ariel develops or acquire into its products; and . timing of acquisitions and dispositions of businesses and assets. The amount and timing of Ariel's operating results generally will vary from quarter to quarter depending on the level of actual and anticipated business activities and as Ariel develops and launches new products. Ariel has experienced sharply increased revenue in periods that involved new product introductions and significant sales to original equipment manufacturers, with equally sharp decreases in revenue in subsequent periods as distributors and original equipment manufacturers complete their inventory build-up process. Furthermore, Ariel has a limited backlog of orders and revenue for any future quarter is difficult to predict. Supply, 39
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manufacturing or testing constraints could result in delays in the delivery of Ariel's products. Any delay in the product deployment schedule of one or more of Ariel's new products would likely adversely affect its operating results for a particular period. Ariel's technology is not patented and it will not be protected by patent laws Ariel believes that its success is dependent upon its proprietary technology. However, since Ariel has not in the past actively pursued patent protection on most of its products and does not hold patents on many of its current products, it will not be protected by patent laws in the event competitors are able to create substantially similar or duplicate products. Ariel principally relies upon copyright, trade secret and contract law to protect its proprietary technology. Ariel cannot assure you that it will be able to prevent misappropriation of its technology or that its competitors will not independently develop technologies that are substantially equivalent or superior to its technology. If third parties believe Ariel is infringing on their intellectual property rights, claims brought against Ariel could be costly and result in the loss of significant rights The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. Patent, trademark and other intellectual property rights are important to Ariel and other technology companies. Many companies devote significant resources to developing patents that could affect many aspects of Ariel's business. Other parties may assert infringement or unfair competition claims against Ariel that could relate to any aspect of its technologies or other intellectual property. Ariel may also be subject to claims relating to components it purchases from its suppliers and integrates into its products. Ariel cannot predict whether third parties will assert claims of infringement against it, the subject matter of any of these claims or whether these assertions or prosecutions will harm its business. If Ariel is forced to defend itself against any of these claims whether they are with or without merit or are determined in its favor, it may face costly litigation, diversion of technical and management personnel an inability to use its current technology or product shipment delays. As a result of a dispute, Ariel may have to develop non-infringing technology or enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may be unavailable on terms acceptable to Ariel, or at all. If there is a successful claim of patent infringement against Ariel and it is unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, Ariel's business and competitive position may be adversely affected. Ariel does not have its own manufacturing facilities and it depends on a limited number of outside companies to manufacture substantially all the equipment it sells Ariel does not have its own manufacturing facilities and relies on K- Byte/Hibbing Manufacturing and JRE Inc. in the United States to manufacture substantially all of its equipment. These agreements can be terminated on short notice by any party. Ariel cannot assure you that it will be able to maintain these relationships or replace them on attractive terms. There are risks associated with its relationship with these third parties, including reduced control over: . delivery schedules; . quality assurance; . manufacturing costs; . capacity during periods of excess demand; and . availability of access to process technologies. 40
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Ariel depends on its key personnel and it may be unable to replace key executives if they leave. Ariel's failure to attract, assimilate and retain other highly qualified personnel in the future could seriously harm its business Ariel's success is largely dependent upon the personal efforts of its executive officers as well as other key personnel and its future success is also dependent on its ability to recruit and retain additional experienced engineering and sales personnel. Ariel intends to appoint additional senior management personnel as well as to hire additional engineering, sales and support personnel in the future. Competition for personnel, especially engineers and sales personnel, in New Jersey is intense. There can be no assurance that Ariel will be able to retain or hire other necessary personnel. Loss of the services of, or failure to recruit, key personnel could materially harm its business. Ariel's management team may not be able to successfully implement its business strategy because it has only recently begun to work together Ariel's business is highly dependent on the ability of its management to work together effectively to execute its business strategy. Several members of its senior management have been employed by Ariel for a relatively short period of time and Ariel is in the process of recruiting additional senior management. These individuals have not previously worked together as a management team. In addition, the members of Ariel's management team who have been with Ariel for a longer period have had only limited experience within its new target markets. The failure of Ariel's management team to work together effectively could prevent efficient decision making by Ariel's executive team, affecting product development and sales and marketing efforts, which would negatively impact Ariel's results of operations. Risks Relating to Ariel's Industry Ariel must keep pace with rapid technological changes to remain competitive There can also be no assurance that Ariel's competitors will not develop future generations of competitive products that will offer superior price, features or performance advantages which would render its products uncompetitive. There are currently competing technologies that offer alternative solutions which allow for faster Internet access compared to dial- up access. These competing technologies include digital subscriber line, wireless and cable. Ariel cannot assure you that, in order to remain competitive, it will be successful in developing and introducing on a timely basis new products and technologies. Ariel's success in the ISP market depends on the continued growth and use of Internet and dial-up access technologies Demand for Ariel's ISP remote access solutions is being driven by the increase in the use of the Internet. Ariel's future performance depends substantially upon the continued widespread acceptance and use of the Internet and other online services. Rapid growth in the use of the Internet and other online services is a relatively recent phenomenon, and Ariel cannot assure you that acceptance and use will continue to develop or that a sufficiently broad base of consumers will adopt, and continue to use, the Internet and other online services as a medium of communication and commerce. The emergence of alternative technologies may substantially reduce its potential markets. If dial-up access technologies become obsolete, Ariel would have to develop and market new products in order to continue its operations. Ariel cannot be certain that it will succeed in adapting its product strategies to compete effectively with these alternative technologies. Ariel's customers are subject to government regulations and changes in these laws or regulations could negatively affect its ability to develop new technologies or sell new products The jurisdiction of the Federal Communications Commission extends to the entire communications industry, including Ariel's customers and their products and services that incorporate its products. For example, 41
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FCC regulatory policies that affect the availability of data and Internet services may impede its customers' penetration into their markets or affect the prices that they are able to charge. In addition, international regulatory bodies are beginning to adopt standards for the communications industry. Although Ariel's business has not been affected by regulations to date, in the future, delays caused by its compliance with regulatory requirements, in particular telecommunication tariffs regulations, may result in order cancellations or postponements of product purchases by its customers, which would harm its business. Risks Related to the Exchange Offer MAYAN, or Ariel following the closing of the merger, may not have the financial resources to repurchase the exchange notes in the event of a repurchase event Upon a repurchase event, the holders of the exchange notes may require MAYAN, or Ariel following the closing of the merger, to repurchase all or a portion of the exchange notes. A repurchase event is (i) the occurrence of a change of control as defined in the exchange notes indenture or (ii) after the merger (or alternative mergers or public equity offerings), delisting of the common stock into which the exchange notes are convertible. If a repurchase event were to occur, MAYAN or Ariel may not have enough funds to pay the repurchase price for all exchange notes and therefore may be unable to repurchase the exchange notes. In addition, any future credit agreements or other debt agreements may contain similar provisions, or expressly prohibit the repurchase of the exchange notes upon a repurchase event or may provide that a repurchase event constitutes an event of default under that agreement. If a repurchase event occurs at a time when MAYAN or Ariel is prohibited from repurchasing the exchange notes, it could seek the consent of its lenders to repurchase the exchange notes or could attempt to refinance its debt agreements. If it does not obtain consent, MAYAN or Ariel could not repurchase the exchange notes. MAYAN's or Ariel's failure to repurchase the exchange notes would constitute an event of default under the exchange notes indenture, which might constitute an event of default under the terms of its other debt. MAYAN expects that it would require third-party financing to satisfy these obligations, and it can provide no assurance that it would be able to obtain financing on favorable terms, if at all. MAYAN's (or Ariel's following the merger) substantial leverage as a result of the issuance of the exchange notes and the existing notes and the covenants in the exchange notes indenture could harm its ability to finance future operations Even if the exchange offer results in all the existing notes being exchanged for the exchange notes, thereby reducing MAYAN's subordinated indebtedness from $75.0 million to $50.0 million, MAYAN (or Ariel following the merger) will continue to be highly leveraged after giving effect to the exchange offer. The degree to which MAYAN (or Ariel following the merger) is leveraged could have important consequences for shareholders and holders of the exchange notes, including, but not limited to, the: . limitation on MAYAN's or Ariel's ability to refinance its existing indebtedness or obtain additional financing to fund interest payments, note repurchases, future working capital, capital expenditures, or other general corporate purposes; . requirement that its cash flow from operations to pay the principal of, and interest on, the exchange notes, thereby reducing its projected cash flow to fund working capital, capital expenditures or other general corporate purposes; . limitation on its flexibility in planning for, or reacting to, changes in the business and the telecommunications industry, including the pursuit of its growth strategy; . limitation on its ability to withstand adverse economic conditions or take advantage of significant business opportunities that may arise; . limitation on its ability to compete with, and placing it at a disadvantage to, competitors who are not as highly leveraged; 42
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. limitation on its ability to invest in new or developing technologies; and . limitation on its ability to respond to changes affecting the implementation of its financing, development or operating plans. MAYAN's or Ariel's ability to pay interest on the exchange notes and to satisfy its other debt obligations will depend upon its future operating performance. Prevailing economic conditions and financial, business and other factors, many of which are beyond its control, will affect its ability to make these payments. If, in the future, MAYAN or Ariel cannot generate sufficient cash flow from operations to make scheduled payments on the exchange notes or to meet its other obligations, it will need to refinance its indebtedness, obtain additional financing or sell assets. MAYAN or Ariel cannot be certain that its business will generate cash flow, or that it will be able to obtain funding sufficient to satisfy its debt service requirements. 43
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ARIEL SPECIAL MEETING General Ariel is furnishing this document to holders of Ariel common stock in connection with the solicitation of proxies by Ariel's board of directors for use at the special meeting of stockholders of Ariel to be held on , 2001, and any adjournment or postponement of that meeting. Date, Time and Place The special meeting will be held on , 2001, beginning at [ : ] a.m., local time, at . Matters to be Considered at the Special Meeting At the special meeting and any adjournment or postponement of the special meeting, Ariel stockholders will be asked: . to consider and vote upon the approval of the merger agreement; . to approve an amendment to Ariel's certificate of incorporation to increase the number of authorized shares of common stock from 2,000,000 shares to 12,500,000 shares, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger; . to approve the one for 20 reverse stock split of the common stock of Ariel, to be effective immediately prior to the effective time of the merger; . to approve the implementation of the 2001 Stock Incentive Plan under which 15,659,762 shares of Ariel common stock will initially be reserved for issuance; . elect Ariel's current board of directors to serve until the earlier of (i) the closing of the merger or (ii) until their successors are duly elected and qualified; and . to transact any other business as may properly come before the special meeting. Record Date Ariel's board has fixed the close of business on , 2001, as the record date for determination of Ariel stockholders entitled to notice of and to vote at the special meeting. Voting of Proxies Ariel requests that its stockholders complete, date and sign the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to Ariel, or otherwise provide their proxy by telephone or the Internet. Brokers holding shares in "street name" may vote the shares only if the stockholder provides instructions on how to vote. Brokers will provide directions on how to instruct the broker to vote the shares. All properly executed proxies that Ariel receives prior to the vote at the special meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve the merger agreement, the merger, the amendments to Ariel's certificate of incorporation, the implementation of the 2001 Stock Incentive Plan, the election of Ariel's current board of directors and the related transactions. Ariel's board does not currently intend to bring any other business before the special meeting and, so far as Ariel's board knows, no other matters are to be brought before the special meeting. If other business properly comes before the special meeting, the proxies will vote in accordance with their own judgment. Stockholders may revoke their proxies at any time prior to its use . by delivering to the secretary of Ariel a signed notice of revocation or a later-dated, signed proxy; or . by attending the special meeting and voting in person. Attendance at the special meeting does not in itself constitute the revocation of a proxy. 44
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Votes Required As of the close of business on the record date, there were shares of Ariel common stock outstanding and entitled to vote, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. The affirmative vote of the holders of a majority of the shares of Ariel common stock outstanding and entitled to vote at the Ariel meeting is required for approval of the merger agreement and for the amendment to the certificate of incorporation. The holders of a majority of the shares of Ariel common stock that are present in person or represented by proxy must approve the 2001 Stock Incentive Plan and a plurality of the votes cast in person or by proxy by the holders of the shares of Ariel common stock is required to elect directors. Ariel stockholders have one vote per share of Ariel common stock owned on the record date. As of the record date, directors and executive officers of Ariel and their affiliates owned shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, or approximately % of the shares of Ariel common stock outstanding on that date. Ariel's directors and executive officers, and their affiliates, have indicated their intention to vote all of their shares of Ariel common stock in favor of each of the proposals at the Ariel special meeting. Pursuant to voting agreements entered into concurrent with the merger agreement, Ariel stockholders owning approximately % of Ariel's common stock outstanding as of the record date have agreed to vote all of their shares of Ariel common stock for: . approval of the merger agreement; . approval of the increase in the authorized shares of Ariel; . approval of the one for 20 reverse stock split; and . approval of the implementation of the 2001 Stock Incentive Plan. As of June 30, 2001, directors and executive officers of MAYAN beneficially own 3,250 shares of Ariel common stock after giving effect to the one for 20 reverse stock split. Quorum; Abstentions and Broker Non-Votes The required quorum for the transaction of business at a special meeting is the presence, in person or by proxy, of a majority of the shares of Ariel common stock outstanding and eligible to vote as of the record date. Abstentions and broker non-votes each will be included in determining the number of shares present and voting at the meeting for the purpose of determining the presence of a quorum. Brokers holding shares for beneficial owners cannot vote on the actions proposed in this document without the owners' specific instructions. Accordingly, Ariel stockholders are urged to return the enclosed proxy card marked to indicate their vote. Broker non-votes and abstentions will not be included in vote totals and will have the effect of a vote against each of the proposals at the Ariel special meeting. Solicitation of Proxies and Expenses Ariel has retained the services of CIC Georgeson Shareholder Services to assist in the solicitation of proxies from Ariel stockholders. The fees to be paid to the firm by Ariel for those services are not expected to exceed $8,000 plus reasonable out-of-pocket expenses. Ariel and MAYAN will each bear its own expenses in connection with the solicitation of proxies for its special meeting of stockholders and shareholders, except that each will pay one-half of all printing and mailing costs and expenses incurred in connection with the registration statement and this document. In addition to solicitation by mail, the directors, officers and employees of Ariel may solicit proxies from Ariel stockholders by telephone, email, facsimile or in person, but they will not receive any compensation for those services. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward 45
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soliciting materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. Board Recommendations The disinterested members of Ariel's board have determined that the merger agreement and the merger are fair to, and in the best interests of, Ariel and its stockholders. Accordingly, the disinterested members of the board unanimously have approved the merger agreement and unanimously recommend that Ariel stockholders vote "FOR" approval of the merger agreement. In considering that recommendation, Ariel stockholders should be aware that some Ariel officers and key employees have interests in the merger that are different from, or in addition to, those of Ariel's stockholders. See "The Merger-- Interests of Ariel's Management in the Merger and Potential Conflict of Interest." The members of the Ariel board also have determined that: . increasing the number of Ariel's authorized shares of common stock from 2,000,000 to 12,500,000, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger; . effecting a one for 20 reverse stock split of Ariel's common stock, to be effective immediately prior to the effective time of the merger; and . approving the implementation of the 2001 Stock Incentive Plan. are in the best interests of Ariel and its stockholders. The disinterested members of the Ariel board unanimously recommend that Ariel stockholders vote "FOR" the approval of these proposals. The members of the Ariel board of directors have also determined that: . electing Ariel's current board of directors to serve until the earlier of (i) the completion of the term for which each was previously elected, (ii) the closing of the merger or (iii) until their successors are duly elected and qualified is in the best interest of Ariel and its stockholders, and unanimously recommend that Ariel stockholders vote "FOR" election of Messrs. Agnello, Goei, Paul, Burlinson, Fuchs, Schneider and Atlas. The matters to be considered at the special meeting are of great importance to Ariel stockholders. Accordingly, Ariel stockholders are urged to read and carefully consider the information presented in this document, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope. Ariel stockholders should not send any stock certificates with their proxy cards. 46
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MAYAN SPECIAL MEETING General MAYAN is furnishing this document to MAYAN shareholders in connection with the solicitation of proxies by the MAYAN board of directors for use at the special meeting of shareholders of MAYAN to be held on , 2001, and any adjournment or postponement thereof. Date, Time and Place The special meeting will be held on , 2001, beginning at [ : ] a.m., local time, at . Matters to be Considered at the Special Meeting At the MAYAN special meeting and any adjournment or postponement of the special meeting, MAYAN shareholders will be asked: . to consider and vote upon the approval and adoption of the merger agreement. In addition, in connection with the approval of the merger, a sufficient number of holders of preferred stock of MAYAN will be required to convert the preferred stock they hold into common stock of MAYAN immediately prior to the effective time of the merger pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation to cause the automatic conversion of all of MAYAN's preferred stock into common stock. Record Date MAYAN's board has fixed the close of business on , 2001, as the record date for determination of MAYAN shareholders entitled to notice of and to vote at the special meeting. Voting of Proxies MAYAN requests that all holders of MAYAN common stock on the record date complete, date and sign the accompanying proxy card for common shareholders, and that all holders of MAYAN preferred stock on the record date complete, date and sign the accompanying proxy card for preferred shareholders, and promptly return them in the accompanying envelope or otherwise mail them to MAYAN. All properly executed proxy cards that MAYAN receives prior to the vote at the special meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxy cards. If no direction is indicated on any proxy card, it will be voted in favor of approval and adoption of the merger agreement and approval of the merger. A MAYAN shareholder may revoke a proxy at any time prior to its use: . by delivering to the secretary of MAYAN a signed notice of revocation; . by delivering to the secretary of MAYAN a later-dated, signed proxy card; or . by attending the special meeting and voting in person. Attendance at the special meeting does not in itself constitute the revocation of a proxy. Votes Required In order for the merger to be effective: . the holders of a majority of the shares of MAYAN common stock outstanding as of the record date, voting as a class, and . the holders of a majority of the shares of MAYAN preferred stock outstanding as of the record date, voting together as a single class must vote to adopt and approve the merger agreement and approve the merger. 47
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As of the close of business on the record date, there were 52,500,796 shares of MAYAN common stock and preferred stock outstanding and entitled to vote, consisting of 16,500,736 shares of common stock and 36,000,060 shares of preferred stock. The holders of a majority of the outstanding shares of MAYAN common stock and the holders of a majority of the outstanding shares of preferred stock entitled to vote must approve the merger agreement. MAYAN shareholders have one vote per share of MAYAN common stock owned on the record date and one vote for each share of common stock into which any preferred stock could be converted. In order for the MAYAN preferred stock to be automatically converted into shares of MAYAN common stock pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation, the holders of a majority of the shares of each series of MAYAN preferred stock outstanding as of the record date must vote for the conversion of that series preferred stock into common stock. As of the close of business on the record date, 1,907,500 shares of MAYAN Series A preferred stock were issued and outstanding, 7,843,137 shares of MAYAN Series B preferred stock were issued and outstanding, 11,826,346 shares of MAYAN Series C preferred stock were issued and outstanding and 14,423,077 shares of MAYAN Series D preferred stock were issued and outstanding. Each share of MAYAN preferred stock outstanding on the record date is entitled to one vote at the special meeting. As of the record date, the executive officers and directors of MAYAN and their affiliates owned shares of MAYAN common stock and shares of MAYAN preferred stock which are convertible into the same number of shares of MAYAN common stock, or approximately % of the shares of MAYAN capital stock outstanding on that date. The directors and executive officers of MAYAN have indicated their intention to vote their shares of MAYAN common stock in favor of the merger agreement. Under separate voting agreements entered into concurrent with the merger agreement, MAYAN's directors and executive officers owning approximately % of MAYAN's capital stock outstanding as of the record date have agreed to vote all of their shares of MAYAN capital stock for approval of the merger agreement. As of June 30, 2001, directors or executive officers of Ariel owned 625,000 shares of MAYAN common stock, 2,500 shares of MAYAN Preferred Stock and had the right to purchase an additional 1,208,170 shares of MAYAN common stock pursuant to outstanding stock options. See "The Merger--Interests of Certain Persons in the Merger." Quorum and Abstentions A majority of all shares of MAYAN common stock and preferred stock, outstanding as of the record date, each as a separate class, represented in person by proxy, constitutes a quorum for the transaction of business at the special meeting. If you submit a proxy that indicates an abstention from voting in all matters, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, but they will not be voted on any matter at the applicable special meeting. Consequently, your abstention will have the same effect as a vote against the proposal to adopt and approve the merger agreement. Solicitation of Proxies and Expenses MAYAN will solicit proxies from the MAYAN shareholders and will bear its own expenses in connection with the solicitation of proxies for its special meeting of shareholders, except that Ariel and MAYAN each will pay one-half of all printing and mailing costs and expenses incurred in connection with the registration statement and this document. In addition to solicitation by mail, the directors, officers and employees of MAYAN may solicit proxies from shareholders by telephone, email, facsimile or in person, but they will not receive any additional compensation for those services. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners. 48
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Board Recommendations The disinterested members of the MAYAN board have determined that the merger agreement and the merger are advisable and in the best interests of MAYAN and its shareholders. Accordingly, the disinterested members of the board unanimously have approved the merger agreement and unanimously recommend that shareholders vote "FOR" approval of the merger agreement. In considering that recommendation, MAYAN shareholders should be aware that some MAYAN directors and officers have interests in the merger that are different from, or in addition to, those of MAYAN shareholders, and that Ariel has agreed to provide indemnification arrangements to directors and officers of MAYAN. See "The Merger--Interests of MAYAN's Management in the Merger and Potential Conflict of Interest." The matters to be considered at the special meeting are of great importance to the shareholders of MAYAN. Accordingly, MAYAN shareholders are urged to read and carefully consider the information presented in this document, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope. MAYAN's shareholders should not send any stock certificates with their proxy cards. A transmittal form with instructions for the surrender of MAYAN common stock certificates will be mailed to MAYAN shareholders promptly after completion of the merger. For more information regarding the procedures for exchanging MAYAN stock certificates for Ariel stock certificates, see "The Merger--Exchange of MAYAN Stock Certificates for Ariel Stock Certificates." 49
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THE MERGER This section of the document describes material aspects of the proposed merger, including the merger agreement which is attached as Appendix I and which we incorporate by reference. While we believe that the description covers the material terms of the merger and the related transactions, this summary may not contain all of the information that is important to Ariel stockholders and MAYAN shareholders. Stockholders should read the entire merger agreement and the other documents we refer to carefully and in their entirety for a more complete understanding of the merger. Background of the Merger As a regular part of their business plans MAYAN and Ariel have from time to time each considered opportunities for expanding and strengthening their technology, products, research and development capabilities and distribution channels, including strategic acquisitions, business combinations, investments, licensing and development agreements and joint ventures. Additionally, in light of the rapid changes in the telecommunications equipment industry, including industry consolidation and globalization, the MAYAN board of directors regularly met with MAYAN senior management to review MAYAN's position relative to its peers and new entrants in the industry, as well as the strategic alternatives available to MAYAN in order for it to remain competitive and enhance shareholder value. Throughout 2000, the Ariel board of directors regularly discussed additional funding alternatives and strategic partners. In June 2000, the board of directors authorized Pennsylvania Merchant Group to act as its investment banker in those efforts. Further, Ariel's chairman, Anthony Agnello, was authorized to retain additional third parties, on a non-exclusive basis, to act as finders for pursuing strategic relationships. In fact, three entities were so engaged. Mr. Agnello reported the status of these efforts to the board of directors at its meetings of October 19, 2000, December 14, 2000 and January 26, 2001. Further, at each of those meetings, Dennis Schneider, Ariel's chief executive officer and president, and Jack Loprete, Ariel's vice president of finance, updated the board of directors regarding funding alternatives. The proposals received by Ariel consisted of forms of equity credit lines all of which the board deemed unacceptable, and thus, rejected. Following its December 31, 2000 fiscal year end, the Ariel board of directors met to consider Ariel's liquidity needs, its product development efforts and potential, its collaborative opportunities, its prospects for continuing to operate as an independent company and developments in Ariel's marketplace in general. At its regular January 2001 meeting, it was clear to the board of directors that Ariel would likely run out of cash in the second quarter of 2001 and could not continue on its present course. During the first week of February 2001, Esmond Goei, chief executive officer and a director of MAYAN, who is also Vice Chairman of the Ariel board, contacted other members of the Ariel board to discuss for the first time whether Ariel would be interested in a business combination with MAYAN. Over the next week, Mr. Goei, Dan Gatti, president and the former chief executive officer of MAYAN, and Mr. Schneider engaged in preliminary discussions regarding a possible business combination and the potential market for the combined enterprise. On February 15, 2001, prior to any further discussion, MAYAN and Ariel signed a non-disclosure agreement. In the period from February 19 to February 21, 2001, Mr. Goei, Mr. Gatti, Mr. Schneider and Dan Brown, vice president of product marketing of MAYAN, held several meetings and conference calls to evaluate addressable market and revenue opportunities for the combined products. Mr. Goei, Mr. Gatti, Mr. Schneider and Mr. Brown also discussed the merits of a potential strategic business combination of MAYAN and Ariel, including the opportunities for potential cost savings that could be achieved in products and services, management and sales organizations by combining the two companies and sharing resources and personnel. 50
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On February 22, 2001, John Tingleff, chief financial officer of MAYAN, met with Mr. Goei to discuss the potential terms of a proposed merger of Ariel and MAYAN. On February 23, 2001, Mr. Goei and Mr. Gatti met with Mr. Schneider and Mr. Loprete at the Cranbury office of Ariel to present company overviews for MAYAN and Ariel. Mr. Goei and Mr. Loprete discussed the potential terms of a business combination between the two companies, taking into consideration the cash position of each company, relative to the other, the market strength and competitive position of each company and the revenue potential for each company. A proposal that Ariel stockholders maintain 10% of the equity of the combined company, with MAYAN shareholders receiving 90% of the equity was discussed, along with the registration of the Ariel stock to be issued in the merger and the proposed management of the combined company following the merger, which management would consist of members of both companies. Mr. Loprete held informal discussions with Ariel management and board members to discuss those potential terms. On February 25, 2001, Mr. Goei distributed a term sheet to Messrs. Agnello and Schneider. The parties ultimately declined to execute the term sheet and proceeded directly to negotiate the definitive agreement. On February 26, 2001, Mr. Goei discussed with Brobeck, Phleger & Harrison LLP, MAYAN's outside legal counsel, his fiduciary duties and obligations with respect to a possible transaction between Ariel and MAYAN. Thereafter, Mr. Goei conducted informal discussions with the Ariel board of directors and the other members of the MAYAN board of directors to discuss his interests in MAYAN and to discuss the benefits of a business combination between Ariel and MAYAN and the potential structure for that combination. The discussion involved MAYAN's current cash position, its competitive positioning, MAYAN's stage of product readiness and its latest financing transaction. On February 27, 2001, the board of directors of MAYAN met to discuss possible strategic alternatives, including additional venture financing, joint ventures, licensing of key software and possible strategic business combinations, including with Ariel, as well as the purchase of Ariel for cash. The MAYAN board reviewed competitive situations within the metropolitan communications market and evaluated the relative strengths and weaknesses in pursuing a possible business combination, particularly the combination of MAYAN with a publicly traded entity. The board also considered the proposed terms of a combination with Ariel. The MAYAN board, with Mr. Goei abstaining, authorized MAYAN management to continue discussions with Ariel about a possible transaction. On February 28, 2001, the Ariel board convened a special meeting to discuss the merits of a combination with MAYAN and to discuss the proposed terms of a combination. The Ariel board, with Mr. Goei abstaining, authorized Ariel management to proceed with further discussions and with the negotiation of a definitive merger agreement with MAYAN. During the period from February 28 through March 2, 2001, a representative of MAYAN conducted a series of due diligence meetings at Ariel's office in Cranbury. Various members of the Ariel management team met with the MAYAN representative to discuss the status of current operations and possible cost savings associated with the combination and the sharing of resources and personnel. On March 6, 2001, the board of directors of MAYAN, along with observers, met to discuss the potential benefits and costs of a combination with Ariel, including possible strategic alternatives, such as additional venture financing, joint ventures, licensing of key software and possible strategic business combinations, MAYAN's current competitive position in the market, the volatility of the telecommunications industry, the potential cost savings of a combination with Ariel, the potential for liquidity for the MAYAN shareholders, the assumption of Ariel liabilities, entry into the public markets and the future disclosure obligations associated with that entry, market acceptance of the combined company, the length of time necessary to complete the transaction and the expenses involved in doing so. Representatives of Brobeck attended the meeting. The board, with Mr. Goei abstaining, authorized Brobeck to proceed with the preparation of a definitive merger agreement. 51
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On March 9, 2001, Mr. Goei, Mr. Gatti and Mr. Tingleff met with representatives of Robertson Stephens in New York to discuss the proposed transaction and the engagement of Robertson Stephens as MAYAN's financial advisor for the transaction. On March 10, 2001, an informal conference call among the MAYAN management team, and representatives of Brobeck and Robertson Stephens was conducted to update each party on the status of the transaction and to discuss the potential terms of the transaction, including the proposals that MAYAN shareholders receive 90% of the equity of the combined company with Ariel stockholders maintaining the remaining 10%. Other terms which were discussed included the conversion of MAYAN preferred stock, the registration of the Ariel stock to be issued in the merger, and the potential management of the combined company following the merger, which management would consist of members of the management of both companies, and the treatment of MAYAN's outstanding convertible promissory notes. On March 12, 2001, MAYAN convened a special telephonic meeting of the board of directors and observers to discuss the proposed merger between MAYAN and Ariel, to approve the formation of a special acquisition committee of the board of directors to lead negotiations and be available to assist management and outside counsel in discussions regarding the potential merger, and to approve the negotiation of a definitive merger agreement. At the beginning of the meeting, Mr. Goei disclosed in detail his interest in the transaction as a director, shareholder and optionee in both corporations and discussed his involvement at Ariel. Following a series of questions for Mr. Goei, Mr. Goei left the meeting and removed himself from further discussions and negotiation in connection with the transaction. Robertson Stephens discussed with MAYAN various alternatives to the proposed transaction including licensing of key software as well as the purchase of Ariel for cash. Brobeck discussed the proposed transaction structure, as well as the risks and legal aspects of, including the fiduciary duties of the board in regards to, the proposed transaction with Ariel. The MAYAN board, with Mr. Goei abstaining, considered all of the matters discussed, reviewed the proposed transaction terms under discussion by the parties, appointed Jim Mongiello and Steve Krausz, both disinterested members of the MAYAN board, as the special acquisition committee of the board of directors and approved the negotiation of a definitive merger agreement, as well as the engagement of Robertson Stephens as MAYAN's financial advisor for the transaction pursuant to an engagement letter, dated March 13, 2001. On March 12, 2001, the special acquisition committee directed Brobeck to distribute a first draft of the merger agreement. On March 16, 2001, the Ariel board convened another special meeting to discuss the benefits of the MAYAN transaction. Mr. Goei was not present at the meeting. The members of the board present determined to retain Needham & Company, Inc. as its financial advisor to advise it in connection with the possible merger with MAYAN and to render a fairness opinion if the board were to determine to proceed with a merger with MAYAN. The board also authorized management to retain Steptoe & Johnson, LLP and Paul & Rosen, LLP as special counsel to provide legal assistance in connection with the transaction, and through management, directed Steptoe & Johnson, LLP to provide Ariel's initial comments on the draft of the merger agreement previously distributed by Brobeck. On March 16, 2001, Brobeck distributed a second draft of the merger agreement, and preliminary drafts of ancillary agreements to the merger agreement. During the period of March 19 and March 22, Brobeck and Steptoe & Johnson LLP participated in a series of negotiations on the terms of the merger agreement and the ancillary agreements by teleconference. These negotiations covered all aspects of the transaction, including, among other things, the representations and warranties made by the parties, the restriction on the conduct of their business, the terms of the conduct of the parties pending closing, additional covenants, the terms of the non-solicitation covenant, Nasdaq listing requirements and the termination provisions. Between the period of March 19 and March 24, Mr. Tingleff had multiple discussions with the special acquisition committee regarding the status of the transaction and various business terms relating to the agreements. 52
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On March 21, 2000, Mr. Schneider sent Mr. Tingleff a partial draft of the Ariel 2000 10-K report. On March 22, 2001, the Ariel board held a special meeting to review drafts of the revised merger agreement and related agreements, which had been separately provided to each member prior to the meeting. All members other than Mr. Goei were present. The board reviewed and discussed the principal terms of the merger agreement and the ancillary agreements, including the bridge loan and security agreements required by MAYAN to secure the bridge loan. The board then reviewed and discussed the principal terms of the proposed transaction, the merger consideration, the conditions to closing, the covenants that Ariel was required to make, Ariel's financial condition including its liquidity and need for financing to continue operations, and the alternatives available to Ariel which were limited to convertible equity credit lines. A representative of Needham & Company was present and made a financial presentation to the board regarding the proposed merger with MAYAN. The Needham & Company representative indicated that based on their analysis as of that date and based on the financial terms set forth in the draft merger agreement as of that date, Needham & Company expected to be able to deliver a written opinion to the effect that the proposed exchange ratio is fair to Ariel from a financial point of view. After the presentation, the board members who were present unanimously approved the terms of the merger agreement subject to the receipt of the aforesaid written opinion from Needham & Company with such changes as Ariel's officers deemed appropriate and authorized Ariel's officers to execute, on behalf of Ariel, the merger agreement and the ancillary agreements. On March 23, 2001, representatives from Brobeck met with Mr. Tingleff at the MAYAN office in San Jose to discuss the status of the transaction. Brobeck briefed Mr. Tingleff of MAYAN's legal duties and responsibilities in connection with considering the merger, and reviewed the principal terms of the merger agreement and related agreements. Mr. Tingleff reviewed the status of the negotiation, the principal issues in the proposed transaction, and outstanding issues and documents to be provided by Ariel. On March 25, 2001, an informal conference call was conducted among Mr. Tingleff, the special acquisition committee and Brobeck to update the committee on the status of the negotiations, and the possible treatment of MAYAN's convertible promissory notes. The special acquisition committee reviewed the status of the transaction and principal issues of the debt exchange offer and evaluated the potential outcomes in connection with the proposed exchange offer, including obtaining the support of the bond holders to the proposed transaction with Ariel and reducing the principal amount of the outstanding debt. The committee authorized Mr. Tingleff to proceed with further investigation and discussions regarding the potential debt exchange offer. On March 27, 2001, Ariel amended its shareholder rights plan to exempt the MAYAN transaction from triggering the rights under the plan. On March 28, 2001, Needham & Company delivered to the Ariel board its written opinion that, as of that date and subject to the various considerations set forth in the opinion, the exchange ratio was fair to Ariel from a financial point of view. On March 28, 2001, MAYAN convened a special meeting of the board of directors to review and discuss the final merger agreement and the ancillary agreements, which had been separately provided to each member of the board prior to the meeting. Representatives of Robertson Stephens and Brobeck were present. Brobeck briefed the board on the board's legal duties and responsibilities in connection with the merger with Ariel, and reviewed the principal terms of the merger agreement and the ancillary agreements. The MAYAN board reviewed and discussed the principal terms of the proposed transaction, the merger consideration, the conditions to closing and covenants of Ariel, the termination rights and the non-solicitation provisions applicable to Ariel and MAYAN. Robertson Stephens gave a presentation at which materials relating to its analyses were discussed. Robertson Stephens then delivered its oral opinion, subsequently confirmed in writing, that as of that date, the exchange ratio was fair to the holders of MAYAN common stock from a financial point of view. After the presentation, the special acquisition committee recommended and the disinterested members of the MAYAN board then unanimously approved (with Mr. Goei abstaining) the terms of the merger agreement and authorized Mr. Tingleff to execute, on behalf of MAYAN, the merger agreement. 53
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On March 28, 2001, MAYAN and Ariel each executed the merger agreement, and the officers and directors of MAYAN entered into voting agreements with Ariel and agreed to vote their share in favor of the transaction. On the same day, Ariel and MAYAN issued a joint press release after the Nasdaq National Market closed announcing the merger. Recommendation of the Ariel Board of Directors and Ariel's Reasons for the Merger Anthony M. Agnello, Jay H. Atlas, Robert F. Burlinson, Ira H. Fuchs and Harold W. Paul, the disinterested members of Ariel's board of directors unanimously concluded that the merger was in the best interests of Ariel and its stockholders, and determined to recommend that the stockholders approve the merger agreement as well as the other proposals required in connection with the merger, including the amendment to Ariel's certificate of incorporation to increase the number of authorized shares of Ariel common stock and effect a reverse stock split of Ariel's common stock, and the implementation of the 2001 Stock Incentive Plan. This decision was based upon several potential benefits of the merger that Ariel's board believes will contribute to the success of the combined company. These potential benefits from combining MAYAN with Ariel include: . providing Ariel with the financial resources to support its continuing operations; . the complementary nature of each company's products and the potential for other products based on the combined technologies of the two companies; . increased distribution channels for Ariel's products through MAYAN's portfolio of potential strategic partners; . increased distribution channels for MAYAN's products and services through Ariel's base of customers; . increased product diversification and penetration of each company's existing or potential customer base; . similarities in corporate culture such as similar departmental set-ups, a similar knowledge base and similar decision-making and execution styles, embracing creativity in employees; . the opportunity for expanded research and development of the combined product offerings, including potential new product offerings; and . obtaining the experience and expertise of engineers and design specialists to help advance Ariel's business and technology. The disinterested members of Ariel's board reviewed a number of factors in evaluating the merger, including the following: . results of the due diligence investigation conducted by Ariel's management, accountants, financial advisors and legal counsel confirming information about MAYAN's business, financial performance and condition, operations, technology and management, such as the status of product development, the need to restructure its business model and the capital required to do so, its debt burden and cash on hand; . the financial condition and results of operations and prospects of Ariel in the absence of a business combination and its inability to continue operations in the short term without capital infusion; . Ariel's lack of liquidity, including its net working capital deficit, and lack of prospects to obtain funding if the merger is not consummated; . current financial market conditions and historical market prices, volatility and trading information with respect to Ariel common stock and MAYAN common stock; . the anticipated substantial adverse effects on Ariel's stockholders and present and potential employees, business partners and lenders that would result from insolvency or concerns about the potential for it; . the anticipated benefits that would arise from entering into the merger agreement and the bridge loan, including the substantial lessening of those liquidity and solvency concerns; 54
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. the consideration Ariel will issue in the merger in light of comparable merger transactions and the percentage of ownership of the combined company after the merger; . the belief that the terms of the merger agreement and related agreements are reasonable; . the expected impact of the merger on the customers and upon employees of Ariel and the combined company, some of whom would lose their jobs to overlap and redundancy; . Ariel's management's view as to the integration of MAYAN which it believed could be accomplished to create a strong new business; . the analyses and presentations prepared by Needham & Company and Needham & Company's written opinion to the effect that, as of March 28, 2001, and subject to the various considerations set forth in its opinion, the exchange ratio was fair from a financial point of view to Ariel. The disinterested members of Ariel's board also considered the terms of the merger agreement regarding Ariel's rights and limits on its ability to consider and negotiate other strategic transaction proposals, as well as the possible effects of the provisions regarding conditions to closing. In addition, it was noted to Ariel's board that the merger is expected to be a tax-free transaction and accounted for as a purchase, and that significant goodwill is expected to be created on the books of the combined company as a result of the merger. The disinterested members of Ariel's board also identified and considered a number of potentially negative factors in its deliberations concerning the merger including the following: . the risk that the potential benefits of the merger may not be realized; . the risk that the merger may not be consummated, notwithstanding the voting agreements obtained from holders of approximately 48.23% of MAYAN's outstanding common stock and preferred stock as of June 30, 2001; . the risk that if the merger is not completed, Ariel will not have working capital to fund its operations and it would be required to repay any amounts advanced to it by MAYAN between execution of the merger agreement and closing or termination; . the assumption of MAYAN's convertible subordinated promissory notes and the reaction of the noteholders to the proposed merger; . MAYAN's recent layoffs and shifts in strategic direction including additional potential acquisitions; . the risk of management and employee disruption associated with the merger, including the risk that despite the efforts of the combined company, key technical, sales and management personnel might not remain employed by the combined company; . the challenges of integrating Ariel's operations in New Jersey, France and Germany with MAYAN's operations in California, Texas and Arizona and the related challenges of conducting multi-site operations in several states and countries; and . the acceleration of the vesting of options upon execution of the merger agreement for certain employees of Ariel may result in "excess parachute payments" as defined in Section 280G of the Internal Revenue Code. Excess parachute payments are not deductible in accordance with Section 280G. As a result, Ariel will not be entitled to a tax deduction for the amounts determined to be excess parachute payments. The disinterested members of Ariel's board concluded, however, that, on balance, the merger's potential benefits to Ariel and its stockholders outweighed the associated risks and that the proposed merger represented Ariel's best opportunity to continue its operations both in the near and long term, especially in light of its critical cash needs which MAYAN was prepared to address. This discussion of the information and factors considered by the disinterested members of Ariel's board is not exhaustive. In view of the variety of factors considered in connection with its evaluation of the merger, Ariel's board did not find it practicable to, and did not quantify or otherwise assign relative weight to, the specific factors considered in reaching its determination. 55
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For the Reasons Discussed Above, the Disinterested Members of Ariel's Board of Directors Unanimously Have Determined the Merger Agreement and the Merger, and the Transactions Contemplated Thereby, Including the Change of Ariel's Name to "MAYAN Networks Corporation" to Be Fair to and In the Best Interests of Ariel and Its Stockholders. In Connection With the Merger, the Disinterested Members of Ariel's Board of Directors Unanimously Recommend That Ariel Stockholders Vote For Approval of the Merger Agreement. The Members of Ariel's Board of Directors Have Also Determined That the Proposal to Amend Ariel's Certificate of Incorporation to Increase the Number of Authorized Shares of Ariel Common Stock and Effect a Reverse Split of Ariel's Common Stock, the Proposal to Approve the Implementation of the 2001 Stock Incentive Plan and the Proposal to Elect Ariel's Current Board of Directors Are Also In the Best Interest of Ariel and Its Stockholders, and Unanimously Recommend That Ariel Stockholders Vote For the Approval of These Proposals. Opinion of Ariel's Financial Advisor Pursuant to an engagement letter dated March 20, 2001, Ariel retained Needham & Company to render an opinion as to the fairness, from a financial point of view, of the proposed exchange ratio to Ariel. The proposed exchange ratio was determined through arm's length negotiations between Ariel and MAYAN and not by Needham & Company. On March 28, 2001, Needham & Company delivered its written opinion that, as of that date and based upon and subject to the assumptions and other matters described in the written opinion, the proposed exchange ratio is fair to Ariel from a financial point of view. The Needham & Company opinion is addressed to the Ariel board, is directed only to the financial terms of the merger agreement, and does not constitute a recommendation to any Ariel stockholder as to how that stockholder should vote at the Ariel special meeting. The complete text of the Needham & Company opinion, which sets forth the assumptions made, matters considered, limitations on and scope of the review undertaken by Needham & Company, is attached to this document as Appendix VII. The summary of the Needham & Company opinion set forth in this document is qualified in its entirety by reference to the Needham & Company opinion. You should read the Needham & Company opinion carefully and in its entirety for a description of the procedures followed, the factors considered, and the assumptions made by Needham & Company. In arriving at its opinion, Needham & Company, among other things: . reviewed a draft of the merger agreement dated March 28, 2001; . reviewed publicly available information concerning Ariel and other relevant financial and operating data of Ariel and MAYAN, including additional detail regarding financial statement line items for Ariel and historical financial statements of MAYAN, furnished to Needham & Company by Ariel and MAYAN; . held discussions with members of management of Ariel and MAYAN concerning the current and future business prospects of Ariel and MAYAN; . reviewed and discussed with the management of Ariel and MAYAN historical financial statements and financial forecasts and projections prepared by those respective management teams; . reviewed the historical stock prices and trading volumes of Ariel common stock; . compared publicly available financial data of companies whose securities are traded in the public markets and that Needham & Company deemed generally relevant to similar data for Ariel and MAYAN; . reviewed the financial terms of other business combinations that Needham & Company deemed generally relevant; and . performed and/or considered other studies, analyses, inquiries and investigations as Needham & Company deemed appropriate. 56
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In addition, Needham & Company held discussions with members of Ariel's management concerning Ariel's views as to: . the anticipated adverse effects on Ariel's business, assets, liabilities, operations and prospects that Ariel believes would occur if Ariel were not to enter into the merger agreement and the bridge loan; . the liquidity position of Ariel and its ability to continue as a going concern; . Ariel's anticipated inability to remedy its liquidity shortfall in a timely manner and the substantial risk of Ariel becoming insolvent and seeking the protection of state insolvency or federal bankruptcy law; . the anticipated substantial adverse effects on Ariel's stockholders and present and potential employees, business partners and lenders that would result from insolvency or concerns about the potential for it; and . the anticipated benefits that would arise from entering into the merger agreement and the bridge loan, including the substantial lessening of those liquidity and solvency concerns. Needham & Company assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by or discussed with it for purposes of rendering its opinion. Needham & Company assumed that the financial forecasts relating to Ariel and MAYAN and information relating to the joint prospects of the combined companies were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Ariel and MAYAN, at the time of preparation, of the future operating and financial performance of Ariel, MAYAN and the combined companies. Needham & Company assumed for purposes of its opinion that the aggregate number of shares of Ariel common stock used in calculating the exchange ratio and issuable to MAYAN securityholders, other than holders of MAYAN's convertible subordinated notes, will be no greater than 8,373,167, after giving effect to the one for 20 reverse stock split. Needham & Company did not assume any responsibility for or make or obtain any independent evaluation, appraisal or physical inspection of the assets or liabilities of Ariel or MAYAN. The Needham & Company opinion states that it was based on economic, monetary and market conditions existing as of its date. Needham & Company expressed no opinion as to what the value of Ariel common stock will be when issued to the stockholders of MAYAN pursuant to the merger or the prices at which Ariel common stock will actually trade at any time. In addition, Needham & Company was not asked to consider, and the Needham & Company opinion does not address: . Ariel's underlying business decisions to engage in the merger; . the relative merits of the merger as compared to any alternative business strategies that might exist for Ariel; or . the effect of any other transaction in which Ariel might engage. No limitations were imposed by Ariel on Needham & Company with respect to investigations made or procedures followed by Needham & Company in rendering its opinion. Based on this information, Needham & Company performed a variety of financial analyses of the merger and the merger consideration. The following paragraphs summarize the material financial analyses performed by Needham & Company in arriving at its opinion. Contribution Analysis. Needham & Company reviewed and analyzed the pro forma contribution of each of Ariel and MAYAN to pro forma combined balance sheet information as of December 31, 2000 and to pro forma projected calendar 2001 and 2002 operating results. Needham & Company reviewed, among other things, the pro forma contributions to revenues, net income, assets and stockholders' equity. This analysis indicated that Ariel would have contributed: . 79.7% of estimated calendar 2001 pro forma combined revenues, . 46.1% of estimated calendar 2002 pro forma combined revenues, 57
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. 7.7% of estimated calendar 2001 pro forma combined net loss, . 1% of pro forma combined cash as of December 31, 2000, . 9% of the pro forma combined total assets as of December 31, 2000, and . 24% of the pro forma combined stockholders' equity as of December 31, 2000. Based on the exchange ratio, Ariel's stockholders will own approximately 10% of Ariel after the merger. The results of the contribution analysis are not necessarily indicative of the contributions that the respective businesses may have in the future. Liquidation Value Analysis. Needham & Company conducted a liquidation value analysis to analyze possible scenarios if the merger was not consummated and additional sources of financing were not available to Ariel. Needham & Company's analysis reviewed the possible values of Ariel's net assets in a liquidation based upon three scenarios. These scenarios were based upon different assumptions with respect to, among other things, the following: the percentages of the book value of tangible assets on Ariel's December 31, 2000 audited balance sheet that may be realized upon a liquidation; and the values, based upon discussions with Ariel's management, estimated to be receivable upon liquidation for Ariel's intellectual property and other tangible assets. The results of this analysis showed that in one of the three scenarios, amounts received from the sale of Ariel's assets upon liquidation would be insufficient to cover the book value of liabilities as of December 31, 2000 by $240,000. In the second and third possible scenarios, the net value estimated to be realized upon liquidation of Ariel's assets, less its liabilities, was $2,227,000, or $0.17 per share, and $4,622,000, or $0.35 per share, respectively. Needham & Company noted Ariel management's assessment that Ariel's liquidity position coupled with its inability to raise financing other than the bridge loan from MAYAN raised substantial doubts as to Ariel's ability to continue as a going concern. Discounted Cash Flow Analysis. Needham & Company also analyzed MAYAN based on a discounted cash flow analysis of the estimated performance of MAYAN. For this purpose, Needham & Company used estimated consolidated income statements for MAYAN for the third and fourth quarters of 2001, calendar year 2002 and the first and second quarters of 2003 provided by MAYAN management and for the third and fourth quarters of 2003 prepared by Needham & Company with the assistance of Ariel and MAYAN management. The discounted cash flow analysis determined the estimated after-tax cash flows to be generated over the period commencing with the beginning of the third calendar quarter of 2001 and then added a terminal value based upon a range of earnings multiples of comparable optical networking companies. The after-tax cash flows and terminal values for MAYAN were discounted using a range of discount rates of 50% to 70%. The present value of cash flows of MAYAN was negative due to the operating losses estimated by management to occur through calendar 2002. Accordingly, the terminal value represented more than 100% of the present value of the MAYAN equity determined by the discounted cash flow analysis. The discounted cash flow analysis resulted in a range of discounted cash flow values for MAYAN from approximately $578.4 million to $844.1 million. These values represent between $3.44 to $5.02 per share issuable to MAYAN securityholders pursuant to the merger based upon the proposed exchange ratio. Accretion/Dilution Analysis. Needham & Company reviewed various pro forma financial impacts of the merger on the holders of Ariel common stock based on the proposed exchange ratio and estimated financial results, as adjusted to reflect the combined company's new Optical BypaSS7 product, and assuming projected general and administrative cost savings resulting from the merger of $1.0 million. Needham & Company noted that the merger could result in accretion to the estimated earnings per share of Ariel common stock for the fiscal year ending December 31, 2001 of approximately 11% and in dilution to the estimated earnings per share for the fiscal year ending December 31, 2002 of approximately 107%. The actual operating or financial results achieved by the combined entity may vary from projected results, and these variations may be material. 58
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Selected Transaction Analysis. Needham & Company also analyzed publicly available financial information for selected mergers and acquisitions of technology companies that represent transactions since November 1998 involving companies engaged in businesses that were deemed generally comparable to Ariel's business. In examining the selected transactions, Needham & Company analyzed: . the enterprise value as a multiple of net sales for the last twelve months, or LTM net sales; and . market value as a multiple of net income for the last twelve months. In some cases, complete financial data was not publicly available for the selected transactions and only partial information was used in those instances. Needham & Company also analyzed, for the selected transactions, the premium of consideration offered to the acquired company's stock price one day, one week and four weeks prior to the announcement of the transaction, as well as target company equity value to LTM net sales but determined that the results were not meaningful due to Ariel's liquidity position and general financial condition. Needham & Company noted that the selected transactions involved companies that did not have the severe lack of liquidity to which Ariel was subject. The transactions analyzed by Needham & Company were: [Download Table] Acquirer Target -------- ------ Avocent Corporation Equinox Systems, Inc. Intel Corporation Dialogic Corporation Cisco Systems, Inc. Summa Four, Inc. Needham & Company also reviewed information regarding the pending acquisition of Lan Media Corporation by SBE, Inc. but complete financial data was not publicly available. The following table sets forth information concerning the multiples of target company enterprise value to LTM net sales for the selected transactions. [Download Table] Selected Transactions --------------------- High Low Mean Median ---- ---- ---- ------ Target enterprise value to LTM net sales............. 2.9x 2.3x 2.6x 2.7x Applying the range of multiples for the selected transactions to corresponding financial data for Ariel resulted in a range of implied enterprise values for Ariel of $18.8 million to $23.1 million. Deducting approximately $2.0 million in debt resulted in a range of implied equity values for Ariel of $16.8 million to $21.1 million, or $1.28 to $1.61 per share. Needham & Company noted that the closing sale price per share for the Ariel common stock on March 27, 2001 was $1.25. Needham & Company placed relatively less emphasis on the "Accretion/Dilution Analysis" and the "Selected Transaction Analysis" due to Ariel's severe liquidity constraints and lack of alternatives within the time frame required to alleviate its cash shortfall. No company, transaction or business used in the "Selected Transaction Analysis" as a comparison is identical to Ariel, MAYAN or the merger. Accordingly, these analyses are not simply mathematical; rather, they involve complex considerations and judgments concerning differences in the financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the selected transactions and the companies involved in them or the transaction to which they are being compared. Other Analyses. In rendering its opinion, Needham & Company considered other analyses, including a history of trading prices and volumes for Ariel and an analysis of the stock price performance and selected financial and operating data of a group of publicly traded companies that Needham & Company deemed generally comparable to Ariel and MAYAN. Needham & Company primarily used the analysis of other companies to provide guidance in determining the earnings multiples used in the discounted cash flow analysis of MAYAN. Needham & Company reviewed the range of earnings multiples of companies that were deemed 59
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generally comparable to MAYAN and, after taking into consideration differences in the financial and operating characteristics of those companies, determined the ranges of earnings multiples used in the discounted cash flow analysis. The summary set forth above, while summarizing the material financial analyses performed by Needham & Company, does not purport to be a complete description of the analyses performed by Needham & Company in connection with the rendering of its opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, the fairness opinion is not readily susceptible to summary description. Further, Needham & Company did not assign relative weights to any of the analyses or factors considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Needham & Company believes that its analyses must be considered as a whole and that considering any portions of its analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Needham & Company made numerous assumptions with respect to industry performance, general business and economic and other matters, many of which are beyond the control of Ariel and MAYAN. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable. Additionally, analyses relating to the values of business or assets do not purport to be appraisals or necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. The Needham & Company opinion and Needham & Company's related analyses were only one of many factors considered by Ariel's board of directors in its evaluation of the proposed merger and should not be viewed as determinative of the view of Ariel's board of directors or management with respect to the exchange ratio or the proposed merger. Under the terms of the Needham & Company engagement letter, Ariel has paid or agreed to pay Needham & Company $150,000 for rendering the Needham & Company opinion. No portion of Needham & Company's fees are contingent on consummation of the merger. Ariel has also agreed to reimburse Needham & Company for its reasonable out-of-pocket expenses and to indemnify it against specified liabilities relating to or arising out of services performed by Needham & Company as financial advisor to Ariel. Needham & Company is a nationally recognized investment banking firm. As part of its investment banking services, Needham & Company is frequently engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. Needham & Company was retained by the Ariel board of directors to render an opinion as to the fairness, from a financial point of view, of the proposed exchange ratio to Ariel based on Needham & Company's experience as a financial advisor in mergers and acquisitions as well as Needham & Company's familiarity with technology companies and with Ariel. Needham & Company has in the past provided investment banking services to Ariel, for which it received fees. In the past two years, Needham & Company acted as a placement agent in connection with the February 2000 sale of Ariel common stock and warrants to purchase Ariel common stock, for which it received customary fees. As partial compensation for these services, Needham & Company received, and currently holds, a warrant to purchase 4,350 shares of Ariel common stock at an exercise price of $0.35 per share, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. In the normal course of business, Needham & Company may actively trade the equity securities of Ariel for its own account or for the account of its customers and, therefore, may at any time hold a long or short position in these securities. Recommendation of the MAYAN Board of Directors and MAYAN's Reasons for the Merger In addition to the anticipated joint benefits described above, the MAYAN board believes that additional reasons the merger will be beneficial to MAYAN and its shareholders include: . MAYAN will obtain the experience and expertise of engineers and design specialists to help advance MAYAN's business and technology; 60
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. the potential for the merger to increase the ability of each company to achieve profitability, as a result of product sales and distribution synergies and cross-selling opportunities, the opportunity to leverage the recurring maintenance revenues of the combined company and the opportunity to reduce overhead and other costs; . the opportunity to enhance relationships with technology partners and other strategic partners and to attract new partners; . the opportunity to increase the competitive position of the combined company by offering a broad product family to a large customer base and by combining the technology, sales and management resources of MAYAN and Ariel; . the ability of the combined company to offer complementary product lines, which presents the opportunity to increase the breadth of products offered and to be a single source provider of a range of complementary products and services; . the ability of the two companies to combine their technological resources to develop new products with increased functionality and bring them to market faster; . the availability to the combined company of greater resources for product marketing and distribution; . increased product diversification and penetration of each company's customer base; . similarities in corporate culture such as similar departmental set-ups, a similar knowledge base, and similar decision-making and execution styles, embracing creativity in employees; . MAYAN's belief that greater size and resources are increasingly required for companies to successfully compete in this industry; . MAYAN's belief that the Ariel common stock may be a currency which could be used to finance future acquisitions at a faster pace and at a less dilutive price than what MAYAN could do with its own stock on its own; . the difficulty of completing an initial public offering; . the merger will provide MAYAN shareholders with shares of Ariel common stock which are listed on the Nasdaq National Market in a tax-free exchange transaction; . the treatment of MAYAN's outstanding convertible subordinated promissory notes after the merger, including the convertibility of the notes into the common stock of Ariel; and . the lack of other suitable acquisition candidates. Messrs. Edrington, Gatti, Krausz, Mongiello and Morris, the disinterested members of MAYAN's board, reviewed a number of factors in evaluating the merger, including the following: . historical information and the views of MAYAN's management and financial advisers concerning the strengths and weaknesses of MAYAN and Ariel and the key attributes and opportunities of the combined company in terms of, among other things, products, sales, customers, management, and financial and competitive position; . MAYAN's management's view of the financial condition, results of operations and businesses of MAYAN and Ariel before and after giving effect to the merger and the board's determination of the merger's effect on shareholders, including financial condition, gross margins, product sales mix, backlog and pipelines, existing and potential clients, internal operating processes, the complementary nature of Ariel's market space to MAYAN's target customers and the combined product and services offered from both companies which would increase the combined company's customer base and range of products offered; 61
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. the financial condition and results of operations and prospects of MAYAN and Ariel in the absence of a business combination including MAYAN's and Ariel's lack of other suitable acquisition candidates, the uncertainty of the market environment for MAYAN's products and MAYAN's prospects for remaining independent; . the anticipated impact of the merger on MAYAN's customers, strategic partners and employees and their expected reaction to the announcement of the merger, including the potential loss of those customers, partners and employees as a result of the merger; . the uncertain current and prospective market environment for MAYAN's products and services; . the substantial charges and costs to be incurred in connection with the merger, including costs of integrating the businesses, which costs are currently undetermined, and transaction expenses arising from the merger, which are expected to be approximately $4.0 million; . the prospects of MAYAN independent of Ariel, including risks and potential rewards associated with remaining independent in the face of industry-wide consolidation; . possible alternative means of achieving the anticipated benefits of the merger, including the possibility of a combination with other companies and possible strategic alliances that would not involve a combination, and internal development of new products and services, including the feasibility of these alternatives, their potential timing and resource requirements; . the 90% ownership consideration in publicly tradeable securities that MAYAN shareholders will receive in the merger in light of comparable merger transactions where such ownership percentage may have been less; . the belief that the terms of the merger agreement and related agreements are reasonable; . MAYAN's management's view as to the integration of Ariel, including the potential cost of integration, the potential loss of employees as a result of the merger and the potential difficulties of integrating operations in multiple states and countries; . reports from MAYAN's management and advisors as to the results of their due diligence investigations of Ariel, which were favorable overall; . the treatment of the convertible notes in the merger; . the expectation that the merger would be accounted for as a purchase; and . the analyses and presentations prepared by Robertson Stephens and Robertson Stephens' written opinion to the effect that, as of March 28, 2001, and subject to the various considerations set forth in its opinion, the exchange ratio was fair from a financial point of view to the holders of MAYAN common stock. Messrs. Edrington, Gatti, Krausz, Mongiello and Morris, the disinterested members of MAYAN's board, also identified and considered a number of potentially negative factors in its deliberations concerning the merger including the following: . the risk that the potential benefits of the merger (including expected synergies and cost savings) may not be realized; . the need to achieve significant cost reductions in order for the combined company to realize the potential benefits of the merger and to become profitable, including reductions in operating costs and in the cost of goods sold; . the reduction of MAYAN's cash balances as a result of loans to Ariel under the bridge loan; . the risk that MAYAN and Ariel would not be able to integrate their respective products, technology and organizations; 62
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. the possibility that the merger may not be approved by the shareholders of one or both companies, or that even if it is approved, the merger may not be completed; . the risk that if the merger is not completed, MAYAN would have made loans to Ariel, and would have incurred other significant costs in contemplation of the merger, including approximately $4.0 million in expected transaction expenses, $3.7 million in bridge loans as of July 23, 2001, and potential opportunities that MAYAN may have foregone in contemplation of the Ariel transaction, and that these actions could weaken it as an independent company if the merger were not completed; . the impact of the merger on MAYAN's convertible promissory notes; . Ariel's cash position and lack of prospects to obtain funding; . the risk of management and employee disruption associated with the merger, including the risk that despite the efforts of the combined company, key technical, sales and management personnel might not remain employed by the combined company; . the challenges of integrating Ariel's operations in New Jersey, France and Germany with MAYAN's operations in California, Texas and Arizona and the related challenges of conducting multi-site operations in several states and countries; . the risk that the merger could adversely affect MAYAN's or Ariel's relationships with customers and strategic partners; and . the other applicable risks described in this document under the heading "Risk Factors--Risks Related to the Merger," beginning on page 18. Messrs. Edrington, Gatti, Krausz, Mongiello and Morris, the disinterested members of MAYAN's board, concluded, however, that, on balance, given the merger's potential benefits to MAYAN and its shareholders outweighed the associated risks. This discussion of the information and factors considered by the disinterested members of MAYAN's board is not exhaustive. In view of the variety of factors considered in connection with its evaluation of the merger, MAYAN's board did not find it practicable to, and did not quantify or otherwise assign relative weight to, the specific factors considered in reaching its determination. For the Reasons Discussed Above, the Disinterested Members of MAYAN'S Board of Directors Unanimously Have Approved the Merger Agreement and the Merger and Have Determined That the Merger is Advisable and in the Best Interests of MAYAN and its Shareholders and Unanimously Recommend That MAYAN Shareholders Vote For Approval of the Merger Agreement. Opinion of MAYAN's Financial Advisor Under a letter agreement dated March 13, 2001, MAYAN engaged Robertson Stephens to render an opinion as to the fairness of the exchange ratio, from a financial point of view, to the holders of MAYAN common stock. In connection with the evaluation and approval by the special committee of the merger agreement and the merger, Robertson Stephens delivered a written opinion, dated March 28, 2001, that as of that date and based on the matters considered and the limitations on the review undertaken described in the opinion, the exchange ratio was fair, from a financial point of view, to the holders of MAYAN common stock. Robertson Stephens has consented to the use of its opinion in this document, and the full text of this opinion is attached as Appendix VIII to this document. No limitations were imposed by MAYAN's board of directors or the special committee on Robertson Stephens with respect to the investigations made or procedures followed by it in furnishing its opinion. The exchange ratio was determined through negotiations between the managements of MAYAN and Ariel. Robertson Stephens was not asked by MAYAN to propose or recommend, and did not propose or recommend, any specific exchange ratio for the merger. 63
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You should consider the following when reading the discussion of the opinion of Robertson Stephens in this document: . We urge you to read carefully the entire opinion of Robertson Stephens, which is set forth in Appendix VIII to this document. . The following description of the Robertson Stephens opinion is qualified by reference to the full opinion attached as Appendix VIII to this document. The full opinion sets forth, among other things, the assumptions made by Robertson Stephens, the matters it considered and the limitations on the review undertaken. . The Robertson Stephens opinion was provided for the information of the special committee in connection with its evaluation of the merger. The Robertson Stephens opinion is not intended to be and does not constitute a recommendation to any shareholder of MAYAN as to how to vote, or take any other action, with respect to the merger. This opinion may not be summarized, described or referred to or furnished to any party except with Robertson Stephens' express prior written consent. . Robertson Stephens' opinion does not address the relative merits of the merger and the other business strategies that the special committee or the MAYAN board of directors has considered or may be considering, nor does it address the decision of the special committee or the MAYAN board of directors to proceed with the merger. It should be understood that subsequent developments may affect the conclusion expressed in the Robertson Stephens opinion and that Robertson Stephens disclaims any undertaking or obligation to advise any person of any change in any matter affecting its opinion which may come or be brought to its attention after the date of its opinion. Its opinion is limited to the fairness, from a financial point of view as of March 28, 2001, to the holders of MAYAN common stock, of the exchange ratio. In connection with the preparation of its opinion, Robertson Stephens has, among other things: . reviewed publicly available financial statements and other business and financial information of Ariel; . reviewed internal financial statements and other financial and operating data, including financial forecasts and other forward looking information, concerning (a) MAYAN prepared by the management of MAYAN and (b) Ariel prepared by the managements of Ariel and MAYAN, respectively; . held discussions with the respective managements of MAYAN and Ariel concerning the businesses, past and current operations, financial condition and future prospects of both MAYAN and Ariel, independently and combined, including discussions with the management of MAYAN and Ariel concerning their views regarding the strategic rationale for the merger; . reviewed the financial terms and conditions set forth in a draft, dated March 27, 2001, of the merger agreement; . reviewed the stock price and trading history of Ariel common stock; . compared the financial performance of MAYAN and Ariel and the prices and trading activity of Ariel common stock with that of other publicly traded companies comparable with MAYAN and Ariel, respectively; . compared the financial terms of the merger with the financial terms, to the extent publicly available, of other transactions that it deemed relevant; . reviewed the pro forma impact of the merger on MAYAN's revenue per share and cash earnings per share; . prepared an analysis of the relative contributions of MAYAN and Ariel to the combined company; and . made other studies and inquiries, and reviewed other data, as it deemed relevant. 64
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In its review and analysis, and in arriving at its opinion, Robertson Stephens assumed and relied upon the accuracy and completeness of all of the financial and other information provided to it, including information furnished to it orally or otherwise discussed with Robertson Stephens by the managements of MAYAN and Ariel, or publicly available and neither attempted to verify, nor assumed responsibility for verifying, any of that information. Robertson Stephens relied upon the assurances of the managements of MAYAN and Ariel that they were not aware of any facts that would make that information inaccurate or misleading. Furthermore, Robertson Stephens did not obtain or make, or assume any responsibility for obtaining or making, any independent evaluation or appraisal of the properties, assets or liabilities, contingent or otherwise, of MAYAN or Ariel, nor was Robertson Stephens furnished with any evaluation or appraisal of the properties, assets or liabilities, contingent or otherwise, of MAYAN or Ariel. With respect to the financial forecasts and projections, and the assumptions and bases on which they are founded, for Ariel and MAYAN, including projections with respect to operations of the combined companies following the merger, that Robertson Stephens reviewed, Robertson Stephens assumed that: . these forecasts and projections were reasonably prepared in good faith on the basis of reasonable assumptions; . these forecasts reflected the best currently available estimates and judgments of the managements of Ariel and MAYAN; . these forecasts reflected the best currently available estimates and judgments of the managements of Ariel and MAYAN as to the future financial condition and performance of MAYAN and Ariel; and . Robertson Stephens further assumed that the projections and forecasts would be realized in the amounts and in the time periods estimated. The Robertson Stephens opinion is based on market, economic and other conditions as they existed or were disclosed to Robertson Stephens and could be evaluated as of the date of the Robertson Stephens opinion and made available to Robertson Stephens on that date. In addition, Robertson Stephens assumed that: . the merger will be consummated upon the terms set forth in the draft agreement without material alteration, including, among other things, that the merger will be accounted for as a purchase business combination in accordance with U.S. generally accepted accounting principles; . the merger will be treated as a tax-free reorganization pursuant to the Internal Revenue Code of 1986, as amended; and . the historical financial statements of each of MAYAN and Ariel reviewed by Robertson Stephens have been prepared and fairly presented in accordance with U.S. generally accepted accounting principles consistently applied. Robertson Stephens expressed no opinion as to: . the value of any employee agreement or other arrangement entered into in connection with the merger; . any tax or other consequences that might result from the merger; or . what the value of Ariel common stock will be when issued to MAYAN's shareholders pursuant to the merger or the price at which the shares of Ariel common stock that are issued pursuant to the merger may be traded in the future. The Robertson Stephens opinion does not address the relative merits of the merger and the other business strategies that the special committee of the MAYAN board of directors has considered or may be considering, nor does it address the decision of the special committee to proceed with the merger. The following is a summary of the material financial analyses performed by Robertson Stephens in connection with rendering its opinion. The summary of the financial analyses is not a complete description of 65
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all of the analyses performed by Robertson Stephens. Certain of the information in this section is presented in tabular form. In order to understand better the financial analyses performed by Robertson Stephens, these tables must be read together with the text of each summary. The Robertson Stephens opinion is based on the totality of the various analyses that it performed, and no particular portion of the analyses has any merit standing alone. Comparable Company Analysis Using publicly available information, Robertson Stephens analyzed, among other things, the trading multiples of selected optical equipment companies, including: [Download Table] . Nortel Networks .ONI Systems . Alcatel--Alsthom .Sycamore Networks . Lucent Technologies .Corvis Corporation . Ciena .Redback Networks As set forth in the following table, applying a range of multiples for these companies to calendar year 2002 revenue estimates for MAYAN resulted in the following range of implied equity values for MAYAN: Implied MAYAN Equity Value (Dollar Amounts In Millions) [Download Table] Multiple Implied Revenue Range Equity Value ------- -------- ------------ 2002 2.3x-3.9x $111.2-$189.6 Also, using publicly available information, Robertson Stephens analyzed, among other things, the trading multiples of selected next generation access companies, including: [Download Table] . Netro Corporation .Digi International . Terayon .Paradyne . Copper Mountain .Tut Systems . Carrier Access .Com21 As set forth in the following table, applying a range of multiples for these companies to calendar year 2002 revenue estimates for Ariel resulted in the following range of implied equity values for Ariel: Implied Ariel Equity Value (Dollar Amounts In Millions) [Download Table] Implied Multiple Equity Revenue Range Value ------- -------- ------- 2002 0.3x-0.5x $11.8-$20.4 The above implied equity values for MAYAN and Ariel were used to compute a range of 1.5x to 4.5x for an implied exchange ratio as compared to the proposed exchange ratio of 3.333x. Selected Precedent Transaction Analysis Robertson Stephens analyzed the adjusted aggregate value paid or proposed to be paid in selected precedent transactions for next generation access companies, including: . Efficient Networks/Siemens 66
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. CommTech/ADC Telecommunications . Future Networks/Tellabs . Ramp Networks/Nokia . Accord Networks/Polycom . Woodwind Communications Systems/VINA Technologies . Multimedia Development Corp./Efficient . IPCell & Vovida Networks/Cisco Systems . Mariposa Technology/Marconi PLC . Broadband Access/ADC Telecom . Sonoma Systems/Nortel Networks . Millennia Systems/Carrier Access . Mainsail Networks/Terayon Communication . HyNEX Ltd./Cisco Systems . Network TeleSystems/Efficient . ACT Networks/Clarent . GVN Technologies/Advanced Fibre Communications . NetScreen Technologies /Efficient Networks . Ultracom Communications Holdings/Terayon . PairGain Technologies/ADC Telecommunications . Combox/Terayon . OnPrem/Copper Mountain . Promatory Communications/Nortel Networks . Teltrend/Westel Technologies . Siara Systems/Redback Networks . Flowpoint (Cabletron)/Efficient Networks . Premisys Communications/Zhone Technologies . Telegate Ltd./Terayon . Cocom A/S / Cisco Systems . Rooftop Communications/Nokia . Xedia/Lucent Technologies . Pathway/ADC Telecommunications . Rascom/Excel Switching Corp. . Assured Access/Alcatel . RELTEC Corp./GEC . Diamond Lane/Nokia 67
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Robertson Stephens compared, among other things, total adjusted enterprise value in these transactions as a multiple of LTM (last twelve months) and NTM (next twelve months) revenue and premium to market price of common stock one day before announcement. Applying these multiples to Ariel's LTM and NTM revenue, respectively, resulted in the following range of implied equity values. Implied Ariel Equity Value (Dollar Amounts in Millions) [Download Table] Multiple Implied Revenue Range Equity Value ------- --------- ------------ LTM Revenue......................................... 3.9x-6.5x $31.7-$ 53.6 NTM Revenue......................................... 2.9x-4.8x $74.6-$125.2 Robertson Stephens also analyzed the premium the day prior to announcement of the transaction in the precedent transactions. Implied Ariel Equity Value (Dollar Amounts in Millions) [Download Table] Premium Implied Stock Price Range Equity Value ----------- ------- ------------ 1 Day Prior (3/27/01)................................. 30%-50% $22.4-$25.9 The above implied equity values were used to compute a range of implied exchange ratios of 0.6x-1.7x for LTM Revenue Analysis, 0.2x-0.7x for NTM Revenue Analysis and 1.2x-2.3x for One Day Premium to Market Analysis as compared to the proposed exchange ratio of 3.333x. No company, transaction or business used in the comparable company analysis or the selected precedent transaction analysis is identical to MAYAN, Ariel or the merger. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors and trends that could affect the acquisition, public trading and other values of the comparable companies or the business segment, company or transactions to which they are compared. Contributions Analysis Robertson Stephens analyzed the respective contributions of Ariel and MAYAN to the estimated revenue and gross profit of the combined company for fiscal years 2002 and 2003. Also, Robertson Stephens analyzed the respective contributions of Ariel and MAYAN to the assets of the combined company as of June 30, 2001. The actual results achieved by the combined company may vary from projected results and the variations may be material. [Download Table] MAYAN's Ariel's Contribution Contribution to Combined to Combined Company's Company's Estimated Estimated Year Revenue Revenue ---- ------------ ------------ FY2002E.......................................... 37.9% 62.1% FY2003E.......................................... 64.9% 35.1% [Download Table] MAYAN's Ariel's Contribution Contribution to Combined to Combined Company's Company's Year Gross Profit Gross Profit ---- ------------ ------------ FY2002E.......................................... 35.3% 64.7% FY2003E.......................................... 67.8% 32.2% 68
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[Download Table] MAYAN's Ariel's Contribution Contribution to Combined to Combined Company's Company's At Assets Assets -- ------------ ------------ June 30, 2001.................................... 91.1% 8.9% While this summary describes the analysis and factors that Robertson Stephens deemed material in its presentation to the special committee, it is not a comprehensive description of all analyses and factors considered by Robertson Stephens. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Robertson Stephens did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Robertson Stephens believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying its opinion. Several analytical methodologies were employed and no one method of analysis should be regarded as critical to the overall conclusion reached by Robertson Stephens. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The conclusion reached by Robertson Stephens is based on all analyses and factors taken as a whole and also on application of Robertson Stephens' own experience and judgment. This conclusion may involve significant elements of subjective judgment and qualitative analysis. Robertson Stephens therefore gives no opinion as to the value or merit standing alone of any one or more parts of the analysis it performed. In performing its analyses, Robertson Stephens made numerous assumptions with respect to industry performance, general business and other conditions and matters, and industry and transaction trends, many of which are beyond the control of MAYAN or Robertson Stephens. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by these analyses. Accordingly, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which these businesses actually may be sold in the future, and these estimates are inherently subject to uncertainty. Furthermore, no opinion is being expressed as to the prices at which shares of MAYAN's or Ariel's common stock may be traded at any future time. MAYAN engaged Robertson Stephens under a letter agreement dated March 13, 2001. The agreement provides that, for its services, Robertson Stephens is entitled to receive a fee, which was payable upon the delivery of its opinion and an additional fee contingent upon consummation of the merger totaling approximately $3,300,000. In addition, MAYAN has agreed to indemnify Robertson Stephens for certain liabilities that may arise out of the engagement. The terms of the fee arrangement with Robertson Stephens were negotiated at arm's- length between MAYAN and Robertson Stephens, and the special committee and the MAYAN board of directors was aware of these fee arrangements. Robertson Stephens was retained based on Robertson Stephens' experience in connection with mergers and acquisitions and in securities valuations generally, as well as Robertson Stephens' investment banking relationship and familiarity with MAYAN. Robertson Stephens may in the future provide investment banking or other financial advisory services to MAYAN or Ariel. In the ordinary course of business, Robertson Stephens acts as a market maker and broker in the publicly traded securities of MAYAN and Ariel and receives customary compensation in connection therewith. In the ordinary course of business, Robertson Stephens actively trades in the equity and derivative securities of MAYAN and Ariel for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in those securities. Robertson Stephens acted as the placement agent for MAYAN's sale of $75,000,000 of convertible subordinated securities on October 20, 2000. Pursuant to Robertson Stephens' role as placement agent and market maker in those securities, as of the date of the opinion, Robertson Stephens held a portion of those securities worth approximately $5,000,000. 69
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Robertson Stephens is an internationally recognized investment banking firm. As part of its investment banking business, Robertson Stephens is frequently engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. Interests of MAYAN's Management in the Merger and Potential Conflicts of Interest Esmond Goei, Chief Executive Officer and director of MAYAN, who is also currently serving as Vice-Chairman of Ariel's board of directors, beneficially owns, or has the right to acquire, 3,250 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, and 1,835,670 shares of MAYAN capital stock. Mr. Goei has abstained from voting on all proposals with respect to the merger. As of June 30, 2001, the executive officers and directors of MAYAN and their affiliates collectively beneficially owned an aggregate of 3,520,500 shares of MAYAN common stock and 20,015,143 shares of MAYAN preferred stock. Additionally, as of June 30, 2001, the executive officers and directors of MAYAN held options to purchase an aggregate of 2,303,170 shares of MAYAN common stock. Upon consummation of the merger, it is anticipated that the directors and officers of MAYAN and their affiliates will beneficially own approximately 14.35% of the then outstanding shares of Ariel common stock, calculated on the basis set forth under the heading "Principal Shareholders of MAYAN," assuming that all options and warrants to purchase MAYAN common stock and all options and warrants to purchase Ariel common stock are exercised and excluding shares of common stock issuable upon the conversion of $75,000,000 in convertible promissory notes issued by MAYAN which may convert to Ariel common stock following the merger. See "Principal Shareholders of MAYAN" for a description of the outstanding MAYAN stock options that will become Ariel stock options upon consummation of the merger. The merger agreement provides that Esmond Goei and John Tingleff, Chief Financial Officer of MAYAN, will be appointed as Chief Executive Officer and Chief Financial Officer, respectively, of Ariel following the merger, and will be entitled to serve in those offices from the effective time of the merger until their successors shall be duly appointed and qualified. The merger agreement also provides that Esmond Goei, Thomas Edrington, Steven Krausz, Jim Mongiello and Peter Morris, all members of the board of directors of MAYAN, will be elected to Ariel's board of directors following the merger, and will be entitled to serve from the effective time of the merger until their successors shall be duly elected and qualified. Ariel has agreed to indemnify present and former officers and directors of MAYAN against any costs or expenses, judgments, fines, losses, claims, damages or liabilities arising out of or pertaining to matters relating to their service as an officer or director existing or occurring at or prior to the effective time (including, without limitation, the transactions contemplated by the merger agreement) whether asserted or claimed prior to, at or after the effective time, to the fullest extent that MAYAN would have been permitted under applicable law and its articles of incorporation and bylaws. The merger agreement provides that all rights to indemnification for present and former officers and directors of MAYAN shall survive the merger and continue in full force and effect for a period of not less than six years from the effective time. Ariel also has agreed to maintain insurance for MAYAN's directors and officers equivalent to MAYAN's current directors' and officers' liability insurance for not less than six years after the effective time, subject to limitations. As a result of the foregoing, the directors and executive officers of MAYAN may be more likely to approve the merger than MAYAN shareholders generally. Interests of Ariel's Management in the Merger and Potential Conflicts of Interest As a condition to completion of the merger, executive officers and key employees of Ariel are required to sign employment agreements with the combined company, effective only upon completion of the merger, that 70
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include compensation and proposed options to purchase shares of Ariel common stock. Under the employment agreements, the executive officers and key employees agree to waive acceleration benefits with respect to options held pursuant to their prior employment or severance agreements or pursuant to the 1995 Stock Option Plan with Ariel and refrain from competing with the combined company for a period of one year following termination of employment, and will, upon termination without cause, receive 3 to 6 months of severance pay as well as an additional one to two years of vesting of the shares of Ariel common stock issuable upon exercise of Ariel stock options, based upon the date of the termination. As of June 30, 2001, these executive officers and key employees held 85,833 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, which represents approximately 12.01% of the outstanding shares of Ariel common stock. Additionally, Dennis Schneider, President, Chief Executive Officer and director of Ariel, has agreed to enter into an employment agreement with the combined company pursuant to which Mr. Schneider will become the Senior Vice President of Marketing of the combined company following the merger. Under Mr. Schneider's employment agreement, Mr. Schneider agrees to waive the acceleration benefits on his stock options (with respect to this merger only) under his existing employment agreement with Ariel and refrain from competing with the combined company for a period of one year following termination of employment. Additionally, upon an involuntary termination without cause, Mr. Schneider will receive 6 months of severance pay. The Merger MAYAN will merge with and into Ariel following: . the approval of each of the proposals submitted at the Ariel special meeting; and . the satisfaction or waiver of the other conditions to the merger. Ariel will be the surviving corporation following the merger and Ariel's name will be changed to MAYAN Networks Corporation. This surviving corporation will combine all of the assets and liabilities of MAYAN with all the assets and liabilities of Ariel. Additionally, the MAYAN shareholders, option holders and warrant holders will own approximately 90% of the issued and outstanding equity securities of the combined company, excluding shares of common stock issuable upon the conversion of $75,000,000 in convertible promissory notes issued by MAYAN which may convert to Ariel common stock following the merger pursuant to the terms of the convertible promissory notes and related indenture. Ariel stockholders, option holders and warrant holders, assuming all outstanding options and warrants are exercised, will retain control of approximately 10% of the combined company. The merger will be accounted for under the purchase method. Because MAYAN will own approximately 90% of the common stock of Ariel (on a diluted basis) after the merger, the merger will be accounted for as a reverse acquisition which results in MAYAN being the acquirer of Ariel for accounting purposes. Closing At the closing of the merger, the parties will cause the merger to become effective by filing a certificate of merger with the Secretary of State of the State of Delaware and an agreement of merger with the Secretary of the State of California. Ariel and MAYAN are working toward completing the merger as soon as possible and hope to complete the merger by the third calendar quarter of 2001. Because the merger is subject to a number of conditions, however, we cannot predict the exact timing. Ariel Name Change The Ariel board has also determined that because of the MAYAN name and brand and product marketing, it is in the best interest of the combined company that its name be changed from Ariel to "MAYAN Networks Corporation." If Ariel's stockholders approve the merger agreement and the merger is effected, Ariel's name will automatically be changed to "MAYAN Networks Corporation." 71
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Conversion of MAYAN Stock in the Merger At the effective time, each issued and outstanding shares of MAYAN common stock, other than shares held in the treasury of MAYAN, will be converted into shares of Ariel common stock in accordance with the formula described below. MAYAN shareholders will also receive cash, without interest, for any fractional shares of Ariel common stock they would otherwise receive in the merger. For purposes of the information in this document, we have assumed that the holders of MAYAN Series A, B, C and D preferred stock will vote in favor of voluntary conversion of their shares into MAYAN common stock immediately prior to the effectiveness of the merger pursuant to Article III, Section B(4)(b)(ii) of MAYAN's Amended and Restated Articles of Incorporation, pursuant to which each series of MAYAN preferred stock will automatically convert into common stock if holders of at least a majority of each series consent to the conversion. It is a condition to the obligations of MAYAN at the closing that the conversion of preferred stock occur immediately prior to the closing. At the effective time of the merger, the MAYAN shareholders will be entitled to receive that number of shares of Ariel common stock equal to: (i) approximately 8,373,167 shares of Ariel common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, which number will be increased in the event that Ariel's third party expenses in connection with the merger, which total approximately $360,000 as of June 30, 2001, exceed $750,000 and proportionately adjusted as appropriate for any other stock split, stock dividend or similar event with respect to MAYAN common stock or Ariel common stock effected between the date of this document and the completion of the merger, divided by (ii) the aggregate number of shares of MAYAN common stock which are outstanding immediately prior to the effective time (including all shares of MAYAN common stock issued or issuable upon conversion of all shares of MAYAN preferred stock and upon exercise, conversion or exchange in full or all unvested and vested MAYAN stock options and MAYAN warrants which remain outstanding and are not exercised, converted, exchanged or expired as of the effective time, excluding the outstanding convertible subordinated promissory notes). As of March 28, 2001, the date of the signing of the merger agreement, the aggregate number of shares of MAYAN common stock and preferred stock outstanding (including all shares of MAYAN common stock issued or issuable upon conversion of all shares of MAYAN preferred stock and upon exercise, conversion or exchange in full of all unvested and vested MAYAN stock options and MAYAN warrants which remain outstanding and are not exercised, converted, exchanged or expired as of the effective time, excluding the outstanding convertible subordinated promissory notes), equaled approximately 50,844,989 shares. If, prior to the effective time of the merger, the outstanding shares of Ariel common stock are changed into or exchanged for a different number of shares or a different class as a result of any other stock split, combination, reclassification or dividend, the nature of the consideration to be received by the holders of MAYAN capital stock and the exchange ratios will be appropriately and proportionately adjusted. MAYAN Stock Options and Warrants At the effective time, each outstanding option to purchase shares of MAYAN common stock issued under MAYAN's 1998 Employee Stock Option/Stock Purchase Plan, and all other options to purchase MAYAN's common stock and warrants to purchase MAYAN's common stock as of the date of the merger will be assumed by Ariel, regardless of whether the options and warrants are then exercisable, and converted into options and warrants to purchase Ariel common stock. Each assumed MAYAN stock option and warrant will constitute an option or warrant to acquire, on the same terms and conditions that were applicable to the option immediately prior to the effective time, that number of shares of Ariel common stock equal to the number of shares of 72
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MAYAN common stock purchasable pursuant to that option or warrant multiplied by the common stock exchange ratio as described above and rounding any fractional share down to the nearest whole number, at a price per share, rounded up if necessary to the next whole cent, equal to the aggregate exercise price for the shares of MAYAN common stock purchasable pursuant to that MAYAN stock option or warrant immediately prior to the effective time divided by the number of full shares of Ariel common stock deemed purchasable pursuant to that MAYAN stock option or warrant in accordance with the foregoing. The duration and other terms of that Ariel option or warrant, including the vesting schedule, will be the same as the prior MAYAN stock option or warrant. The parties intend for the MAYAN stock options assumed by Ariel to qualify as incentive stock options to the extent the stock options qualified as incentive stock options prior to the effective time. MAYAN Convertible Subordinated Promissory Notes and Exchange Offer On May 22, 2001 MAYAN commenced an offering of up to $50.0 million in aggregate principal amount of new 7 7/8% Convertible Subordinated Notes due 2005, for up to $75.0 million in aggregate principal amount of 5 1/4% Convertible Subordinated Notes due 2005, or existing notes, to holders of record as of May 21, 2001, which consists of approximately 15 holders who MAYAN understands are qualified institutional buyers. The offer will remain open until June 21, 2001, unless extended by MAYAN. MAYAN is offering to exchange $2,000 in principal amount of exchange notes for each $3,000 in principal amount of existing notes. Holders may tender all, some or none of their existing notes. The exchange notes will be convertible at any time prior to maturity. Before the closing of the merger with Ariel (or alternative mergers), the exchange notes will be convertible into shares of MAYAN's common stock at an initial conversion price of $5.00 per share of MAYAN common stock, subject to adjustments. If the merger with Ariel closes, the outstanding exchange notes will, upon such closing, become convertible at any time thereafter into shares of Ariel common stock at an initial conversion price per share equal to $1.60 multiplied by a fraction in inverse proportion to the proportion of the reduction in the number of shares of Ariel common stock resulting from the reverse stock split in Ariel shares provided for in the merger agreement, subject to adjustments. The conversion price will be adjusted in the event of any of the following: (1) MAYAN dividends or distributes to all of the holders of common stock shares of its common stock; (2) MAYAN subdivides or combines its common stock; (3) MAYAN issues rights or warrants to all holders of its common stock to purchase common stock at less than the current market price; (4) MAYAN dividends or distributes to all holders of its common stock capital stock or evidences of indebtedness or assets, but excluding: . dividends, distributions and rights or warrants referred to in (1), (2) and (3) above; or . dividends and distributions paid exclusively in cash referred to in (5) below; (5) MAYAN makes a dividend or distribution to all holders of its common stock consisting exclusively of cash if the aggregate amount of these distributions combined together with (A) all other all-cash distributions made within the preceding 12 months for which MAYAN made no adjustment to the conversion price, plus (B) any cash and the fair market value of other consideration payable in any tender offers by MAYAN or any of MAYAN's subsidiaries for common stock concluded within the preceding 12 months in respect for which MAYAN made no adjustment, exceeds 10% of MAYAN's market capitalization (as determined in the exchange notes indenture); (6) the purchase of common stock pursuant to a tender offer made by MAYAN or any of its subsidiaries which involves an aggregate consideration that, together with (A) any cash and the fair market value of any other consideration payable in any other tender offer by MAYAN or any of its subsidiaries 73
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for common stock expiring within the 12 months preceding such tender offer, plus (B) the aggregate amount of any such all-cash distributions referred to in (5) above to all holders of common stock within the 12 months preceding the expiration of the tender offer for which MAYAN has made no adjustment to the conversion price, exceeds 10% of MAYAN's market capitalization (as determined in the exchange notes indenture) on the expiration of such tender offer; or (7) payment on tender offers or exchange offers by a third party other than MAYAN or its subsidiaries if, as of the closing date of the offer, MAYAN's board of directors does not recommend rejection of the offer. MAYAN will only make this adjustment if a tender offer increases the person's ownership to more than 25% of MAYAN's outstanding common stock and the payment per share is greater than the current market price of the common stock. MAYAN is permitted to reduce the conversion price of the exchange notes for limited periods of time, if MAYAN's board of directors deems it advisable. Any such reduction shall be effective for not less than 20 days. MAYAN is required to give at least 15 days prior notice of any such reduction. MAYAN may also reduce the conversion price to avoid or diminish income tax to holders of MAYAN's common stock in connection with a dividend or distribution of stock or similar event. If MAYAN has not, on or before December 31, 2001, closed the merger with Ariel (or an alternative transaction), then holders will have the right to exercise, at their option, an election under the exchange notes indenture to have their exchange notes, effective as of January 31, 2002, automatically convert into notes governed by alternative terms provided for under the exchange notes indenture that are substantially the same as the terms applicable to the existing notes. These alternative terms will provide for payment of unpaid interest on the conversion date accrued to such date at 7 7/8% per year and for interest thereafter to accrue at 5 1/4% per year and will also provide for the principal amount of the converted exchange notes to be deemed to increase, effective as of the conversion date, to $3,000 per $2,000 in face amount of converted exchange notes. If the event of a (i) change in control of Ariel after the merger with MAYAN or (ii) a delisting of Ariel's common stock (after the merger with MAYAN), the holders of the exchange notes may require Ariel after the merger with MAYAN to repurchase the exchange notes at 105% of the principal amount plus accrued and unpaid interest. In addition, prior to the earlier of (i) 90 days following the effective date of a shelf registration statement covering a resale of the exchange notes and common stock into which the exchange notes are convertible following the merger with Ariel, (ii) the closing of an alternative merger or (iii) January 10, 2002, if at the close of business on December 31, 2001 MAYAN has not closed the merger with Ariel, the holders of the exchange notes may require the repurchase of the exchange notes at 37.5% of the principal amount plus accrued and unpaid interest. This repurchase option could require MAYAN, or Ariel after the merger with MAYAN, to make a cash payment of up to approximately $18,750,000 to repay the exchange notes and will result in the exchange notes being classified as a current liability on MAYAN's balance sheet (or Ariel's balance sheet after the merger with MAYAN) until this repurchase option expires. The Exchange Agent As of the effective time, Ariel is required to deposit with a bank or trust company certificates representing the shares of Ariel common stock to be exchanged for shares of MAYAN common stock and cash to pay for any dividends or distributions that holders of MAYAN common stock may be entitled to receive under the merger agreement. Exchange of MAYAN Stock Certificates for Ariel Stock Certificates Promptly after the effective time, the exchange agent will mail to MAYAN shareholders a letter of transmittal and instructions for surrendering their MAYAN stock certificates in exchange for Ariel stock certificates. 74
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MAYAN shareholders should not submit their stock certificates for exchange until they have received the letter of transmittal and instructions referred to above. Transfer of Ownership; Distributions with Respect to Unexchanged Shares Ariel will issue an Ariel stock certificate in a name other than the name registered for the surrendered MAYAN stock certificate only if the exchange agent is given all documents required . to show and effect the unrecorded transfer of ownership; and . to show that any applicable stock transfer taxes have been paid. If there is any dividend or other distribution on Ariel common stock with a record date after the merger, former MAYAN shareholders will receive, only following surrender of their MAYAN stock certificates, the dividend or other distribution payable with respect to the whole shares of Ariel common stock issued in exchange for their MAYAN stock certificates. Representations and Warranties MAYAN and Ariel each made a number of representations and warranties in the merger agreement about their authority to enter into the merger agreement and to consummate the other transactions contemplated by the merger agreement and about aspects of their business, financial condition, structure and other facts pertinent to the merger. MAYAN made representations addressing the following topics: . MAYAN's organization, qualification to do business and good standing; . MAYAN's capitalization; . the effect of the merger agreement and the merger on obligations of MAYAN; . inapplicability of governmental consents and approvals in connection with the merger; . MAYAN's financial statements and the absence of undisclosed liabilities; . litigation involving MAYAN; . tax matters regarding the merger; . MAYAN's affiliates; and . the registration statement and joint proxy/prospectus. Ariel's representations and warranties addressed, among other things, the following topics: . Ariel's organization, qualification to do business and good standing; . Ariel's capitalization; . the effect of the merger agreement and the merger on obligations of Ariel; . inapplicability of governmental consents and approvals in connection with the merger; . Ariel's filings and reports with the Securities and Exchange Commission; . Ariel's financial statements and the absence of undisclosed liabilities; . changes in Ariel's business since December 31, 2000; . matters relating to Ariel's employees and employee benefit plans; . Ariel's material contracts and obligations; 75
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. litigation involving Ariel; . environmental laws that apply to Ariel; . tax matters regarding the merger; . intellectual property used or owned by Ariel; . Ariel's insurance; . Ariel's properties; . Ariel's current rights plan; . Ariel's business practices; . Ariel's books and records; . the delivery of a fairness opinion from Ariel's financial advisor; . Ariel's affiliates; and . the registration statement and joint proxy/prospectus. The representations and warranties in the merger agreement are complicated and not easily summarized. We urge stockholders to read carefully the articles in the merger agreement entitled "Representations and Warranties of MAYAN" and "Representations and Warranties of Ariel." Ariel's and MAYAN's Conduct of Business Before Completion of the Merger Ariel has agreed that, until the completion of the merger or unless MAYAN consents in writing, Ariel and its subsidiaries will conduct their businesses in the ordinary course of business consistent with past practices and shall use reasonable efforts: . to keep available the services of their current officers, significant employees and consultants; and . to preserve their relationships with corporate partners, customers, suppliers and other persons with which they have business relations in order to preserve substantially intact their business organization. Ariel has also agreed that, until the completion of the merger or unless MAYAN consents in writing, Ariel and its subsidiaries will not engage in any of the following: . modification of Ariel's certificate of incorporation or bylaws; . issuance, sale, pledge, disposition of, grant, transfer, lease, license, guarantee or encumbrance of shares of Ariel capital stock or securities convertible into Ariel capital stock, except for limited issuances of securities in connection with the exercise of outstanding stock options; . issuance, sale, pledge, disposition of, grant, transfer, lease, license, guarantee or encumbrance of any material properties or assets of Ariel or any Ariel subsidiaries, except for dispositions of inventory in the ordinary course of business or consistent with past practice; . acquisition of interests in other entities; . incurrence of any indebtedness for borrowed money or issuance of any debt securities; . material modification or termination of material contracts, except in the ordinary course of business; . making of or authorizing any new capital expenditures, or entering into any agreements providing for capital expenditures; . declaration, setting aside or issuance of dividends or other distributions; 76
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. redemption, purchase or other acquisition, directly or indirectly, of any shares of Ariel capital stock except repurchases of unvested shares at cost in connection with the termination of the employment relationship with any employee pursuant to stock option or purchase agreements; . modification of exercisability of any stock options or authorization of cash payments in exchange for stock options except as otherwise required under any stock plan; . amendment of the terms of any of Ariel's securities or any securities of any Ariel subsidiary; . increase of compensation payable to directors, officers, consultants or employees; . granting of any additional severance arrangements or entering into of any additional agreements, which provide benefits upon a change in control of Ariel that would be triggered by the merger, with any director, officer, consultant or other employee; . entering into any collective bargaining agreement; . payment, discharge or satisfaction of any claims, liabilities or other indebtedness other than in the ordinary course consistent with past practice or under certain other circumstances; . making of any material changes with respect to Ariel's accounting policies, principles, methods or procedures; . making of material tax elections or settlements or compromises of any material tax liability; and . authorizing or entering into any formal or informal agreement or otherwise making any commitment to do any of the foregoing or to take any action which would make any of the representations or warranties of Ariel contained in the merger agreement untrue or incorrect or prevent Ariel from performing or causing Ariel not to perform its covenants thereunder or result in any of the conditions to the merger not being satisfied. MAYAN has agreed that, until the completion of the merger or unless Ariel consents in writing, MAYAN will not engage in any of the following: . sale, pledge, disposition of, transfer or encumbrance of any material properties or assets of MAYAN except in the ordinary course of business; and . authorizing or entering into any formal or informal agreement or otherwise making any commitment to do any of the foregoing or to take any action which would make any of the representations or warranties of MAYAN contained in the merger agreement untrue or incorrect or prevent MAYAN from performing or causing MAYAN not to perform its covenants thereunder or result in any of the conditions to the merger not being satisfied. Each of Ariel and MAYAN has also agreed: . to notify the other promptly of certain events; . to provide reasonable access to the other to its facilities and records; and . to make all necessary filings and obtain any consents and approvals as may be required in connection with the merger agreement and the merger. Additionally, Ariel has agreed to provide MAYAN copies of (i) its audited financial statements at and for the year ended December 31, 2000 and (ii) its filings with the Securities Exchange Commission, and MAYAN has agreed to provide Ariel copies of any reports it provides to its noteholders. The agreements related to the conduct of each of Ariel's and MAYAN's businesses in the merger agreement are complicated and not easily summarized. We urge stockholders to carefully read the article in the merger agreement entitled "Conduct of Business." 77
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No Solicitation of Transactions Until the merger is completed or the merger agreement is terminated, Ariel has agreed not to take any of the following actions, directly or indirectly: . solicit, initiate, encourage or induce the making, submission or announcement of any "Acquisition Proposal" or take any action that would, individually or in the aggregate, reasonably be expected to lead to an "Acquisition Proposal," by a third party; . furnish any information regarding Ariel or any Ariel subsidiaries to any person in connection with or in response to an "Acquisition Proposal" or an inquiry or indication of interest that could lead to an "Acquisition Proposal," by a third party; . engage in discussions with any person with respect to any "Acquisition Proposal;" . approve, endorse or recommend any "Acquisition Proposal;" or . enter into any letter of intent or similar document or any contract contemplating or otherwise relating to any "Acquisition Proposal." An "Acquisition Proposal" is an offer or proposal for: . a merger, consolidation, share exchange, business combination or similar transaction involving Ariel; . a sale, lease, exchange, transfer or other disposition of 15% or more of the assets of Ariel or any Ariel subsidiary, or the sale, lease, exchange, transfer or other disposition of any of Ariel's assets or any assets of any Ariel subsidiary, the absence of which would materially diminish the value of the merger to MAYAN or the benefits expected by MAYAN to be realized from the merger; . a tender offer or exchange offer for 15% or more of Ariel's outstanding voting securities or the voting securities of any Ariel subsidiary or the filing of a registration statement under the Securities Act; . the acquisition of 15% or more of Ariel's outstanding voting securities or the voting securities of any Ariel subsidiary; . a solicitation in opposition to the approval of the merger agreement by the Ariel stockholders; or . a public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. The Ariel board is not prohibited, however, from complying with Rules 14d-9 and 14e-2 under the Securities Exchange Act of 1934, with respect to a tender or exchange offer. In addition, Ariel may provide information in connection with and engage in discussions with a third party regarding an acquisition proposal, if, among other things: . neither Ariel nor its representatives violated the merger agreement with respect to the acquisition proposal; . the acquisition proposal constitutes an "Ariel Superior Proposal;" . the board of directors of Ariel concludes in good faith, after consultation with Ariel's outside legal counsel, that failure to take that action would be inconsistent with the fiduciary obligations of the Ariel board to the Ariel stockholders under applicable law; . Ariel gives MAYAN at least 24 hours prior written notice of the identity of the person making the acquisition proposal and Ariel's intention to provide information or engage in discussions with that person, and Ariel receives a signed confidentiality agreement from the person making the acquisition proposal governing the use and disclosure of the information; and . Ariel provides MAYAN the same information prior to providing the information to the person making the acquisition proposal. 78
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An "Ariel Superior Proposal" is an unsolicited, written proposal that the board of directors of Ariel has received relating to: . a merger, consolidation, dissolution or similar transaction involving Ariel where the stockholders of Ariel immediately prior to the transaction hold less than 50% of the equity interest in the surviving or resulting entity of that transaction; . a sale or other disposition of all or substantially all of Ariel's assets; or . the acquisition of 50% or more of Ariel's outstanding voting securities; in each case on terms that, the board of directors of Ariel determines in good faith, after considering the advice of an investment bank of nationally recognized reputation, are more favorable to Ariel and its stockholders than the merger with MAYAN, so long as any financing required to consummate the transaction contemplated by the proposal is committed or is otherwise reasonably likely to be obtained by the person making the proposal on a timely basis. MAYAN is not subject to any non-solicitation covenants under the merger agreement but must use reasonable efforts to close the transaction. Conditions to Completing the Merger Ariel's and MAYAN's respective obligations to complete the merger and the related transactions are subject to approval of the merger by MAYAN's shareholders and the approval of the merger agreement by Ariel's stockholders, as well as the prior satisfaction or waiver (if permitted by applicable law) of each of the following conditions before completion of the merger: . the registration statement relating to the issuance of shares of Ariel common stock as contemplated by the merger agreement must be declared effective by the SEC and must not be the subject of any stop order or proceedings seeking a stop order; . no order, statute, writ, injunction or decree prohibits or prevents completion of the merger; . all consents, approvals and authorization legally required to consummate the merger must have been obtained from all governmental entities, except where no material adverse effect could reasonably be expected to occur; . no action or proceeding before any court or governmental agency is threatened, instituted or pending challenging, seeking to make illegal, invalidate, render unenforceable, delay or otherwise restrain or prohibit the consummation of the merger or the actions contemplated thereby, or otherwise relating to and materially adversely affecting the merger; . Ariel and MAYAN must have entered into, executed and delivered all documents necessary in order to comply with the terms of the convertible promissory notes due 2005 and any exchange offer made in connection therewith; and . the shares of Ariel common stock to be issued in connection with the merger must be authorized for listing on the Nasdaq National Market. MAYAN's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . Ariel's representations and warranties must be accurate in all material respects when made and as of the completion of the merger, and MAYAN shall have received from Ariel an officer's certificate to that effect; 79
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. Ariel must have performed or complied in all material respects with all of its covenants in the merger agreement, and MAYAN shall have received from Ariel an officer's certificate to that effect; . MAYAN shall have received a certificate from Ariel's secretary to the effect that all corporate resolutions approving the merger, the amendment to Ariel's certificate of incorporation providing for the authorization of additional shares of Ariel common stock and the reverse stock split and the adoption of the 2001 Stock Incentive Plan were duly adopted and attaching those resolutions and a copy of the amended certificate of incorporation certified by the Delaware Secretary of State; . MAYAN must have obtained the opinion of its tax counsel to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; and . the common stock of the combined company following the merger must qualify for listing on the Nasdaq National Market; . the reverse split of Ariel's common stock must be effective immediately prior to the merger; . each share of MAYAN preferred stock outstanding immediately prior to the merger must have been converted into shares of MAYAN common stock; . the Amended and Restated Investors' Rights Agreement dated as of November 1, 1999, the Amended and Restated Right of First Refusal and Co-Sale Agreement dated as of October 21,1999 and the Amended and Restated Voting Agreement dated as of October 21, 1999, all of which are between MAYAN and some of MAYAN's shareholders, must be terminated; . all consents or approvals required in connection with the merger under any of Ariel's material contracts must have been obtained from all third parties, except where no material adverse effect could reasonably be expected to occur as a result; . each of the current officers and directors of Ariel must have resigned from his or her officer or director position, as the case may be, at Ariel, except for Anthony Agnello and Esmond Goei, who shall remain on the board of directors of the combined company; . the Ariel board of directors and the Ariel stockholders must have approved the adoption of the 2001 Stock Incentive Plan; . each of the optionees of Ariel who are entitled to accelerated vesting as a result of the merger must have waived the acceleration of vesting with respect to his or her options; . Ariel must have filed, if necessary, a registration statement with the SEC, which shall have been declared effective, covering the resale of the convertible subordinated promissory notes, the notes issuable upon exchange of the convertible subordinated promissory notes and the shares of Ariel common stock issuable upon conversion of those notes; . Ariel must have maintained officers' and directors' liability insurance policies in amounts and with coverages equivalent to those in effect at the time of signing of the merger agreement; . no event, change, condition or effect that is materially adverse to Ariel must have occurred; . each of Carlos Borgialli, Gene Corrado, David During, Don Elwell, Richard Flocco, Nathan Guedalia, Ken Kristiansen, Jack Loprete, Bonne Mullen, Aziz Mzili, Arthur Naseef and Johnny Vieira, employees of Ariel, must have entered into an employment agreement with the combined company; . each of the officers and directors of Ariel must have executed market standoff agreements agreeing to refrain from selling, transferring or otherwise disposing of shares of Ariel common stock to be held by them following the merger for one year after the merger; and . MAYAN must have obtained a legal opinion from Ariel's legal counsel. 80
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Ariel's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . MAYAN's representations and warranties must be accurate in all material respects when made and as of the completion of the merger, and Ariel shall have received from MAYAN an officer's certificate to that effect; . MAYAN must have performed or complied in all material respects with all of its covenants in the merger agreement, and Ariel shall have received from MAYAN an officer's certificate to that effect; . Ariel shall have received a certificate from MAYAN'S secretary to the effect that all corporate resolutions approving the merger were duly adopted and attaching those resolutions; . Ariel must have obtained the opinion of its tax counsel to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; . Ariel shall have received a certificate from MAYAN in accordance with treasury regulation Section 1.897-2(h) to the effect that MAYAN is not a United States real property interest as that term is defined in Section 897 of the Internal Revenue Code; and . each officer and director of MAYAN must have executed market standoff agreements agreeing to refrain from selling, transferring or otherwise disposing of shares of Ariel common stock held by them following the merger for one year after the merger. Neither MAYAN nor Ariel has been notified by the other that either party's closing conditions will not be satisfied. Extension, Waiver and Amendment of the Merger Agreement Ariel and MAYAN may amend the merger agreement before completion of the merger; provided, however, that after approval by the Ariel stockholders and the MAYAN shareholders, no amendment may be made without stockholder approval if by law further stockholder approval is required. Either Ariel or MAYAN may, in writing, extend the other's time for or waive compliance with the performance of any of the obligations or other acts under the merger agreement, waive any inaccuracies in the other's representations and warranties and waive compliance by the other with any of the agreements or conditions contained in the merger agreement. Termination of the Merger Agreement The merger agreement may be terminated under limited circumstances at any time before the completion of the merger, as summarized below: . by mutual consent of Ariel and MAYAN; . by Ariel in response to an unsolicited, superior proposal by a third party, following the passage of five (5) business days from MAYAN's receipt of written notice of Ariel's intention to accept the superior proposal, the identity of the person making the superior proposal and the material terms of the superior proposal; . by MAYAN in response to a superior proposal by a third party, following the passage of five (5) business days from Ariel's receipt of written notice of MAYAN's intention to accept the superior proposal, the identity of the person making the superior proposal and the material terms of the superior proposal; . by either of Ariel or MAYAN if the conditions to completion of the merger would not be satisfied because of a breach of a representation, warranty, covenant or agreement of the other party, and the breaching party does not cure the breach within twenty days; 81
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. by Ariel, if the MAYAN shareholders do not approve the merger at the MAYAN special meeting; . by MAYAN, if the Ariel stockholders do not approve the merger agreement and other proposals at the Ariel special meeting; or . by MAYAN, if Ariel common stock has become delisted from the Nasdaq National Market, the outstanding stock of the combined company does not qualify for listing on the Nasdaq National Market or the combined company's initial listing application has been denied. In addition, the merger agreement may be terminated by either MAYAN or Ariel under any of the following circumstances: . if the merger is not completed, without the fault of the terminating party, by August 31, 2001; or . if a final court order prohibiting the merger is issued and is not appealable. Payment of Fees and Expenses Whether or not the merger is consummated, all costs and expenses incurred in connection with the merger agreement and the merger will be paid by the party incurring the expense, except that expenses incurred in connection with printing, filing and mailing the joint proxy statement/prospectus and the registration statement and any fees required to be paid under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, if any, shall be shared equally. In addition, Ariel and MAYAN have agreed to reimburse one another for all expenses reasonably incurred by the non-terminating party if either of them terminates the merger agreement in response to a superior proposal by a third party, following the passage of five (5) business days from the non-terminating party's receipt of written notice of the terminating party's intention to accept the superior proposal, the identity of the person making the superior proposal and the material terms of the superior proposal. Material Federal Income Tax Considerations Brobeck, Phleger & Harrison LLP, counsel to MAYAN, is of the opinion that the following discussion accurately describes the material federal income tax consequences of the merger to the MAYAN shareholders upon their exchange of shares of MAYAN common stock for Ariel common stock pursuant to the merger. These opinions are subject to the assumptions, exceptions, limitations and qualifications referred to herein. This discussion is based on currently existing provisions of the Internal Revenue Code, existing and proposed Treasury regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. Any change, which may or may not be retroactive, could alter the tax consequences to MAYAN shareholders as described herein. MAYAN shareholders should be aware that this discussion does not deal with all federal income tax considerations that may be relevant to particular MAYAN shareholders in light of their particular circumstances, such as shareholders who: . are dealers in securities; . are subject to the alternative minimum tax provisions of the Internal Revenue Code; . are foreign persons; . do not hold their MAYAN capital stock as capital assets; . acquired their shares in connection with stock option or stock purchase plans or in other compensatory transactions; or . acquired their shares as part of an integrated investment such as a hedge, straddle or other risk reduction transaction. 82
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In addition, the following discussion does not address the tax consequences of the merger under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the merger (whether or not any those transactions are undertaken in connection with the merger), including without limitation any transaction in which shares of MAYAN capital stock are acquired or shares of Ariel common stock are disposed of, or the tax consequences of the assumption by Ariel of MAYAN stock options or MAYAN warrants or the tax consequences of the receipt of rights to acquire Ariel common stock. Accordingly, MAYAN shareholders are urged to consult their own tax advisors as to the specific tax consequences to them of the merger, including the applicable federal, state, local and foreign tax consequences. Subject to the assumptions, exceptions, limitations and qualifications referred to herein, the merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code and will result in the following federal income tax consequences to MAYAN shareholders: . No gain or loss will be recognized by holders of MAYAN capital stock solely upon their receipt of Ariel common stock in exchange for MAYAN common stock in the merger (except to the extent of cash received in lieu of a fractional shares of MAYAN common stock). . The aggregate tax basis of the Ariel common stock received by MAYAN shareholders in the merger (including any tax basis attributable to fractional shares deemed disposed of) will be the same as the aggregate tax basis of the MAYAN common stock surrendered in exchange therefor. . The holding period of the Ariel common stock received by each MAYAN shareholder in the merger will include the period for which the MAYAN common stock surrendered in exchange therefor was considered to be held, provided that the MAYAN common stock so surrendered is held as a capital asset at the time of the merger. . Cash payments received by holders of MAYAN common stock in lieu of a fractional share of Ariel common stock had been issued in the merger and then redeemed by Ariel. A MAYAN shareholder receiving that cash will recognize gain or loss, upon the payment, measured by the difference, if any, between the amount of cash received and the basis in such fractional share. The parties are not requesting and will not request a ruling from the Internal Revenue Service as to the tax consequences of the merger. It is a condition to the completion of the merger that MAYAN obtain an opinion from Brobeck, Phleger & Harrison LLP to the effect that the merger will constitute a reorganization within the meaning of the Internal Revenue Code. MAYAN shareholders should be aware that these tax opinions do not bind the Internal Revenue Service and the Internal Revenue Service is therefore not precluded from successfully asserting a contrary opinion. These tax opinions will be subject to assumptions and qualifications, including but not limited to the truth and accuracy of representations made by MAYAN and Ariel. Ariel has indicated it intends to waive this condition and does not intend to seek an opinion on the subject. A successful IRS challenge to the reorganization status of the merger would result in MAYAN shareholders recognizing taxable gain or loss with respect to each share of MAYAN common stock surrendered equal to the difference between each stockholder's basis in that share and the fair market value, as of the effective time, of the Ariel common stock received in exchange therefor. In that event, a shareholder's aggregate basis in the Ariel common stock so received would equal its fair market value as of the closing date of the merger, and the shareholder's holding period for that stock would begin the day after the merger. Accounting Treatment We intend to account for the merger as a purchase for accounting and financial reporting purposes, which means that MAYAN will be treated as a separate entity for periods prior to the closing. Because MAYAN will own approximately 90% of the common stock of Ariel (on a diluted basis) after the merger, the merger will be accounted for as a reverse acquisition which results in MAYAN being the acquirer of Ariel for accounting purposes. 83
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Stockholders' Dissenters' Rights of Appraisal Under Delaware law and California law, neither Ariel stockholders nor MAYAN shareholders, respectively, are entitled to dissenters' rights of appraisal in connection with the merger. Director and Officer Indemnification and Insurance The merger agreement provides that, after the completion of the merger, all rights of indemnification, advancement of expenses, exculpation, limitation of liability and similar rights existing in favor of present and former officers, directors, employees and agents of MAYAN shall survive the merger and shall continue for six years from the effective time. The merger agreement also provides that, for six years after the completion of the merger, Ariel will maintain directors' and officers' liability insurance at least at the level currently maintained by Ariel. Voting Agreements In connection with the merger, the executive officers and directors [and certain employees] of Ariel and MAYAN have entered into voting agreements with MAYAN and Ariel, as the case may be. The terms of the voting agreements provide that those executive officers and directors will vote all shares of Ariel or MAYAN capital stock beneficially owned by them, subject to some exceptions, or any new shares of Ariel or MAYAN stock they may acquire, in favor of the approval of the merger and the merger agreement, and the transactions contemplated thereby. In connection with the voting agreements, each of the executive officers and directors has executed an irrevocable proxy to vote their shares in favor of the approval of the merger agreement and the merger, and the transactions contemplated thereby. As of June 30, 2001, the MAYAN shareholders who entered into voting agreements collectively beneficially held approximately 25,838,813 shares of MAYAN capital stock which represented approximately 48.23% of the outstanding MAYAN capital stock. As of March 28, 2001, the Ariel stockholders who entered into the voting agreements collectively beneficially held approximately 83,525 shares, after giving effect to the one for 20 reverse stock split, of Ariel common stock which represented approximately 12.66% of the outstanding Ariel common stock, including shares issuable under stock options which are vested or will be vested within 60 days. None of the executive officers and directors who are parties to the voting agreements were paid additional consideration for entering into the voting agreements. Market Stand-Off Agreements Each officer and director of MAYAN and Ariel has entered into an agreement under which that person has agreed not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Ariel common stock held or later acquired by that person for a period ending one year after the closing date, provided that Mr. Agnello is permitted to except 10,000 shares from this agreement, after giving effect to the one for 20 reverse stock split. Bridge Loan At the time of the signing of the merger agreement, MAYAN agreed that for so long as the merger agreement has not been terminated, MAYAN will advance to Ariel, on an as-needed-basis, bridge loans of up to an aggregate of $2,000,000 for the purpose of financing operating expenses incurred in the ordinary course of business. In June 2001 MAYAN increased the amount to an aggregate of up to $4,000,000. The loans will be advanced on the terms set forth in the form of bridge loan attached to the merger agreement. Each advance of all or any portion of the bridge loan is subject to the following conditions: (i) the representations and warranties of Ariel set forth in the merger agreement must be true and correct in all material respects as of the time of that advance, (ii) Ariel must not have breached in any material respect any covenant contained in the merger agreement, and (iii) Ariel must have given MAYAN at least three (3) days' written notice requesting that advance and affirming that the conditions described in (i) and (ii) above have been satisfied. As of July 23, 2001, MAYAN has made eight advances to Ariel in the aggregate amount of $3,700,000. 84
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The bridge loans may be secured by the assets of Ariel, including Ariel's intellectual property, and become due and payable on the earlier of the effective time of the merger or MAYAN's demand following termination of the merger agreement. Upon the occurrence of "events of default" as defined therein, including, but not limited to the existence of any material changes to the Ariel Financial Statements that were originally provided to MAYAN for the year ended December 31, 2000, the bridge loan will become immediately due and payable. However, MAYAN's right to demand and receive payment of the bridge loans, and its security interest in the assets of Ariel granted by Ariel to MAYAN under the bridge loans, are subordinate to those granted by Ariel to Transamerica Business Credit Corporation pursuant to that certain Loan and Security Agreement between Ariel and Transamerica Business Credit Corporation dated as of June 11, 1997 and as thereafter amended from time to time. Ariel Rights Plan On October 9, 1998, Ariel implemented a rights plan pursuant to which one preferred share purchase right was distributed to holders of Ariel's common stock as a dividend for each share of Ariel common stock they held on that date. Each right entitles the holder of that right to purchase 1/100 of a share of Series A Preferred Stock of Ariel at a purchase price equal to $25 per 1/100 share of the preferred stock. The rights under the preferred stock are triggered upon the earlier of the time Ariel learns that a person or group has acquired beneficial ownership of 15% or more of the Ariel common stock or the close of business on the date designated by the board of directors following the commencement of, or public disclosure of an intent to commence, a tender offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of Ariel's common stock. Absent an amendment to the rights plan, the merger would act as that trigger. Under the rights plan, Ariel may amend the plan without any action on the part of the holders of the rights. On March 27, 2001, Ariel amended its rights plan to exempt the MAYAN transaction from triggering the rights under the plan. 2001 Stock Incentive Plan The board of directors of Ariel agreed to adopt, prior to the effective time of the merger, a 2001 Stock Incentive Plan, in the form attached as Appendix VI hereto. The 2001 plan will serve as the successor to the Ariel stock plans and the MAYAN stock plan. The board of directors of Ariel has agreed to take all actions that are necessary so that at the effective time, all the Ariel stock options outstanding under the Ariel stock plans will be transferred to the 2001 plan and shall be treated as outstanding options under the 2001 plan. Each outstanding option so transferred will, however, continue to be governed solely by the terms of the documents evidencing those options and no provision of the 2001 plan will be deemed to affect or otherwise modify the rights or obligations of the holders of those transferred options. See "Other Ariel Proposals" for a description of the 2001 Stock Incentive Plan. Listing of Ariel Common Stock to be Issued in the Merger and Common Stock of Combined Company The filing of an application with the Nasdaq National Market for the listing of the shares of Ariel common stock to be issued in the merger and the filing and acceptance of an application for initial listing of the outstanding common stock of the combined company is a condition to the consummation of the merger. Restrictions on Sale of Shares By Affiliates of Ariel and MAYAN The shares of Ariel common stock to be issued in connection with the merger will be registered under the Securities Act and will be freely transferable under the Securities Act, except for shares of Ariel common stock subject to the Stand-Off Agreements and shares of Ariel common stock issued to any person who is deemed to be an affiliate of either Ariel or MAYAN at the time of the special meetings. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under common control with either 85
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Ariel or MAYAN and may include some of the officers, directors, or principal stockholders of Ariel or MAYAN. Affiliates may not sell their shares of Ariel common stock acquired in connection with the merger except pursuant to: . an effective registration statement under the Securities Act covering the resale of those shares; . an exemption under paragraph (d) of Rule 145 under the Securities Act; or . another applicable exemption under the Securities Act. Ariel's registration statement on Form S-4, of which this document forms a part, does not cover the resale of shares of Ariel common stock to be received by affiliates in the merger. Management Following the Merger Upon completion of the merger, it is anticipated that some of the directors of MAYAN, including Thomas Edrington, Steven Krausz, Jim Mongiello and Peter Morris, will become the new directors of the combined company, along with Esmond Goei, a current member of the boards of both MAYAN and Ariel, and Anthony Agnello, a current member of the board of directors of Ariel. It is anticipated that the terms of service of these new board members will be staggered as follows: Messrs. Agnello and Goei will have terms expiring after the first year of service, which we expect will be in 2002, Messrs. Mongiello and Edringon will have terms expiring after their second year of service, which we expect will be in 2003, and Messrs. Morris and Krausz will have terms expiring after their third year of service, which we expect will be in 2004. Additionally, it is also anticipated that some of the current officers of MAYAN, including Esmond Goei and John Tingleff, will become the Chief Executive Officer and Chief Financial Officer, respectively, of the combined company. Dennis Schneider, Ariel's current Chief Executive Officer is also expected to become the Senior Vice President of Marketing of the combined company. Operations Following the Merger Following the merger, MAYAN and Ariel will operate as a single company. Ariel and MAYAN have agreed that the shareholders of MAYAN will become stockholders of Ariel, and their rights as stockholders of Ariel will be governed by Ariel's certificate of incorporation, Ariel's bylaws and the laws of the State of Delaware. 86
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The merger agreement requires Ariel to issue, subject to adjustment pursuant to subsequent issuances by MAYAN or repurchases by Ariel, approximately 0.157 shares of Ariel common stock (after giving effect to the one for 20 reverse split which is expected to occur immediately prior to the effective time of the merger) for each share of MAYAN common and preferred stock outstanding when the merger closes, subject to adjustment as provided in the merger agreement. No adjustment to the exchange ratio noted above is expected relating to third party transaction expenses as these expenses are not expected to exceed the specified threshold that would result in an adjustment. The following tables set forth certain historical financial information of Ariel and MAYAN on an unaudited pro forma basis after giving effect to the merger as a "reverse acquisition" (i.e., with MAYAN as the acquiror of Ariel for accounting purposes). Subsequent to the merger, the share information previously reported by MAYAN prior to the merger will be adjusted to reflect the exchange ratio of 0.157. The accompanying unaudited pro forma combined condensed balance sheet assumes the merger took place on March 31, 2001. The unaudited pro forma combined condensed balance sheet combines the unaudited balance sheet of MAYAN as of March 31, 2001 and the unaudited consolidated balance sheet of Ariel as of March 31, 2001. Ariel's fiscal year ends on December 31. For purposes of the pro forma information, MAYAN's statement of operations for the year ended June 30, 2000 has been combined with Ariel's unaudited consolidated statement of operations for the twelve months ended June 30, 2000 and MAYAN's unaudited statement of operations for the nine months ended March 31, 2001 has been combined with Ariel's unaudited consolidated statement of operations for the nine months ended March 31, 2001. The unaudited pro forma combined condensed statement of operations give effect to the Ariel Merger as if it had occurred on July 1, 1999. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the future financial position or future results of operations of MAYAN after the merger or of the financial position or results of operations of MAYAN that would have actually occurred had the merger been effected as of the dates described above. The allocation of the purchase price reflected in the unaudited pro forma combined condensed financial information is preliminary. The actual purchase price allocation to reflect the fair values of assets acquired and liabilities assumed will be based upon management's evaluation of such assets and liabilities after the merger. Accordingly, the adjustments included here will change based upon the final allocation of the total purchase price, as adjusted to reflect stock values. That allocation may differ significantly from the preliminary allocation included in this statement. If the amount allocable to identifiable intangibles changes by $1,000,000, combined pro forma net loss would change by approximately $333,000 (assuming an estimated three year useful life). In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination and SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. SFAS No. 142 also addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 141 is applicable to business combinations beginning July 1, 2001 and MAYAN intends to adopt SFAS No. 142 effective July 1, 2001 and, therefore, MAYAN will account for the proposed merger with Ariel and the related goodwill under SFAS No. 141 and SFAS No. 142; accordingly, MAYAN will not amortize any goodwill resulting from this merger with such goodwill subject to a periodic impairment test. 87
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On May 22, 2001, MAYAN made an offer to its current subordinated note holders to exchange the $75,000,000 of convertible subordinated notes for $50,000,000 of exchange notes with terms including the following: . The exchange notes will bear interest at 7 7/8% and will be payable in 2005. The interest is payable semiannually in cash or common stock of MAYAN then currently traded on a U.S. national securities exchange. If MAYAN pays the interest with its common stock, the shares will be valued at approximately 90% of the then fair market value. . The exchange notes will be convertible into common stock of MAYAN by the holders of the notes at an initial price of $5.00 per share (conversion price-subject to certain adjustments as defined). The exchange notes will be converted into common stock at the option of MAYAN if: (i) MAYAN's common stock becomes publicly traded (such as through the contemplated merger with Ariel), (ii) MAYAN registers additional shares of its common stock to be issued upon conversion of the exchange notes, and (iii) MAYAN's common stock price exceeds 200% of the conversion price for at least 20 days during a 30 day period. MAYAN may be required to pay additional interest to the holders of the exchange notes upon a voluntary conversion by the holders prior to November 1, 2003. . MAYAN will have the option to redeem the exchange notes on or after November 1, 2003 at an amount ranging from 101.575% to 103.150% of the principal amount plus accrued and unpaid interest. In the event of a (i) change in control of MAYAN or (ii) a delisting of MAYAN's common stock (after the merger with Ariel or an alternative public merger or complying public equity offering, as defined), the holders of the exchange notes may require MAYAN to repurchase the exchange notes at 105% of the principal amount plus accrued and unpaid interest. . The holders of the exchange notes may require MAYAN to repurchase the exchange notes at 37.5% of the principal amount plus accrued and unpaid interest prior to the earlier of (i) 90 days following the effective date of a shelf registration statement covering a resale of the exchange notes and common stock into which the exchange notes are convertible following the merger with Ariel (or an alternative public merger or complying public equity offering), (ii) the closing of an alternative merger (as defined) and (iii) January 10, 2002, if at the close of business on December 31, 2001 MAYAN has not closed the merger with Ariel (or an alternative public merger or complying public equity offering). This repurchase option could require MAYAN to make a cash payment of up to approximately $18,750,000 to repay the exchange notes and will result in the exchange notes being classified as a current liability in MAYAN's balance sheet until this repurchase option expires. . If MAYAN does not complete the contemplated merger with Ariel by December 31, 2001, the holders of the exchange notes will have the option to change the terms of the exchange notes to terms that are consistent with the currently outstanding $75,000,000 convertible subordinated notes. The note exchange, when and if completed, and assuming completion of the merger with Ariel by December 31, 2001, will result in MAYAN recording a one- time extraordinary gain in an amount determined upon completion of these events. The pro forma statements do not reflect any effect of the contemplated subordinated note exchange described above, operating efficiencies, cost savings and other benefits, or merger related expenses anticipated by MAYAN's management as a result of the merger. The unaudited pro forma combined condensed financial information should be read in conjunction with the audited consolidated financial statements and related notes of Ariel and the audited financial statements of MAYAN, MAYAN's Management Discussion and Analysis of Financial Condition and Results of Operations and Ariel's Management Discussion and Analysis of Financial Condition and Results of Operations included in this joint proxy statement/prospectus. 88
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UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET March 31, 2001 (In thousands) [Download Table] Note Pro Forma Combined 2 MAYAN Networks Ariel Adjustments Pro Forma ----- -------------- -------- ----------- -------------- (As restated*) (As restated*) ASSETS ------ Current assets: Cash and cash equivalents.......... $ 52,183 $ 423 $ -- $ 52,606 Short-term investments.......... 15,102 -- -- 15,102 Accounts receivable, net.................. -- 422 -- 422 Inventories........... -- 2,280 -- 2,280 Prepaid expenses and other current assets............... 1,064 692 -- 1,756 -------- -------- -------- -------- Total current assets............. 68,349 3,817 -- 72,166 -------- -------- -------- -------- Property and equipment, net.................... 5,599 1,059 -- 6,658 Restricted cash......... 824 -- -- 824 Subordinated debt issuance costs......... 4,356 -- -- 4,356 Goodwill, intangible and other assets........... A,G,H 2,237 674 23,934 26,845 -------- -------- -------- -------- Total assets........ $ 81,365 $ 5,550 $ 23,934 $110,849 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) -------------------- Current liabilities: Accounts payable...... $ 3,835 $ 1,662 $ -- $ 5,497 Accrued payroll and employee benefits.... 406 658 -- 1,064 Royalties payable..... -- 91 -- 91 Other accrued liabilities.......... F 2,640 1,143 2,500 6,283 Current portion of long-term debt obligations.......... E,H 436 886 767 2,089 Current portion of capital-lease........ 5 110 -- 115 -------- -------- -------- -------- Total current liabilities........ 7,322 4,550 3,267 15,139 -------- -------- -------- -------- Subordinated convertible notes.................. 78,295 -- 78,295 Capital-lease obligation, net of current portion........ -- 76 76 Long-term debt.......... E 203 1,067 (1,067) 203 Deferred rent........... 323 -- 323 Convertible Preferred stock.................. D 88,726 -- (88,726) -- Shareholders' equity (deficiency): Common stock.......... A,B,D 19,029 13 111,286 130,328 Additional paid-in capital.............. B -- 46,437 (46,437) -- Notes receivable from shareholders......... (1,053) -- -- (1,053) Deferred stock compensation......... A (11,725) -- (482) (12,207) Accumulated other comprehensive loss... B 47 (958) 958 47 Accumulated deficit... B,C (99,802) (45,635) 45,135 (100,302) -------- -------- -------- -------- Total shareholders' equity (deficiency)....... (93,504) (143) 110,460 16,813 -------- -------- -------- -------- Total liabilities, convertible preferred stock and shareholders' equity (deficiency)....... $ 81,365 $ 5,550 $ 23,934 $110,849 ======== ======== ======== ======== Other data--shares outstanding (see Note 5) .................... 46,606 13,074 (51,709) 7,971 ======== ======== ======== ======== -------- * See Note 12 to MAYAN's financial statements included elsewhere in this joint proxy statement/prospectus. See footnotes to unaudited pro forma combined condensed financial statements. 89
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS Year Ended June 30, 2000 (In thousands, except per share amounts) [Download Table] MAYAN Pro Forma Combined Note 2 Networks Ariel Adjustments Pro Forma ------ -------- -------- ----------- --------- Revenues..................... $ -- $ 8,971 $ -- $ 8,971 Cost of revenues............. -- 4,464 -- 4,464 -------- -------- ------- -------- Gross profit................. -- 4,507 -- 4,507 -------- -------- ------- -------- Operating expenses: Research and development... 35,442 5,553 -- 40,995 Sales and marketing........ 4,165 5,347 -- 9,512 General and administrative............ 2,483 6,660 -- 9,143 Restructuring and special charges................... -- 2,726 -- 2,726 Amortization of intangibles............... C -- -- 2,500 2,500 Amortization of deferred stock compensation........ C 1,112 -- 121 1,233 -------- -------- ------- -------- Total operating expenses................ 43,202 20,286 2,621 66,109 -------- -------- ------- -------- Loss from operations......... (43,202) (15,779) (2,621) (61,602) -------- -------- ------- -------- Interest income.............. 2,508 387 -- 2,895 Other nonoperating income.... -- 51 -- 51 Interest expense including accretion of redemption premium..................... (163) (483) -- (646) -------- -------- ------- -------- Net loss..................... $(40,857) $(15,824) $(2,621) $(59,302) ======== ======== ======= ======== Basic and diluted net loss per share................... $ (10.00) $ (1.42) ======== ======== Shares used in calculating basic and diluted net loss per share (see Note 5)...... 4,085 11,157 ======== ======== Pro forma basic and diluted net loss per share.......... $ (9.71) ======== Shares used in calculating pro forma basic and diluted net loss per share (see Note 5).......................... 6,109 ======== See footnotes to unaudited pro forma combined condensed financial statements. 90
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS Nine Months Ended March 31, 2001 (In thousands, except per share amounts) [Download Table] Pro Forma Combined Note 2 MAYAN Networks Ariel Adjustments Pro Forma ------ -------------- -------- ----------- -------------- (As restated*) (As restated*) Revenues................ $ -- $ 5,719 $ -- $ 5,719 Cost of revenues........ -- 3,233 -- 3,233 -------- -------- ------- -------- Gross profit............ -- 2,486 -- 2,486 -------- -------- ------- -------- Operating expenses: Research and development.......... 25,769 3,742 -- 29,511 Sales and marketing... 7,920 3,880 -- 11,800 General and administrative....... 5,287 5,218 -- 10,505 Amortization of intangibles.......... C -- -- 1,875 1,875 Amortization of deferred stock compensation......... C 4,066 -- 90 4,156 -------- -------- ------- -------- Total operating expenses........... 43,042 12,840 1,965 57,847 -------- -------- ------- -------- Loss from operations.... (43,042) (10,354) (1,965) (55,361) -------- -------- ------- -------- Interest income......... 2,795 140 -- 2,935 Other nonoperating income................. -- 84 -- 84 Interest expense including accretion of redemption premium..... (5,889) (193) -- (6,082) -------- -------- ------- -------- Loss before provision for income taxes....... (46,136) (10,323) (1,965) (58,424) Benefit for income taxes.................. -- 424 -- 424 -------- -------- ------- -------- Net loss................ $(46,136) $ (9,899) $(1,965) $(58,000) ======== ======== ======= ======== Basic and diluted net loss per share......... $ (6.90) $ (0.76) ======== ======== Shares used in calculating basic and diluted net loss per share (see Note 5)..... 6,685 13,074 ======== ======== Pro forma basic and diluted net loss per share.................. $ (7.88) ======== Shares used in calculating pro forma basic and diluted net loss per share (see Note 5)................ 7,356 ======== -------- * See Note 12 to MAYAN's financial statements included elsewhere in this joint proxy statement/prospectus. See footnotes to unaudited pro forma combined condensed financial statements. 91
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION 1. The Merger The merger will be treated as a reverse acquisition purchase in which MAYAN is treated as the acquiror of Ariel for financial accounting purposes. Under that method, the purchase price for accounting purposes is established using the fair market value of the outstanding Ariel common stock, determined using average stock closing prices beginning two days before and ending two days after the announcement of the merger in March 2001, plus the value of Ariel's stock options and warrants and estimated acquisition-related costs. The fair market value of Ariel's common stock for purposes of determining the purchase price is not expected to change from the announcement date value as no adjustment of the exchange ratio as provided in the merger agreement related to Ariel's merger related expenses is expected to occur. The estimated purchase price is as follows (in thousands, except per share amount): [Download Table] Fair value of Ariel's common stock ($1.31 per share)............... $17,127 Fair value of Ariel's options and warrants issued.................. 5,446 Acquisition-related costs (including $1,500 included in other assets and other accrued liabilities as of March 31, 2001)......................... 4,000 ------- $26,573 ======= MAYAN's acquisition related costs primarily represent estimated investment bankers' fees of $3,300,000 and approximately $700,000 of legal, accounting and other related costs. The unaudited pro forma combined condensed balance sheet and statements of operations are not necessarily indicative of the financial position and operating results that would have been achieved had the merger been completed as of the beginning of the earliest periods presented. They should not be construed as being a representation of financial position or future operating results of the combined companies. Management does not expect significant changes to the preliminary valuation of the transaction. However, the final purchase price allocation could be significantly different from the amounts reflected in the unaudited pro forma combined condensed information. If the amount allocable to identifiable intangibles changes by $1,000,000, combined pro forma net loss would change by approximately $333,000 (assuming an estimated three year useful life). In addition, the unaudited pro forma combined condensed financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any restructuring or merger related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger or any effect of the subordinated note exchange transaction contemplated by this joint proxy statement/prospectus. 2. Adjustments to Unaudited Pro Forma Combined Condensed Financial Statements The adjustments to the unaudited pro forma combined condensed balance sheet as of March 31, 2001 and the pro forma combined condensed statements of operations for the year ended June 30, 2000 and for the nine months ended March 31, 2001 in connection with the proposed merger are presented below: (A) The fair values of Ariel's net assets have been estimated for the purpose of allocating the purchase price of the deemed acquisition of Ariel and determining the pro forma effect of the acquisition on the combined financial statements. The estimated purchase price of $26,573,000 has been assigned to the tangible and intangible assets acquired and liabilities assumed as follows (in thousands): [Download Table] Net current and other assets at March 31, 2001.................. $ 5,550 Fair value adjustments: Customer relationships--3-year life........................... 400 Trademarks and trade names--3-year life....................... 800 Acquired in-process research and development--expensed at closing...................................................... 500 Developed technology--3-year life............................. 6,300 Goodwill...................................................... 18,234 Deferred compensation--4-year life............................ 482 ------- 32,266 Less liabilities assumed at March 31, 2001...................... (5,693) ------- $26,573 ======= (see Note 1 for the fair value of Ariel common stock, options and warrants issued.) 92
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued) (B) This adjustment is to eliminate the common stock, additional paid in capital, accumulated other comprehensive loss and accumulated deficit of Ariel. (C) The pro forma adjustments represent the estimate for goodwill, workforce- in-process and deferred compensation amortization that would have been recorded during the period covered by the pro forma statements of operations, related to the acquisition. The in-process research and development expense has been reflected as an adjustment to the accumulated deficit in the pro forma balance sheet. Amortization for deferred stock compensation, customer relationships, trademarks and trade names and developed technology for the year ended June 30, 2000 is $121,000, $133,000, $267,000, and $2,100,000, respectively; and $90,000, $100,000, $200,000, and $1,575,000, respectively for the nine months ended March 31, 2001. The pro forma adjustments are based on the assumption that the identifiable intangibles relating to the merger are amortized on a straight-line basis over three years and deferred stock compensation is amortized over four years. The impact on the pro forma net loss of these amortizations was a charge of $2,621,000 and $1,965,000 for the year ended June 30, 2000 and the nine months ended March 31, 2001. The actual amortization of intangibles arising from the transaction will take place in periods subsequent to the acquisition. (D) This adjustment is to convert all of MAYAN'S convertible preferred stock to common stock. (E) This adjustment is to reclassify Ariel's long-term debt to current due to provisions in the borrowing agreement requiring repayment of this debt in the event of a change in control of Ariel. (F) This adjustment is to accrue for additional MAYAN acquisition related costs. (G) This adjustment is to remove $1,500,000 of acquisition related costs from MAYAN's balance sheets. (See Note 1.) (H) This adjustment is to eliminate the $300,000 promissory note between MAYAN and Ariel. A summary of pro forma adjustments for each financial statement line item having more than one adjustment is as follows (in thousands): [Download Table] Goodwill, intangible and other assets (A)............................................................. $ 25,734 (G)............................................................. (1,500) (H)............................................................. (300) -------- $ 23,934 ======== Current portion of long-term debt obligations (E)............................................................. $ 1,067 (H)............................................................. (300) -------- $ 767 ======== Common Stock (A)............................................................. $ 22,573 (B)............................................................. (13) (D)............................................................. 88,726 -------- $111,286 ======== Accumulated deficit (C)............................................................. $ (500) (B)............................................................. 45,635 -------- $ 45,135 ======== 93
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued) 3. In-Process Research and Development In connection with the merger, it is estimated that approximately $500,000 of the purchase price will be allocated to in-process research and development or IPR&D. Management of MAYAN has estimated the IPR&D included in the purchase price allocation. The preliminary fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from each Ariel research and development project once it has reached technological feasibility. A discount rate consistent with the risks of each such project was used to estimate the present value of cash flows. In estimating future cash flows, consideration was given to other tangible and intangible assets required for the successful development of the technology resulting from each purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution of these assets to each project. The estimated future cash flows resulting from IPR&D were further adjusted for the contribution of core technology to the value of each purchased IPR&D project. Based upon these cash flows the value assigned to purchased research and development was the amount attributable to the efforts of Ariel up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying the estimated present value of future cash flows excluding costs of completion by the percentage of completion of each purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products principally relates to the completion or acceleration of existing development programs. Costs related to the full-scale manufacturing, distribution and marketing of the products are included in the cash flow projection upon which the IPR&D value is based. The resulting net cash flows from such projects were based on Ariel's estimates of revenues, cost of sales, research and development costs, sales and marketing, general and administrative, and the anticipated income tax effect and these estimates were those considered by the MAYAN Networks board of directors in its evaluation of this transaction. The discounting of net cash flows back to their present value is based on a discount derived from the weighted average cost of capital for Ariel. The weighted average cost of capital calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate used in discounting the net cash flows from purchased in- process research and development projects was 30%. The forecast data employed in the analyses were based upon product level forecast information obtained by Ariel from numerous internal and external sources. Ariel management has reviewed and challenged the forecast data and related assumptions and used the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, Ariel believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on the future financial condition and results of operations of Ariel after the merger. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for each of the programs under development. The acquired IPR&D consists of Ariel's work to complete each of the identified programs. The programs are each very specific to the products and markets for which they are intended. There are no alternative uses for the in-process programs if the development programs fail or are otherwise deemed unfeasible. The development effort for the acquired IPR&D does not possess an alternative future use for Ariel after the merger as defined by accounting principles generally accepted in the United States of America. 94
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued) 4. Items Not Adjusted The pro forma statements do not reflect any effect of the proposed note exchange transaction as described in this joint proxy statement/prospectus, operating efficiencies, cost savings and other benefits, or merger related expenses anticipated by MAYAN's management as a result of the merger. If MAYAN does not complete the contemplated merger with Ariel by December 31, 2001, the holders of the exchange notes will have the option to change the terms of the exchange notes to terms that are consistent with the currently outstanding $75,000,000 convertible subordinated notes. The note exchange, when and if completed, and assuming completion of the Ariel merger by December 31, 2001, will result in MAYAN recording a one-time extraordinary gain in an amount determined upon completion of these events. The holders of the exchange notes may require MAYAN to repurchase the exchange notes at 37.5% of the principal amount plus accrued unpaid interest prior to the earlier of (i) 90 days following the effective date of a shelf registration statement covering the resale of the exchange notes and common stock into which the exchange notes are convertible following the Ariel merger (or an alternative public merger or complying public offering), (ii) the closing of an alternative merger (as defined) and (iii) January 10, 2002 if at the close of business on December 31, 2001 MAYAN has not closed the Ariel merger (or an alternative public merger or complying public offering). This repurchase option could require MAYAN to make a cash payment of up to approximately $18,750,000 to repay the exchange notes and will result in the exchange notes being classified as a current liability in MAYAN's balance sheet until this repurchase option expires. 5. Pro Forma Net Loss Per Share The pro forma basic and diluted net loss per share is computed by dividing the pro forma net loss by the pro forma basic and diluted weighted average number of shares outstanding, assuming Ariel and MAYAN had merged at the beginning of the earliest period presented. The pro forma basic and diluted weighted average number of shares outstanding includes the assumed conversion of MAYAN's preferred stock to common stock upon the completion of the merger. The pro forma weighted basic and diluted average number of shares outstanding, and required pro forma adjustment to the weighted shares outstanding, are calculated as follows for the year ended June 30, 2000 and the nine months ended March 31, 2001 (in thousands): [Download Table] Basic and Diluted --------- For the year ended June 30, 2000: MAYAN Networks weighted average common shares......... 4,085 MAYAN Networks weighted average preferred shares...... 31,271 ------ MAYAN Networks weighted average shares.............. 35,356 Multiplied by exchange ratio of ........................ 0.157 ------ Equivalent Ariel shares................................. 5,551 Ariel weighted average shares........................... 11,157 Less effect of one for 20 reverse stock split........... (10,599) ------- Ariel weighted average shares adjusted for stock split.. 558 ------ Pro forma combined weighted average shares outstanding........................................ 6,109 ====== 95
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued) [Download Table] Basic and Diluted --------- For the nine months ended March 31, 2001: MAYAN Networks weighted average common shares......... 6,685 MAYAN Networks weighted average preferred shares...... 36,000 ------ MAYAN Networks weighted average shares.............. 42,685 Multiplied by exchange ratio of ........................ 0.157 ------ Equivalent Ariel shares................................. 6,702 Ariel weighted average shares........................... 13,074 Less effect of one for 20 reverse stock split........... (12,420) ------- Ariel weighted average shares adjusted for stock split.. 654 ------ Pro forma combined weighted average shares outstanding........................................ 7,356 ====== The adjustment to common shares outstanding at March 31, 2001, is calculated as follows (in thousands): [Download Table] As of March 31, 2001: MAYAN Networks common shares outstanding............... 10,606 MAYAN Networks preferred shares outstanding............ 36,000 ------- MAYAN Networks shares outstanding.................... 46,606 Multiplied by exchange ratio of.......................... 0.157 ------- Equivalent Ariel shares.................................. 7,317 Ariel shares outstanding................................. 13,074 Less effect of one for 20 reverse stock split............ (12,420) ------- Ariel shares outstanding adjusted for stock split........ 654 ------- Pro forma combined shares outstanding.................... 7,971 Less combined shares outstanding before exchange ratio effect.................................................. (59,680) ------- Required pro forma adjustment to shares outstanding.. (51,709) ======= 96
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DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS When Ariel and MAYAN complete the merger, MAYAN shareholders will become Ariel stockholders and Ariel will change its name to "MAYAN Networks Corporation." The following is a description of the Ariel common stock to be issued in the merger and a summary of the significant differences between the rights of holders of Ariel common stock and MAYAN common stock. Description of Ariel Capital Stock Ariel's authorized capital stock currently consists of 40,000,000 shares of common stock, par value $.001 per share, and 2,000,000 shares of preferred stock, par value $.001 per share. Common Stock. As of June 30, 2001, there were approximately 659,976 shares of common stock outstanding held of record by approximately 206 stockholders after giving effect to the one for 20 reverse stock split. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of common stock. Subject to preferences applicable to any then outstanding preferred stock, holders of common stock are entitled to share ratably in all assets remaining after payment of its liabilities and the liquidation preference of any preferred stock. Holders of common stock have no preemptive or subscription rights, and there are no redemption or conversion rights with respect to those shares. All outstanding shares of common stock are fully paid and non-assessable. Preferred Stock. Ariel's board of directors has the authority to issue preferred stock in one or more series and to fix the number of shares constituting that series and the preferences, limitations and relative rights, including dividend rights, dividend rate, voting rights, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by its stockholders. The issuance of preferred stock by Ariel's board of directors could adversely affect the rights of holders of common stock. The potential issuance of preferred stock may have the effect of delaying or preventing a change in control of Ariel, may discourage bids for Ariel's common stock at a premium over the market price of the common stock and may adversely affect the market price of, and the voting and other rights of the holders of, common stock. Immediately after the completion of the merger, there will be no shares of preferred stock outstanding. Warrants. As of June 30, 2001, Ariel had outstanding warrants to purchase an aggregate of approximately 124,327 shares of its common stock after giving effect to the one for 20 reverse stock split to become effective immediately prior to the merger. Warrants for 6,191 shares expire on May 18, 2005 and have an exercise price equal to $0.08 after giving effect to the one for 20 reverse stock split. Warrants for 101,760 shares expire on February 24, 2005 and have an exercise price equal to $0.05 after giving effect to the one for 20 reverse stock split. Warrants for 5,213 shares expire on October 18, 2006 and have an exercise price equal to $0.94 after giving effect to the one for 20 reverse stock split. The exercise price of all warrants is subject to customary adjustments on stock splits, stock dividends, any merger or acquisition involving Ariel and similar transactions, such as to permit the holders of warrants to receive upon exercise of the warrants that which they would have received had they exercised the warrants immediately prior to that transaction. Options. As of June 30, 2001 Ariel had outstanding options for approximately 146,048 shares of common stock at a weighted average exercise price of $0.15 after giving effect to the one for 20 reverse stock split. 97
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Effect of Delaware Anti-takeover Statute. Ariel is subject to Section 203 of the Delaware General Corporation law, as amended, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: (i) prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combinations to include: (i) any merger or consolidation involving the corporation and any interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by that entity or person. Certificate of Incorporation and Bylaw Provisions. Ariel's restated certificate of incorporation and restated bylaws include provisions that may have the effect of discouraging, delaying or preventing a change in control of Ariel or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. See "Comparison of Rights of Ariel Stockholders and MAYAN Stockholders". Transfer Agent. The transfer agent and registrar for Ariel's common stock is Continental Stock Transfer & Trust Company. Its address is 2 Broadway, New York, New York, 10004, and its telephone number is (212) 509-4000. Description of MAYAN Capital Stock MAYAN's authorized capital stock consists of 65,000,000 shares of common stock and 36,000,361 shares of preferred stock. The following description of MAYAN's securities does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of MAYAN's agreements and instruments covering MAYAN's preferred stock issuances. 98
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As of June 30, 2001, MAYAN had issued and outstanding 8,480,394 shares of common stock, 1,907,500 shares of Series A preferred stock, 7,843,137 shares of Series B preferred stock, 11,826,346 shares of Series C preferred stock, and 14,423,077 shares of Series D preferred stock. There are outstanding warrants to purchase 88,236 shares of common stock. In addition, as of June 30, 2001, MAYAN had reserved an aggregate of approximately 4,470,942 shares of common stock for issuance of stock options under the 1998 Stock Option Plan and stock options outside of the 1998 Stock Option Plan. MAYAN also has reserved 1,907,500, 7,843,137, 11,826,346 and 14,423,077 shares of common stock to be issued upon the conversion of MAYAN's outstanding shares of Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock, respectively. In addition, MAYAN has reserved 88,236 shares of common stock to be issued upon the exercise of warrants to purchase common stock. An additional 10,000,000 shares of MAYAN common stock have been reserved for issuance upon the conversion of the maximum number of shares of MAYAN's convertible subordinated promissory notes. Common Stock. Subject to the voting rights of the holders of the preferred stock, the holders of common stock will vote as a class with the holders of the preferred stock and are entitled to one vote for each share held of record upon the matters and in the manner as may be provided by law. Subject to the rights of the holders of the preferred stock to receive preferential dividends, the holders of shares of common stock are entitled to receive ratably dividends when, as and if declared by the board of directors out of funds legally available for distribution. In the event of MAYAN's liquidation, dissolution or winding up, the holders of shares of common stock are entitled to share ratably with one another in all available funds and assets remaining after payment of MAYAN's liabilities and the liquidation preferences to the holders of the preferred stock. Other than as described herein, the holders of common stock have no preemptive, subscription, redemption, sinking fund or conversion rights. Pursuant to the terms of their stock option and stock purchase agreements, each of the shares of common stock issued upon exercise of unvested options are subject to a right of repurchase by MAYAN. The repurchase right lapses as the stock vests. In addition, all shares of common stock held by Messrs. Gatti, Goei and Raza, K.D. Partners and F&F, Inc. are subject to a right of refusal in favor of MAYAN and the holders of preferred stock and co-sale rights in favor of the holders of preferred stock. The right of first refusal and co-sale rights lapse on the earlier to occur of: . a liquidation, dissolution or indefinite cessation of MAYAN's business operations; . the execution of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of MAYAN's property and assets; . a firm commitment underwritten public offering at a pre-money valuation equal to or greater than $100,000,000 and which results in aggregate net cash proceeds to MAYAN of at least $10,000,000; or . a merger or sale of all or substantially all of MAYAN'S assets or if MAYAN effects any other transaction or series of related transactions in which more than 50% of the voting power of the company is disposed of. Preferred Stock MAYAN currently has outstanding 1,907,500 shares of Series A preferred stock, 7,843,137 shares of Series B preferred stock, 11,826,647 shares of Series C preferred stock, and 14,423,077 shares of the Series D preferred stock. All of MAYAN's preferred stock is required to be converted into common stock, on a one to one basis, as a condition to the closing of the merger. In addition, the holders of preferred stock are required to terminate their rights as preferred stockholders and to become common holders. 99
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Comparison of Rights of Ariel Stockholders and MAYAN Shareholders The rights of holders of Ariel common stock are governed by Delaware law, Ariel's restated certificate of incorporation, as amended, and Ariel's restated bylaws, while the rights of MAYAN's shareholders are governed by California law, MAYAN's amended and restated articles of incorporation and MAYAN bylaws, as amended. In most respects, the rights of MAYAN's shareholders are similar to those of Ariel stockholders. The following discussion summarizes the significant differences between the companies' charter documents. This summary is not a complete discussion of, and is qualified by reference to, Ariel's restated certificate of incorporation, as amended, Ariel's restated bylaws, Delaware law, MAYAN's amended and restated articles of incorporation, MAYAN's bylaws, as amended, and California law. Capital Stock. MAYAN's amended and restated articles of incorporation provide that MAYAN's authorized capital stock consists of 65,000,000 shares of common stock, $.0001 par value, and 36,000,361 shares of preferred stock, $.0001 par value, consisting of 1,907,500 shares of Series A preferred stock, 7,843,137 shares of Series B preferred stock, 11,826,647 shares of Series C preferred stock, and 14,423,077 shares of the Series D preferred stock. As of June 30, 2001, there were approximately 8,480,394 shares of MAYAN common stock outstanding held by approximately 186 shareholders of record and 36,000,060 shares of MAYAN preferred stock outstanding held by approximately 113 stockholders of record. Ariel's authorized capital stock consists of 2,000,000 shares of common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, par value $.001 per share, and 2,000,000 shares of preferred stock, par value $.001 per share. As of June 30, 2001, there were approximately 659,976 shares of Ariel common stock outstanding, after giving effect to the one for 20 reverse stock split, held by approximately 206 shareholders of record. Classified Board. Ariel's restated certificate of incorporation provides that the Ariel board of directors be divided into three classes with staggered three-year terms. As a result, only one of the three classes of Ariel's board of directors is elected each year. The classification of the Ariel board has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of the members of the board of directors. The MAYAN amended and restated articles of incorporation do not provide for a classified board. Directors. Ariel's restated certificate of incorporation provides that the size of Ariel's board of directors shall be determined by the bylaws or an amendment to the bylaws, adopted by the stockholders or the board of directors, and the board currently consists of seven members. Board vacancies resulting from any increase in the authorized number of directors or any vacancies in the board resulting from death, resignation, removal or other cause may be filled by the affirmative vote of a majority of the directors then in office. MAYAN's bylaws, as amended, provide that the size of MAYAN's board of directors shall be determined by resolution of the board of directors, provided that there shall be at least three, and no more than six, members of the board of directors of MAYAN. MAYAN's current board consists of 6 directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by approval of the board of directors or, if the number of directors that are in office is less than a quorum, by the unanimous written consent of the directors then in office, by the affirmative vote of a majority of the directors then in office pursuant to notice or waivers of notice complying with Section 307 of the California Corporations Code, or by a sole remaining director. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. MAYAN's vacancy provisions are intended to prevent a shareholder from enlarging the board of directors and filling the new directorships with that shareholder's own nominees without the approval of the MAYAN board of directors. Directors' Committees. Ariel's restated bylaws provide that the board of directors may, by a resolution passed by a vote of a majority of the board of directors, designate one or more committees of the board, each comprised of one or more members of the Ariel board. To the extent provided in a resolution of Ariel's board of directors, these committees may exercise all the powers and authority of the board of directors in the 100
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management of the business and affairs of Ariel, including, if the resolution expressly provides, the declaration of a dividend or the issuance of stock, except that no committee may: (i) amend Ariel's certificate of incorporation or bylaws; (ii) adopt an agreement of merger or consolidation; (iii) recommend the sale, lease or exchange of all or substantially all of Ariel's assets; or (iv) recommend dissolution or revocation of a dissolution of Ariel. The MAYAN bylaws, as amended, provide that a majority of the board of directors may designate one or more committees of the board. To the extent provided in a resolution of the MAYAN board of directors, any committees of the MAYAN board of directors may exercise all the powers and authority of the board in the management of the business and affairs of MAYAN except that no committee may: (i) adopt, amend or repeal MAYAN's by-laws, as amended, or any one of them; (ii) approve or adopt, or recommend to MAYAN's stockholders any action or matter expressly required by law to be submitted to the stockholders for approval; (iii) fill vacancies on the board of directors or any committee thereof; (iv) fix the compensation of the members serving on the board of directors or any committee thereof; (v) amend or repeal any resolution of the board of directors which by its express terms is not amendable or repealable; (vi) distribute to shareholders of MAYAN, except at a rate, in a periodic amount or within a price range set forth in the articles of incorporation of MAYAN or determined by the board of directors of MAYAN; or (vii) approve any other committees of the board of directors or members of those committees. Majority Voting. Ariel's restated certificate of incorporation requires the approval of the holders of a majority of the outstanding voting stock of Ariel to effect certain amendments to the restated certificate of incorporation with respect to: (i) the vote necessary to amend Ariel's bylaws or certificate of incorporation; (ii) the size, classification and method of election of the board of directors; (iii) the conduct of stockholders' meetings and stockholder action by written consent; and (iv) indemnification of directors, officers and others. In addition, Ariel's restated certificate of incorporation provides that directors are removable by the vote of the holders of a majority of Ariel's outstanding voting capital stock. Ariel's restated bylaws may be amended by the majority vote of the board of directors or by the vote of the holders of a majority of Ariel's outstanding voting capital stock. MAYAN's amended and restated articles of incorporation require the approval of the holders of (i) a majority of the outstanding shares of common stock, voting separately as a class, (ii) a majority of the outstanding shares of Series A, Series B, Series C and Series D preferred stock, voting separately as a class and (iii) a majority of the outstanding shares of common stock, Series A, Series B, Series C and Series D preferred stock, voting together as a single class, to amend or repeal, or to adopt any provision inconsistent with, the amended and restated articles of incorporation with respect to the rights, powers and privileges of the respective classes of capital stock of MAYAN. MAYAN's bylaws, as amended, require the approval of 50% of the outstanding voting stock of MAYAN to adopt new bylaws or amend or repeal the existing bylaws. 101
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Special Meeting of Stockholders. Ariel's bylaws provide that special meetings of stockholders of Ariel may only be called by Ariel's chairman of the board, chief executive officer or president or at the request of a majority of the board of directors or the request of stockholders owning not less than 10% of Ariel's voting stock. MAYAN's bylaws, as amended, provide that special meetings of stockholders of MAYAN may only be called by (i) the chairman of the board of directors, if any, (ii) a majority of that number of directors as constitutes a quorum, (iii) the president of MAYAN, (iii) the holders of shares entitled, in the aggregate, to cast not less than ten percent (10%) of the votes at the meeting, or (iv) by any other shareholder upon written request to, and subject to the approval of, an authorized officer of MAYAN. Stockholder Action by Written Consent. Ariel's restated bylaws provide that Ariel's stockholders may take action at an annual or special meeting of stockholders of Ariel or by written consent without a meeting. Any action which may be taken at any meeting of shareholders may be taken by written consent, if the consent is signed by the holders of outstanding stock having not less than the minimum number of votes necessary to authorize or take that action at a meeting. MAYAN's amended and restated articles of incorporation and bylaws, as amended, similarly provide that stockholder action may be taken at a duly called annual or special meeting of stockholders or by written consent. Notice Procedures. Ariel's restated bylaws establish advance notice procedures with respect to all stockholder proposals to be brought before meetings of stockholders of Ariel, including proposals relating to the nomination of candidates for election as directors, the removal of directors and amendments to Ariel's restated certificate of incorporation or restated bylaws. These procedures provide that the notice must contain the consent of any nominee for election to the board of directors as well as certain information with respect to that nominee, a brief description of and reasons for any business desired to be brought before a meeting, the ownership interest of the proposing stockholder, and certain other information. Generally, to be timely, notice must be received by Ariel's secretary not less than 30 days prior to the meeting. MAYAN's bylaws, as amended, establish advance notice procedures with respect to all annual meetings and special meetings of the shareholders of MAYAN. Under the notice procedures, written notice of any meeting of the shareholders of MAYAN must be provided to each shareholder entitled to vote at the meeting. Notice will be deemed to have been given to a shareholder at the time when the notice is delivered personally or deposited in the mail or sent by other means of written communication to the shareholder's address as it appears on the books of MAYAN or as provided by the shareholder to MAYAN for the purpose of notice. Unless statutory requirements dictate otherwise, the notices to the shareholders must be sent at least ten (10) days and no more than sixty (60) days before the date of the annual meeting or special meeting and must include the place, date and hour of the meeting. In addition, the notice to shareholders must include (i) in the case of an annual meeting, a description of those matters which the board of directors, at the time of giving notice, intends to present for action by the shareholders (the agenda is not limited, however, to matters described in the notice), or (ii) in the case of a special meeting, a description of the general nature of the business to be transacted and a statement that no other business will be transacted. The notice to shareholders of any meeting at which directors are to be elected shall also be required to include the name of the nominee or nominees whom, at the time of the notice, management intends to present for shareholder action. The bylaws, as amended, do not explicitly authorize shareholders to nominate directors for election at shareholder meetings. However, the bylaws, as amended, do provide that in the event a shareholder wishes to propose that business be transacted at a special meeting, the shareholder may submit a written request to authorized officers of MAYAN specifying the general nature of any proposed business. There is no specific date before, or time period during, which a written shareholder request must be received by an authorized officer of MAYAN in order to be considered timely. However, the notice procedures are intended to afford the board of directors an opportunity to consider the merit of shareholder proposals, and to the extent deemed appropriate by the board of directors, to inform the shareholders about those proposals. Therefore, a proposal has a better chance of being submitted to a full shareholder vote if the written request is delivered to MAYAN well in 102
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advance of the special meeting at which the shareholder wishes to present his or her proposal for shareholder action. Limitations of Liability of Directors. Ariel's restated certificate of incorporation eliminates, to the maximum extent allowed by the Delaware General Corporation Law, a director's personal liability to Ariel or its stockholders for monetary damages for breaches of fiduciary duties. The certificate of incorporation does not, however, eliminate or limit the personal liability of a director for the following: (i) any breach of the director's duty of loyalty to Ariel or its stockholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions; or (iv) any transaction from which the director derived an improper personal benefit. MAYAN's amended and restated articles of incorporation limit the liability of MAYAN's directors to the fullest extent permissible under California law. PROPOSAL TO APPROVE THE AMENDMENT TO ARIEL'S RESTATEDCERTIFICATE OF INCORPORATION Increase in Authorized Shares Immediately prior to completion of the merger, Ariel estimates that it will have approximately shares of common stock outstanding or reserved for issuance after giving effect to the one for reverse stock split to become effective immediately prior to the merger. Ariel's board of directors believes that it is advisable to increase the number of authorized shares of common stock in order to provide Ariel with sufficient shares to (1) complete the exchange of Ariel shares for the outstanding shares of MAYAN common stock in connection with the merger, (2) issue approximately 8,373,167 shares, after giving effect to the reverse stock split, upon exercise of any of MAYAN's outstanding options or warrants and (3) issue upon conversion of MAYAN's outstanding convertible subordinated promissory notes. In addition, although Ariel has no specific plans to use the additional authorized shares of common stock, Ariel's board of directors believes that it is prudent to increase the number of authorized shares of common stock to the proposed level in order to provide for a reserve of shares available for issuance in connection with possible future actions. These actions could include equity financings, business acquisitions, corporate mergers, establishing strategic relationships with corporate partners, funding employee benefit plans, stock splits or stock dividends, and other general corporate purposes. However, having these additional authorized shares of common stock available for issuance would allow the board of directors to issue shares in the future without the delay and expense associated with seeking shareholder approval at that time. Eliminating the delays and expense occasioned by the necessity of obtaining shareholder approval will better enable Ariel, among other things, to engage in financing transactions and acquisitions as well as to take advantage of changing market and financial conditions on a more competitive basis, as determined by Ariel's board of directors. The additional shares of common stock to be authorized by adoption of the proposed amendment would have rights identical to the currently outstanding shares of common stock. Adoption of the proposed amendment and the future issuance of shares of common stock would not affect the rights of the holders of currently outstanding shares of common stock, except for effects incidental to increases in the number of outstanding shares of common stock at the time of any issuances such as dilution of the percentage of ownership, voting power and value of the common stock held by the holders of common stock. Any future issuance of shares of common stock will be subject to the rights of the holders of any outstanding shares of any preferred stock which Ariel may issue in the future. 103
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Reverse Stock Split In order to decrease the number of shares that would be outstanding following the merger, the Ariel board has determined that it is in the best interest of Ariel and its stockholders to effect a one for 20 reverse stock split of the Ariel common stock immediately prior to completion of the merger. The amendment to the restated certificate of incorporation, if approved, will effect a one for 20 reverse stock split of the Ariel common stock, but will not change the authorized number of shares of common stock or preferred stock, the number of treasury shares held by Ariel or the par value of Ariel's common stock or preferred stock. The Ariel board desires to effect the reverse stock split in order to reduce the number of issued and outstanding shares of Ariel's common stock following the merger from approximately 186,070,380 shares to approximately 9,303,519 shares. The Ariel board also believes the reverse stock split will help to avoid a delisting of Ariel's common stock from the Nasdaq National Market, Nasdaq, and to meet the Nasdaq's requirement of a $5.00 minimum bid price per share for the combined company to qualify its common stock for listing following the closing of the merger. Additionally, the Ariel board believes a higher stock price may help generate investor interest in Ariel and help Ariel attract and retain employees and other service providers. Reduction in Shares. After the merger, Ariel will have approximately 180,000,000 shares of its common stock issued and outstanding, up from approximately 13,199,520 shares issued and outstanding today. Additionally, following the merger, Ariel expects to issue additional shares in connection with equity financings, business acquisitions, employee benefit plans and other general corporate purposes, all of which will further increase the number of shares that are issued and outstanding. The Ariel board believes that a smaller number of issued and outstanding shares will be more manageable for the combined company. Nasdaq Listing. Ariel's common stock is quoted on Nasdaq under the symbol "ADSP." On June 19, 2001, Ariel received notice from Nasdaq that its common stock had failed to maintain Nasdaq's minimum bid price closing requirement of $1.00 and that such failure had continued beyond the probationary period allowed under the Nasdaq National Marketplace Rules. The letter specified that, as a result of Ariel's failure to maintain the minimum bid price closing requirement, Ariel's common stock was subject to being delisted. In addition, in accordance with Rule 4330(f) of the Nasdaq National Market, the combined company is required to meet an initial minimum bid price of $5.00 per share in order to qualify the stock for listing on Nasdaq. If Ariel effects a one for 20 split, Ariel believes that it will raise the market price per share of its common stock to a price that is above $5.00 per share. If, following the reverse stock split, the per share price of Ariel's common stock is above $1.00 for ten (10) consecutive trading days, Ariel believes Nasdaq may withdraw the delisting action, and if the per share price of Ariel's common stock is above $5.00 for ten (10) consecutive trading days following he closing of the merger with MAYAN, Ariel believes Nasdaq will approve the combined company's listing application. The Ariel board also believes that maintaining Nasdaq listing may provide a broader market for the combined company's common stock and facilitate the use of the combined company's common stock in financing transactions. The Ariel board approved the reverse stock split partly as a means of increasing the share price of Ariel's common stock above $5.00 per share. If the stockholders do not approve the reverse stock split proposal and the stock price does not otherwise increase to greater than $1.00 per share, Ariel expects the common stock to be immediately delisted from Nasdaq. Additionally, if the stock price does not increase to a price that is greater than $5.00 per share, Ariel expects that the common stock of the combined company will not qualify for inclusion on Nasdaq, which is a condition to the closing of the merger with MAYAN. If this condition is not satisfied, the merger with MAYAN may not occur. Authorized Shares; Future Financings. Upon effectiveness of the reverse stock split, the number of authorized shares of common stock that are not issued or outstanding would increase from approximately 1,340,024 shares to approximately 249,340,024 shares. Ariel will continue to have 2,000,000 authorized but unissued shares of preferred stock. 104
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Authorized but unissued shares will be available for issuance, and we may issue such shares in financings or otherwise. If we issue additional shares, the ownership interest of holders of Ariel's common stock may also be diluted. Also, the issued shares may have rights, preferences or privileges senior to those of Ariel's common stock. Principal Effects of the Reverse Stock Split The reverse stock split will be effected simultaneously for all Ariel's common stock and the exchange number will be the same for all of Ariel's common stock. The reverse stock split will affect all of Ariel's stockholders uniformly and will not affect any stockholder's percentage ownership interests in Ariel, except to the extent that the reverse stock split results in any of Ariel's stockholders owning a fractional share. As described below, stockholders holding fractional shares will be entitled to cash payments in lieu of such fractional shares. Such cash payments will reduce the number of post-split stockholders to the extent there are stockholders presently holding fewer than 20 shares. This, however, is not the purpose for which Ariel is effecting the reverse stock split. Common stock issued pursuant to the reverse stock split will remain fully paid and non-assessable. Ariel will continue to be subject to the periodic reporting requirements of the Exchange Act. Fractional Shares. No scrip or fractional certificates will be issued in connection with the reverse stock split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of shares not evenly divisible by 20 will be entitled, upon surrender of certificate(s) representing such shares, to a cash payment in lieu thereof. The cash payment will equal the fraction to which the stockholder would otherwise be entitled multiplied by the average of the closing prices (as adjusted to reflect the reverse stock split) of our common stock, as reported in The Wall Street Journal, during the sixty (60) trading days preceding the date that is five (5) days before the effective time of the reverse stock split. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to receive payment therefor as described herein. Vote Required Approval of the amendment to Ariel's restated certificate of incorporation to effect the changes described above requires the affirmative vote of the holders of a majority of the outstanding shares of Ariel common stock. Recommendation of the Board of Directors The disinterested members of the Ariel board of directors have determined that the proposal to approve the amendment to Ariel's restated certificate of incorporation is in the best interest of Ariel and its stockholders, and unanimously recommend that Ariel stockholders vote "FOR" the amendment to Ariel's restated certificate of incorporation. Unless authority to do so is withheld, the person(s) named in each proxy will vote the shares represented thereby "For" the approval of the amendment to Ariel's restated certificate of incorporation. 105
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PROPOSAL TO APPROVE THE IMPLEMENTATION OF ARIEL'S 2001 STOCK INCENTIVE PLAN Ariel's stockholders are being asked to approve the implementation of Ariel's 2001 Stock Incentive Plan. Ariel's board of directors adopted the 2001 plan on April 26, 2001, subject to stockholder approval at the special meeting. The 2001 plan will become effective on the date the merger with MAYAN is consummated. The 2001 plan is designed to allow Ariel to continue to utilize equity incentives to attract and retain the services of key individuals essential to Ariel's long-term growth and financial success. Equity incentives play a significant role in Ariel's efforts to remain competitive in the market for talented individuals, and Ariel relies on those incentives as a means to attract and retain highly qualified individuals in the positions vital to Ariel's success. The 2001 plan will serve as the successor to the Ariel existing stock plans which include the 1992 Stock Option Plan, 1994 Stock Option Plan, 1995 Stock Option Plan and 1996 Directors Plan and as the successor to MAYAN's 1998 Stock Option/Stock Issuance Plan, as assumed by Ariel in connection with the merger. No further grants will be made under any of these plans, which will be collectively referred to in this proposal as the predecessor plans, and the outstanding options under the predecessor plans will at that time be transferred to the 2001 plan. The following is a summary of the principal features of the 2001 plan. Any stockholder who wishes to obtain a copy of the actual plan document may do so upon written request to Ariel at 2540 Route 130, Cranbury, New Jersey 08512. Equity Incentive Programs The 2001 plan consists of three separate equity incentive programs: (i) the discretionary option grant program, (ii) the stock issuance program and (iii) the automatic option grant program for eligible non-employee board members. The principal features of each program are described below. The compensation committee of Ariel's board of directors will have the exclusive authority to administer the discretionary option grant and stock issuance programs with respect to option grants and stock issuances made to Ariel's executive officers and eligible non-employee board members and will also have the authority to make option grants and stock issuances under those programs to all other eligible individuals. However, Ariel's board of directors or any secondary committee of one or more board members appointed by the board will also have separate but concurrent authority with the compensation committee to make option grants and stock issuances under those two programs to individuals other than executive officers and non-employee board members. The term plan administrator, as used in this summary, will mean the compensation committee, the board of directors or any secondary committee, to the extent that entity is acting within the scope of its administrative authority under the 2001 plan. However, neither the compensation committee, the board of directors nor any secondary committee will exercise any administrative discretion under the automatic option grant program. All grants under the automatic option grant program will be made in strict compliance with the express provisions of that program. Share Reserve The number of shares of common stock initially reserved for issuance over the term of the 2001 plan will be 15,659,762 shares. That reserve will consist of the shares estimated to be available for issuance under the predecessor plans, including the shares subject to outstanding options under the predecessor plans which will be transferred to the 2001 plan. The number of shares of common stock available for issuance under the 2001 plan will automatically increase on the first trading day of January of each calendar year, beginning with calendar year 2002, by an amount equal to 5% of the total number of shares of Ariel's common stock outstanding on the last trading 106
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day of December the immediately preceding calendar year, but in no event will any annual increase exceed 10,000,000 shares. No participant in the 2001 plan may receive option grants, separately exercisable stock appreciation rights or direct stock issuances for more than 1,000,000 shares of Ariel common stock in total per calendar year, subject to adjustment for subsequent stock splits, stock dividends and similar transactions. Stockholder approval of this proposal will also constitute approval of that 1,000,000-share limitation for purposes of Internal Revenue Code Section 162(m). The shares of Ariel common stock issuable under the 2001 plan may be drawn from shares of Ariel's authorized but unissued common stock or from shares of Ariel's common stock which Ariel acquires, including shares purchased on the open market. Shares subject to any outstanding options under the 2001 plan which expire or otherwise terminate prior to exercise or which are cancelled in accordance with the cancellation-regrant provisions of the discretionary option grant program will be available for subsequent issuance. Unvested shares issued under the 2001 plan and subsequently repurchased by Ariel, at the option exercise or direct issue price paid per share, pursuant to Ariel's purchase rights under the 2001 plan will be added back to the number of shares reserved for issuance under the 2001 plan and will accordingly be available for subsequent issuance. However, any shares subject to stock appreciation rights exercised under the 2001 plan will not be available for reissuance. Eligibility Officers and employees, non-employee board members and independent consultants in Ariel's service or in the service of its parent and subsidiaries (whether now existing or subsequently established) will be eligible to participate in the discretionary option grant and stock issuance programs. Participation in the automatic option grant program will be limited to eligible non-employee members of Ariel's board of directors. As of May 15, 2001, approximately 77 employees, including five (5) executive officers and five (5) non-employee board members, were eligible to participate in the discretionary option grant and stock issuance programs and five (5) non- employee board members were eligible to participate in the automatic option grant program. Valuation The fair market value per share of Ariel's common stock on any relevant date under the 2001 plan will be deemed to be equal to the closing selling price per share on that date on the Nasdaq National Market. On July 23, 2001, the fair market value per share of Ariel's common stock determined on that basis was $0.50. Discretionary Option Grant Program The plan administrator will have complete discretion under the discretionary option grant program to determine which eligible individuals are to receive option grants, the time or times when those grants are to be made, the number of shares subject to that grant, the status of any granted option as either an incentive stock option or a non-statutory option under the federal tax laws, the vesting schedule (if any) to be in effect for the option grant and the maximum term for which any granted option is to remain outstanding. Each granted option will have an exercise price per share determined by the plan administrator, but the exercise price will not be less than one hundred percent of the fair market value of the option shares on the grant date. No granted option will have a term in excess of ten years. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date. However, one or more options may be structured so that they will be immediately exercisable for any or all of the option shares. The shares acquired under those immediately exercisable options will be subject to 107
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repurchase by Ariel, at the exercise price paid per share, if the optionee ceases service prior to vesting in those shares. Upon cessation of service, the optionee will have a limited period of time in which to exercise his or her outstanding options to the extent exercisable for vested shares. The plan administrator will have complete discretion to extend the period following the optionee's cessation of service during which his or her outstanding options may be exercised (up to the expiration of the option term) and/or to accelerate the exercisability or vesting of those options in whole or in part. That discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee's actual cessation of service. The plan administrator is authorized to issue tandem stock appreciation rights under the discretionary option grant program which will provide the holders with the right to surrender their options to Ariel for an appreciation distribution. The amount of the distribution payable by Ariel will be equal to the excess of (a) the fair market value of the vested shares of Ariel's common stock subject to the surrendered option over (b) the aggregate exercise price payable for those shares. That appreciation distribution may, at the discretion of the plan administrator, be made in cash or in shares of Ariel's common stock. The plan administrator will also have the authority to effect the cancellation of outstanding options under the discretionary option grant program (including options transferred from the predecessor plans) in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. Stock Issuance Program Shares may be issued under the stock issuance program at a price per share not less than their fair market value, payable in cash or through a full recourse promissory note. Shares may also be issued as a bonus for past services without any cash outlay required of the recipient. Shares of Ariel's common stock may also be issued under the program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals or the completion of a designated service period. The plan administrator will have complete discretion under the program to determine which eligible individuals are to receive those stock issuances or share right awards, the time or times when those issuances or awards are to be made, the number of shares subject to that issuance or award and the vesting schedule to be in effect for the stock issuance or share rights award. The shares issued may be fully and immediately vested upon issuance or may vest upon the completion of a designated performance goals or the satisfaction of specified service requirements. The plan administrator will, however, have the discretionary authority at any time to accelerate the vesting of any and all unvested shares outstanding under the stock issuance program. Outstanding share right awards under the program will automatically terminate, and no shares of Ariel's common stock will actually be issued in satisfaction of those awards, if the performance goals or service requirements established for those awards are not attained or satisfied. The plan administrator, however, will have the discretionary authority to issue shares of Ariel's common stock in satisfaction of one or more outstanding share right awards as to which the designated performance goals or service requirements are not attained or satisfied. Automatic Option Grant Program Under the automatic option grant program, eligible non-employee members of the board of directors will receive a series of option grants over their period of board service. Each eligible new non-employee board member will, at the time of his or her initial election or appointment to the board after the closing of the merger, receive an option grant for 12,500 shares of Ariel's common stock after giving effect to the one for 20 reverse stock split, provided that individual has not previously been in Ariel's service. On the date of each annual stockholders meeting held after the plan effective date, each individual who is to continue to serve as a 108
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non-employee board member will automatically be granted an option to purchase 2,500 shares, after giving effect to the one for 20 reverse stock split, of Ariel's common stock, provided he or she has served as a non-employee board member for at least six months. The non-employee board members eligible to participate in the automatic option grant program will be limited to those who first become non-employee board members on or after the plan effective date, whether through appointment by the board or election by Ariel's stockholders, and those non-employee board members who continue to serve as non-employee board members at one or more annual stockholders meetings held after the plan effective date. There will be no limit on the number of those 2,500-share, after giving effect to the one for 20 reverse stock split, annual option grants any one eligible non-employee board member may receive over his or her period of continued board service, and non-employee board members who have previously been in Ariel's employ will be eligible to receive one or more of those annual option grants over their period of board service. Stockholder approval of this proposal will also constitute pre-approval of each option granted under the automatic option grant program and the subsequent exercise of those options in accordance with the terms of the program summarized below. Each automatic grant will have an exercise price per share equal to the fair market value per share of Ariel's common stock on the grant date and will have a maximum term of 10 years, subject to earlier termination following the optionee's cessation of board service. Each automatic option will be immediately exercisable for all of the option shares. However, any unvested shares purchased under that option will be subject to repurchase by Ariel, at the exercise price paid per share, should the optionee cease board service prior to vesting in those shares. The shares subject to each initial 12,500- share, after giving effect to the one for 20 reverse stock split, automatic option grant will vest in a series of four successive equal annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual 2,500- share, after giving effect to the one for 20 reverse stock split. automatic grant will vest in one installment upon the optionee's completion of one-year of board service over the one-year period measured from the grant date. However, the shares subject to each outstanding automatic option grant will immediately vest in full upon certain changes in control or ownership or upon the optionee's death or disability while a board member. Following the optionee's cessation of board service for any reason, each automatic option grant will remain exercisable for a 12-month period and may be exercised during that time for any or all shares in which the optionee is vested at the time of that cessation of board service. Limited Stock Appreciation Rights Limited stock appreciation rights may be granted under the discretionary option grant program to one or more of Ariel's officers or non-employee board members as part of their option grants, and each option granted under the automatic option grant program will automatically include that limited stock appreciation right. Upon the successful completion of a hostile tender offer for more than 50% of Ariel's outstanding voting securities while the optionee remains a board member, each outstanding option with a limited stock appreciation right may be surrendered to Ariel in return for a cash distribution. The amount of the distribution per surrendered option share will be equal to the excess of (i) the highest tender offer price paid per share in the hostile take-over (ii) the exercise price payable per share under the surrendered option. Stockholder approval of this proposal will also constitute pre-approval of each limited stock appreciation right granted under the automatic option grant program and the subsequent exercise of that right in accordance with the foregoing terms. Predecessor Plans All outstanding options under the predecessor plans transferred to the 2001 plan will continue to be governed by the terms of the agreements evidencing those options, and no provision of the 2001 plan will affect or otherwise modify the rights or obligations of the holders of the transferred options with respect to their 109
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acquisition of Ariel's common stock. However, the plan administrator has complete discretion to extend one or more provisions of the 2001 plan to the transferred options, to the extent those options do not otherwise contain those provisions. No further option grants or stock issuances will be made under the predecessor plans following their termination upon the consummation of the merger with MAYAN. Ariel Stock Awards The table below shows, as to Ariel's chief executive officer, each of the four other most highly compensated executive officers of Ariel (with base salary and bonus for the 2000 fiscal year in excess of $100,000) and the other individuals and groups indicated, the number of shares of common stock subject to option grants made under Ariel's predecessor stock plans from January 1, 2000 through June 30, 2001, together with the weighted average exercise price payable per share. Ariel has not made any direct stock issuances to date under any of the Ariel predecessor plans. [Download Table] Weighted Number of Average Exercise Shares Underlying Price Name and Position Options Granted (#)* Per Share ($)* ----------------- -------------------- ---------------- Dennis Schneider........................ 24,300 $0.12 President and Chief Executive Officer Jay H. Atlas............................ 11,812 $0.12 Former President and Chief Executive Officer Richard Flocco, Jr...................... 4,050 $0.14 VP of Operations John Loprete............................ 4,250 $0.11 Vice President--Finance Eugene Corrado.......................... 3,000 $0.10 VP of Sales Carlos G. Borgialli..................... 9,000 $0.15 Vice President--Engineering All current executive officers as a group (6 persons)...................... 56,412 $0.12 All current non-employee directors as a group (5 persons)...................... 26,200 $0.15 All persons, including employees, current officers who are not executive officers, as a group (90 persons)...... 55,071 $0.17 -------- * After giving effect to the 20 for one reverse stock split which is expected to occur immediately prior to the effective time of the merger. As of June 30, 2001, 149,061 shares of common stock, after giving effect to the one for 20 reverse stock split, were subject to outstanding options under the Ariel predecessor plans, 158,500 shares, after giving effect to the one for 20 reverse stock split, had been issued under those plans, and 4,231 shares, after giving effect to the one for 20 reverse stock split, remained available for future issuance. 110
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MAYAN Stock Awards The table below shows, as to MAYAN's chief executive officer, each of MAYAN's four other most highly compensated executive officers (with base salary and bonus for the 2000 fiscal year in excess of $100,000) and the other individuals and groups indicated, the number of shares of common stock subject to option grants made under MAYAN's predecessor stock plan and stock option grants made outside of MAYAN's predecessor stock plan from January 1, 2000 through June 30, 2001, together with the weighted average exercise price payable per share. MAYAN has not made any direct stock issuances to date under the MAYAN predecessor plan. [Download Table] Weighted Number of Average Exercise Shares Underlying Price Name and Position Options Granted (#) Per Share ($) ----------------- ------------------- ---------------- Daniel J. Gatti......................... 1,725,000 $0.19 Former President, Director and Chief Executive Officer(1) Esmond Goei............................. 1,208,170 $0.75 Chief Executive Officer(2) Daniel W. Brown......................... 300,000 $0.27 Vice President of Product Marketing Julian C. Thomson....................... 400,000 $0.10 Former Vice President of Technology(3) Robert A. Hernandez..................... 350,000 $0.17 Former Vice President of Operations(4) Andrew M. Lovit......................... 350,000 $0.17 Former Vice President of Worldwide Sales(5) All current executive officers as a group (5 persons)...................... 1,538,333 $0.75 All current non-employee directors as a group (2 persons)...................... 210,000 $0.23 All employees, including current officers who are not executive officers, as a group (213 persons)..... 5,504,092 $0.92 -------- (1) Mr. Gatti's service as chief executive officer of MAYAN ceased in March 2001 and his service as president and director of MAYAN ceased in May 2001. (2) Mr. Goei was appointed as the chief executive officer of MAYAN in March 2001. (3) Mr. Thomson's service as Vice President of Technology with MAYAN ceased in March 2001. (4) Mr. Hernandez' service as Vice President of Operations with MAYAN ceased in March 2001. (5) Mr. Lovit's service as Vice President of Worldwide Sales with MAYAN ceased in March 2001. As of June 30, 2001, 3,461,164 shares of common stock were subject to outstanding options under the MAYAN predecessor plan and stock options issued outside of MAYAN's predecessor stock plan, 8,820,383 shares had been issued under that plan, and 4,470,942 shares remained available for future issuance. Cancellation and Regrant of Options. MAYAN's Plan Administrator has the authority to effect the cancellation of any or all options outstanding under the 1998 Stock Option/Stock Issuance Plan and to grant in substitution therefor new options covering the same or different numbers of shares of common stock but with an exercise price per share based upon the fair market value of the common stock on the new grant date. On March 13, 2001, MAYAN cancelled options to purchase 110,500 shares of MAYAN's common stock previously granted to certain employees. These options had an original exercise price of $5.30. MAYAN replaced the cancelled options with new options for the same number of shares but with an exercise price of $0.75. The new options granted in replacement of the original options will become exercisable for those option 111
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shares in one or more installments over the optionee's period of continued service, with each such installment to vest on the same vesting date in effect for that installment under the cancelled higher-priced option. Under the FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation," an Interpretation of APB No. 25, these options will be accounted for as variable grants. Accordingly, MAYAN will be required to recognize compensation expense equal to the intrinsic value, the difference between the exercise price of $0.75 and the fair value of MAYAN's common stock until the options are exercised, forfeited, or expire unexercised. New Plan Benefits No stock option grants or direct stock issuances have been made to date under the 2001 plan. General Provisions Acceleration In the event there should occur a change in control of Ariel, each outstanding option under the discretionary option grant program will automatically accelerate in full, unless assumed or otherwise continued in effect by the successor corporation or replaced with a cash incentive program which preserves the spread existing on the unvested option shares (the excess of the fair market value of those shares over the option exercise price payable for those shares) and provides for subsequent payout of that spread in accordance with the same vesting schedule in effect for those option shares. In addition, all unvested shares outstanding under the discretionary option grant and stock issuance programs will immediately vest, except to the extent Ariel's repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in effect. The plan administrator will have complete discretion to grant one or more options under the discretionary option grant program which will become exercisable for all the option shares in the event the optionee's service with Ariel or the successor entity is terminated (actually or constructively) within a designated period following any change in control transaction in which those options are assumed or otherwise continued in effect. The vesting of outstanding shares under the stock issuance program is also structured to accelerate upon similar terms and conditions. The plan administrator will have the discretion to structure one or more option grants under the discretionary option grant program so that those options will immediately vest upon a change in control, whether or not the options are to be assumed or otherwise continued in effect. The vesting of outstanding shares under the stock issuance program may also be structured to accelerate upon similar terms and conditions. The shares subject to each option under the automatic option grant program will immediately vest upon any change in control transaction while the optionee remains a board member. A change in control will be deemed to occur upon (i) an acquisition of Ariel by merger or asset sale, (ii) the successful completion of a tender offer for more than 50% of Ariel's outstanding voting stock or (iii) a change in the majority of the board effected through one or more contested elections for board membership. The acceleration of vesting in the event of a change in the ownership or control of Ariel may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of Ariel. Stockholder Rights And Option Transferability No optionee will have any stockholder rights with respect to the option shares until that optionee has exercised the option and paid the exercise price for the purchased shares. Options are not assignable or transferable other than by will or the laws of inheritance following optionee's death, and during the optionee's lifetime, the option may only be exercised by the optionee. However, non-statutory options may be transferred or assigned during optionee's lifetime to one or more members of the optionee's family or to a trust established 112
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for one or more of those family members or to the optionee's former spouse, to the extent that transfer is in connection with the optionee's estate plan or pursuant to a domestic relations order. Changes in Capitalization In the event any change is made to the outstanding shares of common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without Ariel's receipt of consideration, appropriate adjustments will be made to (i) the maximum number and/or class of securities issuable under the 2001 plan, (ii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the 2001 plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the automatic option grant program to new and continuing non- employee board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option and under each installment of option shares scheduled to vest or become exercisable subsequently pursuant to that option, (v) the number and/or class of securities and the exercise price per share in effect under each outstanding option transferred from each predecessor plan to the 2001 plan and under each installment of option shares scheduled to vest or become exercisable subsequently pursuant to that option and (vi) the maximum number and/or class of securities by which the share reserve under the 2001 plan is to increase automatically each year. Those adjustments will be designed to preclude any dilution or enlargement of benefits under the 2001 plan or the outstanding options thereunder. Financial Assistance The plan administrator may institute a loan program to assist one or more participants in financing the exercise of outstanding options under the discretionary option grant program or the purchase of shares under the stock issuance program through full-recourse interest-bearing promissory notes. However, the maximum amount of financing provided any participant may not exceed the cash consideration payable for the issued shares plus all applicable taxes incurred in connection with the acquisition of those shares. Special Tax Election The plan administrator may provide one or more holders of non-statutory options or unvested share issuances under the 2001 plan (other than the options granted or the shares issued under the automatic option grant program) with the right to have Ariel withhold a portion of the shares otherwise issuable to those individuals in satisfaction of the withholding taxes to which those individuals become subject in connection with the exercise of those options or the vesting of those shares. Alternatively, the plan administrator may allow those individuals to deliver previously acquired shares of common stock in payment of that withholding tax liability. Amendment and Termination The board may amend or modify the 2001 plan at any time, subject to any required stockholder approval pursuant to applicable laws and regulations. Unless sooner terminated by the board, the 2001 plan will terminate on the earliest of (i) the tenth anniversary of the plan effective date, (ii) the date on which all shares available for issuance under the 2001 plan have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with certain changes in control or ownership of Ariel. 113
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Federal Income Tax Consequences Option Grants Options granted under the 2001 plan may be either incentive stock options which satisfy the requirements of Section 422 of the Internal Revenue Code or non-statutory options which are not intended to meet those requirements. The Federal income tax treatment for the two types of options differs as follows: Incentive Options. No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is generally recognized at the time the option is exercised. The optionee will, however, recognize taxable income in the year in which the purchased shares are sold or otherwise made the subject of a taxable disposition. For Federal tax purposes, dispositions are divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale or other disposition is made more than two (2) years after the date the option for the shares involved in that sale or disposition is granted and more than one (1) year after the date the option for those shares is exercised. If the sale or disposition occurs before these two periods are satisfied, then a disqualifying disposition will result. Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to the excess of (i) the amount realized upon the sale or other disposition of the purchased shares over (ii) the exercise price paid for the shares. If there is a disqualifying disposition of the shares, then the excess of (i) the fair market value of those shares on the exercise date over (ii) the exercise price paid for the shares will be taxable as ordinary income to the optionee. Any additional gain or loss recognized upon the disposition will be recognized as a capital gain or loss by the optionee. If the optionee makes a disqualifying disposition of the purchased shares, then Ariel will be entitled to an income tax deduction, for the taxable year in which that disposition occurs, equal to the excess of (i) the fair market value of those shares on the option exercise date over (ii) the exercise price paid for the shares. If the optionee makes a qualifying disposition, Ariel will not be entitled to any income tax deduction. Non-Statutory Options. No taxable income is recognized by an optionee upon the grant of a non-statutory option. The optionee will in general recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and the optionee will be required to satisfy the tax withholding requirements applicable to that income. If the shares acquired upon exercise of the non-statutory option are unvested and subject to repurchase by Ariel in the event of the optionee's termination of service prior to vesting in those shares, then the optionee will not recognize any taxable income at the time of exercise but will have to report as ordinary income, as and when Ariel's repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses over (ii) the exercise price paid for the shares. The optionee may, however, elect under Section 83(b) of the Internal Revenue Code to include as ordinary income in the year of exercise of the option an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date over (ii) the exercise price paid for those shares. If the Section 83(b) election is made, the optionee will not recognize any additional income as and when the repurchase right lapses. Ariel will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the optionee with respect to the exercised non- statutory option. The deduction will in general be allowed for the taxable year of Ariel in which that ordinary income is recognized by the optionee. Stock Appreciation Rights No taxable income is recognized upon receipt of a stock appreciation right. The holder will recognize ordinary income, in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the base price in 114
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effect for the exercised right, and the holder will be required to satisfy the tax withholding requirements applicable to that income. Ariel will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be allowed for the taxable year in which that ordinary income is recognized. Direct Stock Issuances The tax principles applicable to direct stock issuances under the 2001 plan will be substantially the same as those summarized above for the exercise of non-statutory option grants. Deductibility of Executive Compensation Ariel anticipates that any compensation deemed paid by it in connection with the disqualifying disposition of incentive stock option shares or the exercise of non-statutory options with exercise prices equal to the fair market value of the option shares on the grant date will qualify as performance-based compensation for purposes of Code Section 162(m) and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers of Ariel. Accordingly, all compensation deemed paid with respect to those options will remain deductible by Ariel without limitation under Code Section 162(m). Accounting Treatment Option grants under the discretionary option grant and automatic option grant programs with exercise prices equal to the fair market value of the option shares on the grant date will not result in any direct charge to Ariel's reported earnings. However, the fair value of those options is required to be disclosed in the notes to Ariel's financial statements, and Ariel must also disclose, in footnotes to its financial statements, the pro-forma impact those options would have upon its reported earnings were the fair value of those options at the time of grant treated as a compensation expense. In addition, the number of outstanding options may be a factor in determining Ariel's earnings per share on a fully-diluted basis. Any option grants made to non-employee consultants (but not non-employee board members) will result in a direct charge to Ariel's reported earnings based upon the fair value of the option measured initially as of the grant date and then subsequently on the vesting date of each installment of the underlying option shares. That charge will accordingly include the appreciation in the value of the option shares over the period between the grant date of the option and the vesting date of each installment of the option shares. Should any outstanding options under the 2001 plan be repriced, then that repricing will also trigger a direct charge to Ariel's reported earnings measured by the appreciation in the value of the underlying shares between the grant of the repriced option and the date the repriced option is exercised for those shares or terminates unexercised. Should one or more individuals be granted tandem stock appreciation rights under the 2001 plan, then those rights would result in a compensation expense to be charged against Ariel's reported earnings. Accordingly, at the end of each fiscal quarter, the amount (if any) by which the fair market value of the shares of common stock subject to those outstanding stock appreciation rights has increased from the prior quarter-end would be accrued as compensation expense, to the extent that fair market value is in excess of the aggregate exercise price in effect for those rights. Vote Required The affirmative vote of at least a majority of the shares of common stock present in person or by proxy at the special meeting and entitled to vote is required for approval of the implementation of the 2001 plan. Should that stockholder approval not be obtained, then the 2001 plan will not be implemented. However, in that event, each of 115
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the predecessor plans will remain in effect, and stock option grants and share issuances will continue to be made under those plans until the available share reserve under each of those plans has been issued. Recommendation of the Board of Directors The members of the Ariel board of directors have determined that the proposal to approve the implementation of the 2001 Stock Incentive Plan is in the best interest of Ariel and its stockholders, and unanimously recommend that Ariel stockholders Vote "FOR" approval of the implementation of the 2001 Stock Incentive Plan. Unless authority to do so is withheld, the person(s) named in each proxy will vote the shares represented thereby "For" the approval of implementation of the 2001 Stock Incentive Plan. PROPOSAL TO ELECT ARIEL'S CURRENT BOARD OF DIRECTORS Directors will be elected at the Special Meeting. The Company's Board of Directors currently is composed of seven directors. The Board of Directors is divided into three classes and the members of each class are elected at the Annual Meeting of the stockholders held in the year in which the terms of that class expires. Messrs. Agnello and Paul have terms expiring in 2001. Messrs. Atlas and Goei have terms expiring in 2002. Messrs. Schneider, Fuchs and Burlinson have terms expiring 2003. The incumbent board serves as nominating committee for new directors. On or about March 1, 2001, Ariel's charter was voided because of the inadvertent underpayment of 2000 and 1999 annual franchise taxes due to the state of Delaware. The charter was revived on March 21, 2001 by filing a Certificate of Renewal with the Secretary of State of the State of Delaware, and paying all fees and charges due. Section 312 of the Delaware General Corporation Law provides that upon filing such a certificate, the corporation "shall be renewed and revived with the same force and effect as if its certificate of incorporation had not been" voided and all actions taken by the corporation during the period that the certificate was void shall be valid. Section 312 also requires that whenever a Delaware corporation's charter has been voided and then been reinstated as permitted under such section, a special meeting of the shareholders shall be called and held to re-elect a full board of directors. Accordingly, Ariel is submitting the names of the board of directors, Messrs. Agnello, Paul, Atlas, Goei, Schneider, Fuchs and Burlinson, to be re-elected as directors in the classes in which they are now serving. If the merger transaction with MAYAN is consummated, all of these individuals, with the exception of Messrs. Goei and Agnello, will then resign and the individuals identified under the caption "The Merger-Management Following the Merger" on page 88 will be appointed pursuant to the terms of the merger agreement. Proxies received in response to this solicitation will be voted for the election of all these directors unless otherwise specified in the proxy. The Board of Directors have no reason to believe that the nominees will decline or be unable to serve as a director of the Company. Recommendation of the Board of Directors The members of the Ariel board of directors have determined that the election of each of the members of Ariel's current board of directors to serve until the earlier of (i) the completion of the term for which each was previously elected, (ii) the closing of the merger or (iii) until their successors are duly elected and qualified is in the best interest of Ariel and its stockholders, and unanimously recommend that Ariel stockholders Vote "FOR" election of Messrs. Agnello, Goei, Paul, Burlinson, Fuchs, Schneider and Atlas. Unless authority to do so is withheld, the person(s) named in each proxy will vote the shares represented thereby "For" election of Messrs. Agnello, Goei, Paul, Burlinson, Fuchs, Schneider and Atlas. 116
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MARKET PRICE INFORMATION Ariel Market Price Data Ariel's common stock has traded on the Nasdaq National Market under the symbol "ADSP" since January 24, 1995. The following table sets forth the high and low sales prices reported on the Nasdaq National Market for Ariel common stock for the periods indicated. [Download Table] High Low -------- -------- Fiscal Year Ended December 31, 1999 First Quarter............................................. $ 3.375 $ 1.625 Second Quarter............................................ 3.938 2.000 Third Quarter............................................. 6.563 1.875 Fourth Quarter............................................ 37.000 2.750 Fiscal Year Ended December 31, 2000 First Quarter............................................. $ 12.375 $ 6.750 Second Quarter............................................ 7.813 2.563 Third Quarter............................................. 3.438 1.344 Fourth Quarter............................................ 2.438 0.563 Fiscal Year Ending December 31, 2001 First Quarter............................................. $ 1.8125 $ 0.7812 Second Quarter............................................ 1.4688 0.38 Third Quarter (through July 23, 2001)..................... 0.56 0.38 MAYAN Market Price Data There is no established public trading market for MAYAN common stock. An equivalent market value per share based on Ariel's market value as of March 28, 2001 (assuming an exchange ratio of 3.13 shares of Ariel common stock to one share of MAYAN common stock) is $4.21. Recent Closing Prices On March 28, 2001, the last trading day before announcement of the proposed merger, the closing price per share of Ariel common stock on the Nasdaq National Market was $1.3438. On March 23, 2001, five business days before announcement of the proposed merger, the closing price per share of Ariel common stock on the Nasdaq National Market was $1.1562. On July 23, 2001, the latest practicable trading day before the printing of this document, the closing price per share of Ariel common stock on the Nasdaq National Market was $0.50. As of June 30, 2001 Ariel has 206 stockholders of record. Ariel estimates it has approximately 14,000 stockholders. Because the market price of Ariel common stock is subject to fluctuation, the market value of the shares of Ariel common stock that holders of MAYAN capital stock will receive in the merger may increase or decrease prior to and following the merger. We urge stockholders to obtain current market quotations for Ariel common stock. No assurance can be given as to the future prices or markets for Ariel common stock or the common stock of the combined company. Dividend Information Neither Ariel nor MAYAN has ever paid any cash dividends on its stock, and Ariel anticipates that, following the merger, it will continue to retain any earnings for the foreseeable future for use in the operation of its business. 117
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INFORMATION ABOUT ARIEL General Ariel is a provider of open systems-based digital remote access equipment to Internet Service Providers ("ISPs") and original equipment manufacturers. Ariel's remote access equipment is compatible with open systems platforms running a variety of popular operating systems, including Windows NT and Linux, and enables its customers to build reliable, scalable and easy to manage networks at a cost that is significantly below other available alternatives. Remote access equipment enables a user dialing in over a standard telephone line to connect to a computer network. Because of the significant increase in Internet users, ISPs are faced with the challenge of providing access to a growing number of subscribers, including those subscribers who are staying connected to the Internet for longer periods of time. In addition, ISPs must also find cost effective ways to expand their networks and computer systems to provide additional services such as Internet telephony, fax and voice over the Internet and unified messaging. Ariel's products enable ISPs to use standard PC Systems to build remote access server concentrators (the equipment used to connect multiple users simultaneously to the Internet). Leveraging Ariel's expertise and experience in developing digital signal processing systems and led by new senior management, Ariel is targeting the approximately 8,000 small to mid-sized ISPs (with less than 100,000 subscribers). In 1999 Ariel introduced a new family of dial-up Internet access solutions it calls the PowerPOP (points of presence) architecture, which leverages industry standard hardware, software and applications. Ariel's architecture enables Ariel to take advantage of the increasing performance and plummeting prices of PC-based Systems to provide ISPs with more responsive, reliable and flexible networks while significantly reducing capital equipment costs and simplifying network and systems management. Ariel sells its products to ISPs primarily through distributors. Ariel has historically provided, and will continue to provide, remote access products and digital signal processing (DSP) products to original equipment manufacturers who integrate Ariel's components into their products. Because integration of Ariel's complex components involves a significant amount of technical development and testing by the original equipment manufacturer, Ariel's product is generally used for the duration of the original equipment manufacturer's product-life. Ariel sells its products to original equipment manufacturers though its direct sales force. Ariel intends to continue to offer its component products to original equipment manufacturers, including those original equipment manufacturers who sell products in the ISP market. Ariel's Corporate History Founded in 1982, Ariel was one of the first providers of digital signal processing application development tools. In the mid-1990s, Ariel evolved from being a provider of digital signal processing application development tools to supplying digital signal processing-based subsystems to original equipment manufacturers and government contractors. Ariel's products are incorporated into a variety of applications, including medical instrumentation, machine vision, professional audio, sonar, radar and multimedia. In the mid-1990s, Ariel introduced a series of products aimed at the computer telephony integration market. Computer telephony integration products provide additional functionality which allows standard computers to connect to telephone lines, initiate, receive, transmit, store and otherwise manipulate voice and data telephone communications. Ariel's initial product, the CTI Modem, is used for Internet access, online services and transaction processing. In 1996, Ariel formed a communications systems group to begin development of an Asymmetrical Digital Subscriber Line carrier-class product targeting the needs of major telecommunications and network service providers. This technology adds a high-speed data connection to a standard voice telephone line. Carrier-class is a term used to describe equipment that meets the stringent reliability and environmental needs of telephone 118
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carriers. As a result of Ariel's strategic decision to reposition itself in 1997, Ariel decided to sell its communications systems group, and in September 1998, Ariel completed the sale of the group's assets to Cabletron Systems, Inc. for approximately $30 million. In 1997, Ariel also announced its intent to focus on the remote access equipment market through product offerings that provide high density and cost effective remote access solutions based on industry standard PC platforms. Ariel developed a Windows NT-based remote access solution, which was adopted by Compaq. By late 1998, widespread use of the Internet and improved Internet security led enterprises to outsource their remote access needs to ISPs. As a result, Compaq changed their strategy and there were no revenues from Compaq in 2000 and 1999 as compared to $4.4 million in 1998. While sales to original equipment manufacturer customers generate a majority of Ariel's revenues, today Ariel is focused on developing and marketing remote access solutions that leverage industry standard hardware, software and applications to small and mid-sized ISPs and competitive local exchange carriers. This requires that Ariel develop a complete remote access software product using its plug-in cards and market and sell this product, as opposed to merely selling components to original equipment manufacturers. Industry Overview The ISP Market The Internet has emerged as a global communications medium, enabling millions of people to gather information, communicate and conduct business electronically. International Data Corporation estimates that there were approximately 250 million Internet users worldwide in 2000 and that the number of users will grow to over 500 million by the end of 2003. As a result, the demand for equipment to expand Internet access is growing at an unprecedented rate. ISPs are commonly grouped into categories based on the size of their customer or subscriber base. Large ISPs are generally those with more than 100,000 subscribers. These include ISPs such as America Online, EarthLink, The Microsoft Network, AT&T, Concentric Network and MCI WorldCom. Mid-sized ISPs typically have between 20,000 and 100,000 subscribers and are generally focused in a defined geography, either a metropolitan area or region. Small ISPs have under 20,000 subscribers. Boardwatch Magazine's directory of ISPs lists more than 8,000 small and mid-sized ISPs in the United States. The vast majority of Internet access is through dial-up or analog telephone connections using a PC and a modem. An ISP's network consists of points of presence established in various locations throughout its service area, and a network operations center where the ISP's high speed connection to the Internet resides. When a subscriber's call reaches the points of presence, it is connected to a port. A port is one of many modems located within a remote access concentrator, which allows multiple persons to be connected simultaneously. The subscriber's call is converted to a digital network connection in the points of presence from which an ISP maintains a high- bandwidth connection called the backhaul- connecting the points of presence to its network operations center. As demand for Internet access grows, ISPs are expanding the number of points of presence that they maintain and are increasing the number of ports within many of their points of presence to accommodate a growing number of new subscribers and subscribers staying connected to the Internet for longer periods of time. Remote access server concentrators range in size from 24 ports to hundreds of ports, with the highest sales volume models generally supporting 48 to 96 ports. Market Trends Due to a broad combination of factors including deregulation of the telecommunication industry, competition between network service providers and advances in technology, ISPs are experiencing significant 119
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change. In this context, Ariel believes it is well positioned to take advantage of the following major trends in its industry: Proliferation of PC-Based Servers. Remote access concentrators have traditionally been designed as closed "black box" systems using proprietary hardware and software. Customer-driven modifications or the need for additional features can only be accommodated by each respective manufacturer, which can be expensive and slow to market. Further, given that the systems are proprietary, end users are required to understand the specific details associated with each system. The combination of the increase in the processing power of PC central processing units, and the rapid maturation of PC operating systems such as Windows NT/Windows 2000 and Linux, have enabled the functions of a remote access concentrator to be delivered as an upgrade to a standard PC server instead of requiring a "black box." This approach offers ISPs many advantages, including equipment current cost savings of up to approximately 40% price per port--$110 versus $235--(due in part to decreasing PC prices) and easier operation. Ariel believes that the remote access market will transition from using special-built boxes to industry standard hardware, software, applications and development tools as a result of the advances in performance, scalability and reliability of open systems. Demand for New Services. Advances in the technology underlying the Internet have made it possible to use the Internet to carry two-way voice conversations. To remain competitive, ISPs must offer new services including voice and fax services using voice over the Internet protocol and fax over the Internet protocol. The system requirements imposed by these and other new services will strain the capabilities of existing networking equipment. In particular, it is impossible to upgrade many remote access concentrators to provide voice call handling, or, where upgrades are available, their cost can significantly exceed the purchase price of the original equipment. ISPs expanding their services to add voice and fax services must often purchase entirely new remote access concentrators. Emergence of CompactPCI Standard to Meet Telco Needs. Supported by many industry leaders, the CompactPCI standard enables the development of equipment using PC system standards that meet the requirements for high reliability carrier-grade applications. Ariel was the first company to offer CompactPCI remote access plug-in cards that adhere to this new standard. Improvements in open Systems capabilities, price reductions and the advent of CompactPCI combine to create new opportunities for standards-based systems in high-end ISP environments. Ariel's Approach Ariel has developed a new ISP network architecture and a new family of products that enable ISPs and other network service providers to build and scale their infrastructure using open systems platforms. The proprietary means by which Ariel has integrated its products' capabilities into standard PCs enables its products to more fully and more easily integrate the hardware/system/network models expected by Windows NT, Windows 2000 and Linux operating systems. This ensures compatibility with the full repertoire of communications systems services and applications built for these operating systems. Introduced in 1999, the PowerPOP architecture is a new approach to designing ISP networks. The PowerPOP architecture provides an alternative to the dumb remote access concentrators that ISPs currently use to equip POPs. The PowerPOP architecture combines standard PC servers running a standard off-the-shelf PC operating system (Windows NT or Linux) with one or more of Ariel's plug-in cards. ISPs use these new servers to perform all the functions of a remote access concentrator and to enable the POP to autonomously provide critical network services. The typical ISP network architecture is based on a central network operations center, connected to a number of dumb points of presence. These include services needed to obtain the numerical addresses of Internet Resources ("Domain Name Services"), the mechanisms that allow a subscriber to log in to an ISP's network with a user name and password (called RADIUS) and tools to improve the response time for both recently and frequently accessed web content (called web caching). By providing key network services at the points of presence, ISPs can significantly reduce network traffic between the POPs and their network operating centers, thereby improving response time, reducing backhaul 120
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requirements and improving operating performance. This also enables ISPs to significantly reduce equipment costs while increasing the flexibility, efficiency, manageability and scalability of their networks. New ISPs face the challenge of building an entirely new network from scratch. These ISPs can also use the PowerPOP architecture to substantially reduce the initial cost and complexity of their network. A traditional approach would require a minimum of three boxes--a remote access concentrator, a PC server and a router--for connection to the Internet. Using the PowerPOP architecture, all the services and capabilities required to become an ISP can be deployed in a single PC server system. Additional capacity can be added by installing additional systems either in the network operations center or in new remote points of presence. PowerPOP offers ISPs the following benefits: Reduced Equipment Costs. Ariel believes its PowerPOP architecture redefines the economics of remote access. Using a standards-based platform reduces equipment costs and operating expenses. By leveraging the price erosion and performance increases in PC systems and compared to traditional remote access equipment, a solution built with Ariel's technology can currently be priced at approximately 40% less per port--$110 versus $235--using standard rackmount PC Systems and open standard operating systems such as Windows NT and Linux; Deliver Better Performance to Subscribers. Placing key network services closer to the user creates a more responsive network by reducing the time it takes for subscribers' requests to be filled. In addition, PC-based systems in the points of presence have additional available computing capacity that ISPs can use to deploy new services; Build More Reliable and Manageable Networks. In a traditional ISP network design, servers at the network operations center provide critical network services. ISPs install multiple redundant servers to avoid having a critical service outage and a backup server automatically takes the place of one that fails. Ariel's PowerPOP architecture uses the PC systems in points of presence to duplicate these previously centralized services into each points of presence with built-in backup Systems; and Add New Services with a Software Upgrade. Ariel's technology, and the power available in today's PC servers, enable the upgrade of Ariel's data access solutions from a data-only remote access service to full support of Internet telephony without requiring new hardware. As a result, ISPs will be able to offer voice and fax over the internet services using network-updateable software. The drawbacks to using Ariel's products for remote access services include the additional complexity of the use of an open system server. This requires additional work during installation to configure the base system and then Ariel's additions as well as the ongoing need to manage both the base system and Ariel's application. Products In 2000 Ariel offered two families of products: remote access products that are sold to ISPs and original equipment manufacturers and high-performance general purpose digital signal processing products that are sold only to original equipment manufacturer customers for inclusion in their products. In June 2000 Ariel notified its digital signal processing customers that Ariel would no longer offer some products used for digital audio, sonar and imaging due to the lack of availability of component parts and the prohibitive cost of production, testing and technical support for these older products from chip manufacturers. Remote Access Products. Ariel's remote access products are plug-in cards and software that enable standards-based systems to provide remote access services using off-the-shelf operating systems such as Windows NT and Linux. Plug-in cards are electronic circuits that are compatible with the system expansion connectors built into standard PC systems. 121
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In 1999 Ariel launched its fourth generation of remote access products for Windows NT and Linux, the RS4200 family, based upon the Ariel Access Architecture and incorporating the most recent developments in digital signal processing technology. The RS4200 family was built to meet the demanding requirements of both ISPs and original equipment manufacturer specifications. In 2000 Ariel introduced its BypaSS7 gateway by connecting additional hardware and software to PCs equipped with its RS4200. BypaSS7 adds system signaling software used in the public system telephone network public system telephone network and allows ISPs and competitive local exchange carriers to offer low cost network access via inter-machine trunk lines (IMTs) . BypaSS7 is currently available for data connections to the public system telephone network and is the first complete system solution offered by Ariel including installation and service. Commencing in 1994, Ariel offered a progressively more sophisticated range of plug in cards performing modern functions within standard computer systems. Ariel's first product, the T1 Modem, was built to the original internal interface standards of the IBM PC and supported up to 30 modems at speeds up to 48.8 Kb. Incremental improvements in speed and functionality were delivered in the T1 Modem plus in 1996 (56K speeds), in 1997 in the RS1000 (support for the PCI bus deployed in the IBM PC AT, incorporation of T1/E1 line interfaces), the RS2000 and RS2000C in 1998 (V.90 modems, CompactPCI chassis/system designs); and the RS4200/4200C supporting up to 120 simultaneous modems and up to 4 E1/T1 interfaces. Digital Signal Processing Products. Ariel's family of general purpose, high performance digital signal processing products for original equipment manufacturers are aimed at applications in audio, instrumentation/telemetry, radar, sonar, and imaging. Original equipment manufacturers selecting high performance digital signal processing products do so for the life of their project, therefore original equipment manufacturers tend to continue to purchase these products for many years after the design is no longer state of the art. Research and Development Ariel believes that strong product development capabilities as well as enhancements and upgrades to Ariel's present products are essential to its strategy of building on its position as a technological leader in its industry, maintaining the competitiveness of Ariel's current products and adding new features, functions and products. Ariel has, in the past, made and intends to continue to make, significant investments in product and technological development. Ariel is focusing its development efforts on next generation voice plus data network equipment using standards-based components. Ariel will continue to aggressively develop new capabilities to extend its PowerPOP architecture in such areas as handling combined voice and data applications, system management, performance, density and reduced product cost. Ariel's research and development expenditures totaled $6.7 million, $5.7 million and $5.3 million in 1998, 1999 and 2000, respectively. Ariel performed its research and product development activities at its facilities in Cranbury, New Jersey and Paris, France. Manufacturing and Quality Control Substantially all of the manufacturing of Ariel's products is outsourced. The primary contract manufacturing companies Ariel uses are Reptron Manufacturing Services and JRE Inc. both located in the United States. This allows Ariel to focus its resources on product research and development, marketing and sales and customer support. Ariel's internal manufacturing operations consist primarily of production of prototypes, testing, manufacturing and test engineering, materials purchasing and inspection and quality control. Ariel monitors the performance and quality of the work performed by its outside contractors by using internal quality assurance procedures and by making regular visits to manufacturing facilities. 122
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Ensuring adequate and flexible production capacity, continuous cost reduction and superior product quality are top priorities of Ariel's manufacturing efforts. Ariel achieves its manufacturing goals by: . working closely with its contract manufacturers during the product design and build phases; . effectively managing a limited number of the most qualified suppliers; and . constantly improving upon its product performance tests. Ariel's products are manufactured with components and subassemblies supplied by subcontractors to Ariel's specifications. Ariel has purchased digital signal processing chips and certain other components from Texas Instruments, Lucent Technologies, Conexant, Motorola and Analog Devices, each of which manufactures and is the sole supplier of the digital signal processing chips upon which some of Ariel's products have been developed. Ariel purchased modems for its RS4200 from Mapletree Networks. Although Ariel has not experienced any material difficulties in obtaining supplies or manufactured products, any reduction or interruption in supply or manufacturing from these third parties would adversely affect Ariel's ability to deliver products. Sales and Marketing Ariel markets its products principally to ISPs, competitive local exchange carriers and networking and communications original equipment manufacturers. Ariel sells its products to ISPs through its direct sales force, value added resellers and distributors. Resellers and integrators custom-configure systems with components from Intel, IBM, Compaq, Ariel and others to ISP specifications and deliver directly to ISPs. This approach to delivering products is similar to the low-cost delivery models of the PC industry and ensures that the ISP can obtain its specific desired configuration at a competitive price. Ariel also markets its products to original equipment manufacturer's in the United States and Europe primarily through a direct sales force and through independent sales representatives. Internationally, Ariel also sells its products through value added resellers and distributors in Europe, Israel and the Far East. Ariel maintains sales offices in Dortmund, Germany, and Paris, France. Ariel's marketing communications activities have been outsourced to a number of specialized outside agencies. Ariel obtains most new sales prospects through advertising, existing customers, strategic relationships and trade show participation. Ariel's principal marketing activities include display advertising in trade publications, direct mail, trade show participation and a home page on the web. Technical Support Technical support is provided by application engineers or customer service employees located at Ariel's headquarters. Ariel offers web, fax, pager, telephone and electronic mail support to assist its customers. ISPs are supported by Ariel's telephone support staff, a password protected section of Ariel's website, and, when required, by onsite visits. Original equipment manufacturers support their own customers, however, Ariel's telephone support staff provides support for original equipment manufacturers during their development phase and, given that original equipment manufacturers have substantial technical knowledge, they are often also supported directly by Ariel's engineering department. Development consultation support for original equipment manufacturer engineers in developing their products is provided on a for-fee basis. In addition to assisting original equipment manufacturer customers in their own development projects, Ariel also has processes and capabilities in place to perform custom engineering to provide original equipment manufacturers with products that meet their precise requirements. 123
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Ariel's products are covered by a 5-year limited warranty against defects in manufacture. Product replacement is the most common mechanism used to resolve product defect issues. Ariel's support engineering staff has created an innovative "Spare In The Air" program to ensure the delivery of replacement products within 24 hours of a reported failure. Extended service contracts are also available. Customers Ariel markets its products to two groups of customers--small and mid-sized ISPs in the United States and networking and communications original equipment manufacturers worldwide. While the products Ariel sells to ISPs and original equipment manufacturers are similar, original equipment manufacturers generally incorporate Ariel's products into theirs before reselling to the end user. Some of Ariel's original equipment manufacturer customers include PSI Net, Motorola, Lockheed Martin, UT Starcom and AT&T. For the three months ended March 31, 2001, UT Starcom and Miltape Corporation accounted for 42% and 47% of sales, respectively. Two customers, PSI Net at 20% and Motorola at 11%, each represented greater than 10% of sales for the year ended December 31, 2000. Three customers together represented 45% of sales for the year ended December 31, 1999, including sales to Motorola, Transaction Network Services and Lockheed Martin, which represented 22%, 11% and 12% respectively. In Europe, Ariel sells its full range of products to telecommunications original equipment manufacturers. During 1998 three of Ariel's customers represented 52% of Ariel's sales. Sales to Compaq accounted for 25% of Ariel's total sales and sales to Cabletron and Transaction Network Systems represented 14% and 13%, respectively. As a result of the decline of the enterprise remote access market in late 1998, there have been no sales to Compaq since 1998. Competition The markets for Ariel's products are intensely competitive, continually evolving and subject to changing technologies. Ariel competes principally on the basis of (1) the flexibility, scalability, quality, ease of use, reliability and cost effectiveness of its products and (2) its reputation and the depth of its expertise, customer service and support. Ariel's products typically have a 40% price advantage over competitive products offered by Lucent or Cisco and offer a five year warranty as opposed to the competitions 90 day warranty. Ariel's products have been independently rated to have equal or better ease of installation. Ariel competes for sales to ISPs with other small companies that sell remote access server equipment, such as Interphase, Avail and Netaccess and large, well-established companies that sell remote access server equipment such as Ascend/Lucent, Cisco, and 3Com. When selling to original equipment manufacturers, Ariel competes with third party modem board manufacturers, such as Equinox and 2Digi International and (4) manufacturing departments within Ariel's original equipment manufacturer customers. Because the markets in which Ariel competes are rapidly evolving, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets and further intensify competition. Intellectual Property and Other Proprietary Rights Ariel believes that its success is dependent, in part, on proprietary technology. Ariel seeks to maintain the proprietary nature of its technology by several methods, including: . copyright, trade secret and trademark laws; . confidentiality agreements with employees and third parties; . contractual provisions contained in license and other agreements with consultants, suppliers, strategic partners, resellers and end-user customers; and . patents for technology associated with Ariel's latest generation of remote access products. 124
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Substantially all of Ariel's hardware products contain security codes which deter duplication by third parties. Ariel also asserts copyright in relation to certain aspects of its products and Ariel generally enters into confidentiality agreements with its employees and limit access to Ariel's proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy certain aspects of Ariel's products or to obtain information that Ariel regards as proprietary. Ariel has filed patent applications for patent protection covering some aspects of its next generation products. To date, these patents have not been granted, and Ariel cannot assure you that they will ever be granted. Ariel does not hold patents on any of its other products, and in the event competitors are able to create substantially similar or duplicate products, Ariel will not be able to avail itself of the protection afforded by the patent laws. Ariel believes that due to the rapid pace of innovation within its industry, factors such as the technological expertise of Ariel's personnel and ongoing reliable product maintenance and support are more important in establishing and maintaining a leadership position within the industry than the pursuit of various legal protections of its technology. Ariel also depends upon development, supply, marketing, licensing and other operative relationships with third parties for complementary technologies incorporated in Ariel's products. These cooperative relationships are with hardware and software developers pursuant to which both parties make their respective technology available to the other for the purpose of achieving compatible products. Some of these relationships are based upon annually renewable license agreements under which Ariel obtains technology necessary to produce its products. Although Ariel has no reason to believe that these mutually beneficial relationships will end, these relationships are generally non-exclusive and terminable, and Ariel cannot assure you that it will be able to maintain these relationships or to initiate additional similar relationships. The loss of certain cooperative relationships, particularly with any of the digital signal processing chip suppliers, may have a material adverse effect on Ariel's business. Ariel BypaSS7 and PowerPOP are trademarks of Ariel. All other trademarks and service marks appearing in this memorandum are trademarks or service marks of the respective companies that use them. Backlog Backlog shippable within a twelve-month period was approximately $0.9 million at December 31, 2000. Backlog was $0.5 million at December 31, 1999 and approximately $2.1 million at December 31, 1998. As of March 31, 2001 backlog was approximately $0.9 million. Ariel's order trend is characterized by delivery cycles that range from several days to quantities deliverable over several months. Further, customers may revise scheduled delivery dates or cancel orders. Accordingly, the portion of sales in each fiscal quarter derived from backlog at the beginning of that quarter varies based on the customer's required delivery dates. Employees As of December 31, 2000, Ariel had 67 employees, including 6 employees in Europe and 2 part-time employees. As of March 31, 2001, Ariel had 68 employees, including 6 employees in Europe and 2 part-time employees. None of Ariel's employees are represented by a collective bargaining agreement nor has Ariel experienced any work stoppage. Ariel believes its relationship with its employees is satisfactory. Properties Ariel maintains office and light assembly space comprising approximately 30,000 square feet at 2540 Route 130, Cranbury, New Jersey pursuant to a lease, expiring January 2006. The annual rent is approximately $420,000. Ariel also maintains branch or subsidiary offices in Paris, France, and Dortmund, Germany. Legal Proceedings Ariel is not engaged in any material legal proceedings. Ariel may from time to time become a party to various legal proceedings in the ordinary course of business. 125
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Directors and Executive Officers The following table sets forth Ariel's executive officers and directors as of June 30, 2001. Ariel's board of directors currently consists of seven directors. Except as otherwise stated, executive officers serve at the discretion of the board of directors. The board of directors met 12 times in fiscal year 2000 and no director attended fewer than 75% of the board meetings. [Download Table] Name Age Position ---- --- -------- Anthony M. Agnello...... 51 Chairman of the Board of Directors Dennis I. Schneider..... 49 President, Chief Executive Officer and Director John R. Loprete......... 40 Vice President--Finance Carlos G. Borgialli..... 58 Vice President--Engineering Esmond T. Goei.......... 51 Vice Chairman of the Board of Directors Harold W. Paul.......... 53 Director and Secretary Robert F. Burlinson..... 61 Director Ira H. Fuchs............ 52 Director Jay H. Atlas............ 56 Director Anthony M. Agnello co-founded Ariel in 1982, has been a director since inception and serves as Chairman of the board. He has been a member of the compensation committee since June 1995. He also held the title of President from 1988 until September 1996. In December 1998, Mr. Agnello resigned as Chief Executive Officer simultaneously with the appointment of Mr. Atlas to that position. Mr. Agnello will continue as a director of the combined company after the merger. Dennis I. Schneider was appointed President and Chief Executive Officer in May 2000. Prior to that he was Senior Vice President of Marketing for Ariel since December 1998. Mr. Schneider was elected to the Board of Directors in June 2000. For more than five years, he was a marketing consultant to major corporations in the computer, networking and telecommunications industry including Chase Manhattan Bank, Andersen Consulting, IBM and Lucent Technologies. He has more than 25 years' experience in the industry, holding senior marketing and general management positions with Digital Equipment Corporation and as an officer of Motorola Inc. Upon consummation of the merger, he will be Senior Vice President of Marketing of the combined company. John R. Loprete began working with Ariel in April 1998 and was appointed Vice President--Finance in January 1999. He is a Certified Public Accountant with over 15 years' experience in finance and accounting. His experience includes eleven years with Concurrent Computer Corporation, a Florida-based computer manufacturer. Carlos G. Borgialli was appointed to the position of Vice President-- Engineering in May 1999. Mr. Borgialli joined Ariel from Digital/Compaq, where he spent more than 20 years, leading and improving organizations in the design of client/server business-critical production systems. In his most recent position at Digital/Compaq, he served as Director of Engineering for the Network and Application Communication Products division. Prior to that, he was instrumental in developing and managing the development of a number of key telephony, videotext, and transaction processing products for Digital. Mr. Borgialli has also worked at the NASA Goddard Space Flight Center and spent five years at the Pan American Health Organization/World Health Organization. Esmond T. Goei joined Ariel as Vice-Chairman of the board in August 1999. He is a member of the audit and compensation committees. Prior to joining Ariel, he worked at Northern Telecom, where he last served as Director of the Corporate Venture Capital Division. Prior to that, he was Vice President of the Venture Capital 126
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Division at Toronto Dominion Bank and a Senior Systems Consultant at Touche Ross (now Deloitte & Touche). Mr. Goei co-founded MAYAN in October 1997, and has served as its Chairman of the Board of Directors since October 1997 and its Chief Executive Officer since March 2001 and will continue as Chairman and Chief Executive Officer of the combined company after the merger. Mr. Goei has served as the Chief Executive Officer, President and Chairman of the Board of Directors of XiMnet Corporation, a web services company, from April 1999 to March 2001 and has served as its Chairman of the Board of Directors since April 1999. From July 1994 to January 1999, Mr. Goei served as the Chief Executive Officer, President and Chairman of the Board of Directors of Nhancement Technologies, Inc., a communications systems integration company. Mr. Goei has a BS in Electrical Engineering from Queen's University at Kingston and an MBA from the University of Western Ontario. Harold W. Paul has been a director since June 1995 and was appointed secretary in March 1998. He is a member of the compensation committee. From 1985 to 1998 he was a partner of Berger and Paul LLP and since 1998 he has been a partner at Paul & Rosen LLP, a New York law firm specializing in securities matters. Since July 1999, he has been a director of Kirlin Holding Corp., a Nasdaq listed, Long Island based brokerage and investment banking company. Robert F. Burlinson joined Ariel as a director in November 2000. Since July 2000 he has been a Director of Aztec Technology Partners, Inc. in Braintree, MA. From 1998 through 2000 he was Executive Vice President and Chief Financial Officer of Caribiner International, Inc. (NYSE). From 1996 through 1998 he was Vice President and Principal Financial Officer of Handy and Harman Inc. (NYSE). Ira H. Fuchs joined Ariel as a director in September 2000. Since July 2000 he has been Vice President for Research in Information Technology of the Andrew W. Mellon Foundation in Princeton, New Jersey. From 1985 to 2000, he was Vice President of Computing Information Technology at Princeton University. Jay H. Atlas served as Ariel's Chief Executive Officer and President from December 1998 through May 2000. He was appointed a director in January 1999. From 1995 to 1998, he served as the President and CEO of CTF Group, a management consulting firm. Since 1998, he has served as a trustee of the Kobrick Investment Trust, a group of mutual funds. He has more than 30 years' experience in the industry, including 20 years at Digital Equipment Corporation, in senior management positions in sales, service and marketing. Ariel's board of directors is composed of seven directors. The board is divided into three classes and the members of each class are elected at the annual stockholder meeting held in the year in which terms for that class expire. Messrs. Agnello and Paul have terms expiring in 2001. Messrs. Atlas and Goei have terms expiring in 2002. Messrs. Schneider, Fuchs and Burlinson have terms expiring 2003. The incumbent board nominates new directors. Family Relationship There are no family relationships among any director or executive officer of Ariel. Committees of Ariel's Board of Directors Compensation Committee. The compensation committee is responsible for reviewing Ariel's general compensation strategy; establishing salaries and reviewing benefit programs (including pensions) for the Chief Executive Officer and those persons who report directly to him; reviewing, approving, recommending and administering Ariel's stock option plans and other compensation plans; and approving employment contracts. The compensation committee met two times in the 2000 fiscal year. The current members of the compensation committee are Messrs. Goei, Agnello, and Paul. Audit Committee. The audit committee's functions are to recommend the appointment of independent accountants; review the arrangements for, and scope of, the audit by Ariel's independent accountants; review the independence of Ariel's independent accountants; consider the adequacy of Ariel's system of internal 127
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accounting control and review any proposed corrective actions; review and monitor Ariel's policies relating to ethics and conflicts of interests; discuss with management and the independent accountants Ariel's draft annual financial statements and key accounting and/or reporting matters, including year 2000 issues; and review the activities and recommendations of Ariel's management audit department. The audit committee met three times during the 2000 fiscal year. The current members of the audit committee are Messrs. Goei, Burlinson and Fuchs. Compensation Committee Interlocks and Insider Participation The members of Ariel's compensation committee are Messrs. Agnello, Goei and Paul. None of these current or former members is currently or has been an employee or officer of Ariel other than Mr. Agnello who was Chief Executive Officer of Ariel until December 1998. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of Ariel's board of directors or compensation committee. Mr. Agnello was paid $25,000 and $54,166 for management consulting services rendered in the years ending December 31, 2000 and 1999, respectively. For the year ending December 31, 1998 Mr. Agnello received a bonus in the amount of $950,000 in connection with his role in the sale of Ariel's Communications Systems Group in November 1998. Effective June 30, 2000 Mr. Agnello became an employee of Ariel and through December 31, 2000 he had received compensation as an employee of $62,555. Mr. Paul is a non-employee director who provides legal services for Ariel. His firm received fees of approximately $113,000, $120,000 and $124,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Section 16(a) Beneficial Ownership Reporting Compliance Section 16 (a) of the Securities and Exchange Act of 1934 requires Ariel's directors and executive officers to file with the SEC initial reports of ownership and reports of changes in ownership of Ariel's common stock. Ariel believes that during the fiscal year ended December 31, 2000, its officers and directors complied with all these filings requirements. Ariel has relied upon the representations of its directors and executive officers. Ariel does not believe any other stockholders are subject to Section 16(a) filing requirements. 128
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Executive Compensation The following table summarizes the compensation earned over the last three fiscal years by the Chief Executive Officer, four executive officers and one other individual who was not serving as an executive officer at year end, whose earned compensation exceeded $100,000 for the year ended December 31, 1999. [Enlarge/Download Table] Long-Term Compensation ------------------------------------ Annual Compensation --------------------------- Number of All Other Name and Principal Other Annual Options Compensation Position Year Salary ($) Bonus ($) Compensation* (#)** ($)*** ------------------ ---- ---------- --------- ------------- --------- ------------ Dennis Schneider........ 2000 243,271 320,001 7,131 24,300 13,218 President, CEO and 1999 200,000 120,000 5,119 -- 11,000 Director 1998 7,692 -- -- 11,812 -- Jay H. Atlas............ 2000 116,347(1) 57,292(2) 10,732 -- 314,510(3) Former CEO and 1999 275,502 137,500 5,119 -- 11,000 President and Director 1998 5,288 -- -- 4,050 -- Rich Flocco............. 2000 145,438 48,500(5) 7,131 -- 25,492 Vice President of -- Operations 1999 134,879 12,000 12,924 169,966(7) 1998 123,351 2,538 11,869 4,250 8,973 John Loprete............ 2000 129,616 40,000(6) 8,618 -- 15,152 Vice President of -- Finance 1999 118,462 85,500 14,286 1,798 1998 84,213 -- 10,462 3,000 -- Gene Corrado............ 2000 89,423 28,125 4,160 -- 2,228 Vice President of Sales 1999 -- -- -- -- -- 1998 -- -- -- -- -- Carlos G. Borgialli..... 2000 170,000 42,750(4) 12,377 9,000 8,668 Vice President of Engineering 1999 113,333 20,000 8,912 -- 1,569 1998 -- -- -- -- -- -------- * Represents contributions made by Ariel to Ariel's medical and life insurance and long term disability/short term disability plans, and a Company provided automobile. ** After giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. *** Represents Ariel's contributions to Ariel's 401(k) plan, severance, exercising of options, consulting, auto allowance, payout of excess sick and vacation time, forgiveness of loan, and commission. (1) Mr. Atlas was President and Chief Executive Officer of Ariel until his employment was terminated on May 31, 2000. (2) Includes $33,053 for bonuses paid in 2000 and accrued bonus of $24,239. (3) Includes $158,655 severance and $137,440 in consulting fees subsequent to his termination. Mr. Atlas is entitled to $144,940 in severance benefits to be paid out in 2001--this number is not included above. (4) Includes $35,250 for bonuses paid in 2000 and accrued bonus of $7,500. (5) Includes $32,350 for MBO bonus paid in 2000 and accrued bonus of $16,250. (6) Includes $35,000 for MBO bonus paid in 2000 and accrued bonus of $5,000. (7) Includes $152,250 for options, $1,000 for auto allowance. Compensation Committee Report On Executive Compensation The following Report of the Compensation Committee and the performance graph included elsewhere in this proxy statement do not constitute soliciting material and should not be deemed filed or incorporated by 129
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reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report or the performance graphs by reference therein. Report of Compensation Committee The Compensation Committee of the Board of Directors has furnished the following report on executive compensation for fiscal 2000. What is the Company's philosophy of executive officer compensation? A base salary, a performance-based annual bonus, and periodic grants of stock options. The Compensation Committee believes that this three-part approach best serves the interests of the Company and it's stockholders. It enables the Company to meet the requirements of the highly competitive environment in which the Company operates while ensuring that executive officers are compensated in a way that advances both the short and long-term interests of stockholders. Under this approach, compensation for these officers involves a high proportion of pay that is "at risk"--namely, the annual bonus and stock options. The annual bonus permits individual performance to be recognized on an annual basis, and is based, in significant part, on an evaluation of the contribution made by the officer to Company performance. Stock options relate a significant portion of long-term remuneration directly to stock price appreciation realized by all of the Company's stockholders. Base Salary. Base salaries for the Company's executive officers, as well as changes in such salaries, are based upon recommendations by the Chief Executive Officer, taking into account such factors as competitive industry salaries; a subjective assessment of the nature of the position; the contribution and experience of the officer, and the length of the officer's service. Annual Bonus. In May 2000, the Company entered into a new employment agreement with Mr. Schneider with performance based bonus provisions. Stock Option. Under the stock guidelines adopted by the Compensation Committee, stock option grants may be made to executive officers upon initial employment, upon promotion to a new, higher level position that entails increased responsibility and accountability and in connection with the execution of a new employment agreement. Options typically vest over a minimum four year period. How is the Company's Chief Executive Officer compensated? As Chief Executive Officer, Mr. Schneider is compensated pursuant to an employment agreement entered into in May 2000. The agreement, which extends through December 2001, subject to earlier termination under certain circumstances, provides for an annual base salary of $275,000. Mr. Schneider's bonuses for each fiscal year may be up to 50% of his base annual salary based upon performance related goals set by the Board of Directors. Additionally, he was granted options upon joining the Company and upon assuming the position of Chief Executive Officer, aggregating 486,000 options at various prices. It is the opinion of the committee that the aforementioned compensation structures provide features which properly align the company's executive compensation with corporate performance and the interests of it's stockholders and which offer competitive compensation relevant to comparable opportunities in the marketplace. Respectfully submitted, The Compensation Committee: Anthony M. Agnello Harold W. Paul Esmond Goei 130
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Directors' Compensation Current compensation plan. In August 1999, the board of directors approved a new compensation plan for Ariel's non-employee directors. Each director is paid an annual amount of $6,000 for serving on the board. In addition, under the 1996 directors stock option plan, 2,500 stock options, after giving effect to the one for reverse stock split which is expected to occur immediately prior to the effective time of the merger, are granted to each director upon appointment to the board. The strike price for these options is the price of the common stock on the date of appointment. An additional 750 options, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, are granted for each subsequent year of service. Directors are also compensated in the amount of $1,000 for each meeting attended in person, and $500 for each meeting attended by telephone. In September and November 2000, respectively, Ariel granted each of Messrs. Fuchs and Burlinson options, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, when they joined the board. Option Grants During the Year Ended December 31, 2000 The following table sets forth information regarding stock options granted to the executive officers named in the summary executive compensation table. The table also shows a hypothetical potential realizable value of these options based upon assumed rates of an annual compounded stock price appreciation of 5% and 10% from the date the options were granted and over the full term. The assumed rates of growth were selected for illustrative purposes only, and are not intended to predict future stock prices which will depend upon market conditions and Ariel's future performance and prospects. Based upon the closing stock price and the number of common shares outstanding at the end of 2000, an assumed annual stock price appreciation of 10% would produce a corresponding aggregate pretax gain over the full option term of approximately $1.6 million for Ariel's common stockholders. [Enlarge/Download Table] Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Number of Percent of Option Term at Securities Total Exercise Public Offering Underlying Options Price Price ($) Options Granted in Per Share Expiration ------------------- Name Granted (#)* 2000 ($)* Date 5% 10% ---- ------------ ---------- --------- ---------- --------- --------- Dennis I. Schneider(1).. 24,300 19.6% 0.12 5/19/10 1,838,208 2,927,038 Carlos G. Borgialli(1).. 9,000 6.6% 0.15 4/18/10 539,571 859,177 John R. Loprete(1)...... 4,250 1.0% 0.11 4/18/10 93,152 148,330 Richard Flocco(1)....... 4,050 1.7% 0.14 4/18/10 155,254 247,216 Gene Corrado(1)......... 3,000 2.0% 0.10 5/22/10 149,655 238,300 -------- * After giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. (1) Some options may vest at an accelerated rate if performance goals are achieved. 131
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Option Exercises During the Year Ended December 31, 2000 and Aggregate Fiscal Year-End Option Value The following table sets forth information concerning stock option exercises by the executive officers named in the summary executive compensation table during 2000, including the aggregate value of gains on the date of exercise. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options as of December 31, 2000. Also reported are the values for "in-the-money" options which represent the excess of the closing market price of the common stock at December 31, 2000 over the exercise price of the option. [Enlarge/Download Table] # of Securities Underlying Unexercised Value of Unexercised Number of Options/SARs at Fiscal In-the-Money Options/SARs Shares Year End* at Fiscal Year End Acquired on Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Dennis I. Schneider..... -0- -0- 16,150 8,150 -0- -0- Jay H. Atlas............ -0- -0- 11,812 -0- -0- -0- Jack Loprete............ -0- -0- 1,500 2,750 -0- -0- Richard Flocco.......... -0- -0- 1,525 2,525 -0- -0- Gene Corrado............ -0- -0- 750 2,200 -0- -0- Carlos G. Borgialli..... -0- -0- 4,062 4,937 -0- -0- -------- * After giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. Employment Agreements Dennis I. Schneider, Ariel's Chief Executive Officer, is employed under an employment agreement effective May 31, 2000 for a term ending December 31, 2001, pursuant to which he is paid a base salary of $275,000. He is eligible for a bonus of up to an additional $137,500 based on the achievement if goals set annually by the Board of Directors. Upon execution of the agreement, Mr. Schneider was granted an additional 14,800 stock options at $0.17 per share, after giving effect to the one for 20 reverse stock split, 6,650 of which were vested as of December 31, 2000. The balance will vest at December 31, 2001, or sooner based upon performance goals. Carlos G. Borgialli, Ariel's Vice President of Engineering, is employed under a three-year employment agreement effective May 4, 1999 pursuant to which he is paid a base salary of $170,000, subject to annual review, and is eligible for an incentive bonus of up to $30,000 based upon the attainment of certain goals. Mr. Borgialli was also granted 2,500 common stock purchase options, after giving effect to the one for 20 reverse stock split, pursuant to his employment agreement. Anthony M. Agnello, Ariel's Chairman, resigned as Chief Executive Officer in December 1999 upon the appointment of Jay Atlas as Ariel's Chief Executive Officer and President. Mr. Agnello's employment agreement provided for an annual salary of $200,000 and bonus to be determined annually at the discretion of the board. Upon his resignation as Chief Executive Officer, Mr. Agnello entered into a two-year consulting agreement pursuant to which he is paid $50,000 per year. Mr. Agnello resigned as Chief Executive Officer effective upon Mr. Atlas' appointment as Chief Executive Officer in December 1998. Ariel entered into an agreement with Mr. Agnello in December 1998 providing for a one time severance payment of $600,000 in March 1999 and the issuance of 5,000 common stock purchase options at $0.12 per share, after giving effect to the one for 20 reverse stock split. His non-competition and non-solicitation agreements have been extended through December 2001. Richard W. Flocco has a Severance Agreement with Ariel with an effective date of January 5, 2001. This severance agreement provides that if Mr. Flocco's employment at Ariel is terminated as a result of the elimination of his position due to a "change in control" and such termination was not for cause, he is entitled to receive certain severance benefits, which include six months of his salary and immediate vesting of any 132
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outstanding stock options that he holds. A "change in control" is defined in this severance agreement as occurring upon purchase of Ariel's common stock in a tender or exchange offer, an approval by the stockholders of a merger, consolidation, reorganization, liquidation, dissolution or sale of all or substantially all of Ariel's assets, or upon a change in the Chief Executive Officer of Ariel or Mr. Flocco's immediate supervisor. Mr. Gene M. Corrado has no employment agreement though he has entered into a Non-disclosure, Noncompetition and Non-solicitation agreement pursuant to which while employed by Ariel and for specified periods of time after termination, he has agreed that he will not disclose any of Ariel's confidential information or trade secrets, solicit any of Ariel's customers or employees or compete with Ariel. Severance Packages. Messrs. Schneider, Borgialli and Agnello have executed non-competition and non-solicitation agreements and are subject to non- competition and non-solicitation provisions in their employment agreements pursuant to which for a specified period following the termination of their employment, they have agreed not to solicit any of Ariel's customers or employees or to become associated with any of Ariel's competitors. Pursuant to Mr. Schneider's employment agreement, Ariel has the right to terminate his employment for "cause" or as a result of the employee's disability. Upon the early termination of his employment agreement, by Ariel without cause or by Mr. Schneider for "good reason", Mr. Schneider is entitled to receive one year of his annual salary and one year of benefits, and a pro rata portion of his bonus (which cannot be less than 25% of the bonus that Ariel granted him during the previous fiscal year), payable within six months of termination. In addition, in the event of a change in control, Mr. Schneider is entitled to accelerated vesting of options. A "change in control" includes an acquisition of 15% or more of Ariel's voting securities by any person, changes in the composition of the board of directors, or an approval by the stockholders of a merger, consolidation, reorganization, liquidation, dissolution or sale of all or substantially all of Ariel's assets. Jay Atlas served as Ariel's Chief Executive Officer from December 1998 through May 2000, at which time he and Ariel mutually agreed to terminate the employment relationship and enter into a separation agreement on May 18, 2000. That agreement provided that Mr. Atlas would be paid severance in accordance with the provisions of his employment agreement of December 21, 1998 of one years salary, a pro rata portion of his earned bonus and other pre-termination benefits. Mr. Atlas continues as a Director of Ariel through his elected term. The agreement became effective on May 31, 2000 at which time Mr. Atlas resigned and Mr. Schneider assumed the position of Chief Executive Officer. Pursuant to Mr. Borgialli's employment agreement, Ariel has the right to terminate his employment for "cause" or as a result of the employee's disability. Upon the early termination of his employment agreement, by Ariel without cause or by Mr. Borgialli for "good reason" or due to a change in control, Mr. Borgialli is entitled to receive one-half of his annual salary payable within six months of termination. In addition, in the event of a change in control, Mr. Borgialli is entitled to accelerated vesting of options. A "change in control" includes an acquisition of 15% or more of Ariel's voting securities by any person, changes in the composition of the board of directors, or an approval by the stockholders of a merger, consolidation, reorganization, liquidation, dissolution or sale of all or substantially all of Ariel's assets. John R. Loprete has a Severance Agreement with Ariel with an effective date of December 1, 2000. This severance agreement provides that if Mr. Loprete's employment at Ariel is terminated as a result of the elimination of his position due to a "change in control" and such termination was not for cause, he is entitled to receive certain severance benefits, which include six months of his salary and immediate vesting of any outstanding stock options that he holds. A "change in control" is defined in this severance agreement as occurring upon purchase of Ariel's common stock in a tender or exchange offer, an approval by the stockholders of a merger, consolidation, reorganization, liquidation, dissolution or sale of all or substantially all of Ariel's assets, or upon a change in the Chief Executive Officer of Ariel or Mr. Loprete's immediate supervisor. 133
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As part of the merger, it is expected that Mr. Schneider, Mr. Borgialli, Mr. Loprete, Mr. Flocco and Mr. Corrado will enter into new employment agreements with the combined company, to be effective at the time the merger is consummated, pursuant to which the employees commit to working for a minimum of two years after the effective time of the merger, however, the combined company can terminate the employees' employment for any reason at any time. At the expiration of this two year term, the employment contracts will automatically renew for additional one year periods, unless either parties gives notice otherwise. If the employees are terminated without cause within the initial two-year term, the employee will be entitled to a maximum of six months of their salary as severance pay and accelerated vesting of certain options, and if terminated without cause after the initial two-year term, the employee will be entitled to a maximum of three months salary as severance pay and accelerated vesting of options. The agreement contemplates repricing the employee's options if the combined company adopts such a plan. The employees also agree to waive certain accelerated vesting rights they have with respect to their options and agree to a new vesting schedule for options that are unvested at closing. This agreement places a non-compete prohibition on employees for one year after their termination of employment. Mr. Schneider's agreement also calls for the company to pay his commuting expenses from New Hampshire and for a bonus of up to 50% of his base salary upon the achievement of certain goals and objectives. The 1992 Stock Option and Restricted Stock Plan During 1992, the board of directors approved, and Ariel's stockholders ratified, the adoption of the 1992 stock option and restricted stock plan. The plan provided for a maximum of 30,000 shares of Ariel's common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, to be issued to employees, directors and consultants in connection with stock option grants or restricted stock awards. During 1994, Ariel granted a total of 1,344 options under the plan, after giving effect to the one for 20 reverse stock split, entitling the holders to acquire an equal number of shares of Ariel's common stock at an exercise price per share of $0.12 or $0.13. The options vest over a four-year period. Effective October 31, 1994, the board terminated the plan and, accordingly, no additional options or awards will be issued under the plan. At December 31, 2000, 1,131 options remain outstanding, after giving effect to the one for 20 reverse stock split. The 1994 Stock Option Plan In 1994, the board of directors approved, and Ariel's stockholders ratified, the adoption of the 1994 stock option plan. The plan provides for a maximum of 25,000 shares of Ariel's common stock, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger, to be issued to employees, directors and consultants in connection with stock option grants. Stock options are granted by the board or a committee appointed by the board. Each stock option entitles the holder to acquire an equal number of shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant as determined by the board and 110% of the fair market value for an employee who owns 10% or more of Ariel's common stock. The board will determine the stock option vesting period and expiration date not to exceed ten years from the date the stock options were granted. At the discretion of the board, Ariel may make loans to employees in order to enable them to exercise their stock options. The plan also provides for the board, at its discretion, to accelerate the vesting of all outstanding stock options so that they become fully and immediately exercisable. During October 1994, Ariel granted 7,500 stock options from the plan to three members of Ariel's advisory board. Each stock option entitles the holder to acquire one share of Ariel's common stock at exercise prices, per share, of $0.13 for 3,750 stock options and $0.30 for the remaining 3,750, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. All stock options are immediately exercisable and expire three years from the date of grant. Since Ariel's initial 134
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public offering in January 1995 and pursuant to the underwriting agreement Ariel entered into at the time, no options can be granted under the 1994 plan at an exercise price of less than $4.00. All outstanding options vest over periods ranging from immediate vesting to four years and have ten-year terms. At December 31, 2000, 60 options remain outstanding, after giving effect to the one for 20 reverse stock split. 1995 Stock Option Plan In 1995, the board of directors adopted Ariel's 1995 incentive stock option plan, which was approved by Ariel's stockholders at the annual meeting of stockholders on May 14, 1996. The stockholders ratified an amendment to the plan at the annual meeting of stockholders held on June 23, 1999, increasing the number of shares issuable under the plan from 85,000 to 110,000, after giving effect to the one for 20 reverse stock split. The board believes that the plan is desirable to attract and retain executives and other key employees of outstanding ability. Under the plan, options to purchase a maximum aggregate of 110,000 shares of Ariel's common stock, after giving effect to the one for 20 reverse stock split, may be granted. During 2000, Ariel granted a total of 52,212 options, after giving effect to the one for 20 reverse stock split, entitling the holder to acquire an equal number of shares of Ariel's common stock at exercise prices ranging from $0.06 to $0.41. The options vest over periods ranging from immediate vesting to four years and have ten-year terms. At December 31, 2000, 65,334 options remain outstanding, after giving effect to the one for 20 reverse stock split. The plan is administered by the board of directors, which may delegate its powers to a committee of directors. The board is generally empowered to interpret the plan, prescribe rules and regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are granted and determine the number of shares subject to each option and the applicable exercise price. Upon exercise of an option, the optionee may pay the exercise price with previously acquired securities of Ariel, or at the discretion of the board, Ariel may loan a portion or all of the purchase price to the optionee. Options are exercisable for a term determined by the board, which cannot be greater than ten years from the date of grant. Options may be exercised only as long as the original grantee maintains a relationship with Ariel which confers eligibility to be granted options, or within three months after termination of a relationship with Ariel, or for up to one year following death or total and permanent disability. In the event of the termination of the relationship between Ariel and the original grantee for cause, all options granted to that original optionee terminate immediately. In the event of certain changes affecting Ariel, including a change in control, and in the discretion of the board, each option may become fully and immediately exercisable. Incentive stock options are not transferable other than by will or the laws of descent and distribution. Non-qualified stock options may be transferred to the optionee's spouse or lineal descendants, subject to certain restrictions. Options may be exercised during the holder's lifetime only by the holder or his or her guardian or legal representative. Options granted pursuant to the plan may be designated as incentive stock options, with the attendant tax benefits provided under Sections 421 and 422 of the Internal Revenue Code of 1986. Accordingly, the plan initially provided that the aggregate fair market value (determined at the time an incentive stock option is granted) of the common stock subject to incentive stock options exercisable for the first time by an employee during any calendar year (under all of Ariel's plans or those of any of Ariel's subsidiaries) may not exceed $100,000. The board may modify, suspend or terminate the plan; provided, however, that material modifications affecting, and any changes in, the plan must be approved by the stockholders. Any change in the plan that may adversely affect an optionee's rights under an option previously granted under the plan requires the consent of the optionee. 135
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Non-Plan Options During 2000, Ariel granted 15,575 stock options, after giving effect to the one for 20 reverse stock split, to employees and outside consultants. The options were issued outside the 1995 plan and entitle the holders to acquire an equal number of shares of Ariel's common stock at exercise prices ranging from $0.14 to $0.39, after giving effect to the one for 20 reverse stock split. The options vest over periods ranging from immediate vesting to four years and have ten-year terms. At December 31, 2000, a total of 47,562 non-plan options remain outstanding, after giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. 1996 Directors Plan The 1996 directors plan was adopted by the board of directors on January 24, 1996 and approved by the stockholders at the annual meeting of stockholders held on May 14, 1996. This plan provides for the issuance of up to 12,500 stock options, after giving effect to the one for 20 reverse stock split, to non- employee directors. At the annual meeting of stockholders held on June 24, 1998, the stockholders ratified an amendment to the plan increasing the number of issuable shares to 22,500, after giving effect to the one for 20 reverse stock split. The plan is administered by a committee appointed by the board of directors and is effective for a period of ten years from the date it was adopted. The plan is not subject to any provisions of the Employee Retirement Income Security Act of 1974. At June 30, 2001, 21,050 options remain outstanding pursuant to the 1996 directors plan, after giving effect to the one for 20 reverse stock split. The ability of a grantee to purchase the common stock under the 1996 directors plan is terminated if his or her service is terminated, provided that in certain circumstances the grantee or his estate will have the right to purchase the common stock after termination of service for a limited period of time. The right to acquire common stock is not transferable except in the event of death of the grantee. In the event that a reorganization, merger, consolidation, reclassification, recapitalization or capital adjustment including a stock dividend or other similar change in Ariel's common stock, the committee will adjust the number and kind of shares that may be acquired under the 1996 directors plan. Common stock that may be acquired under the 1996 directors plan may be acquired by the surrender of other shares of common stock owned by a director or the surrender of an unexercised portion of the right to acquire common stock under the 1996 directors plan. Report on Repricing of Stock Options Stock options were granted under the 1994 and 1995 stock option plans to many of Ariel's employees from June 1995 through July 1998 with exercise prices ranging from $0.23 to $0.59 per share, after giving effect to the one for 20 reverse stock split. Subsequent to these grants the market price of Ariel's common stock suffered a significant decline. In order to ensure that the options previously granted would provide a meaningful incentive to motivate and retain employees, employees were given the opportunity to cancel those options and receive in exchange a like number of options granted as of November 15, 1998 with an exercise price of $0.20, after giving effect to the one for 20 reverse stock split, providing for a newly commenced vesting period as of the repricing date. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information regarding beneficial ownership of Ariel's common stock as of June 30, 2001 by: (i) each stockholder known by Ariel to be the beneficial owner of 5% or more of the outstanding common stock, (ii) each director and executive officer of Ariel individually, and (iii) all directors and executive officers as a group. Except as otherwise indicated in the footnotes below, Ariel believes that each of the beneficial owners of the common stock listed in the table, based on information furnished by that owner, has sole investment and voting power with respect to those shares. 136
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Ariel is not aware of any individual or group of individuals that is the beneficial owner of more than 5% of its common stock, other than Mr. Agnello, Ariel's Chairman and former Chief Executive Officer. Unless otherwise specified, the address of the principal stockholders is to Ariel Corporation, 2540 Route 130, Cranbury, NJ 08512. [Download Table] Number of Shares Beneficially Directors and Executive Officers Owned** Percentage -------------------------------- ------------ ---------- Anthony M. Agnello................................ 36,300(1) 5.6% Dennis I. Schneider............................... 16,650(2) 2.5% Esmond T. Goei.................................... 3,250(3) * Ira H. Fuchs...................................... 2,500(3) * Harold W. Paul.................................... 2,250(4) * Robert F. Burlinson............................... 2,500(3) * Jay H. Atlas...................................... 11,812(5) 1.8% Carlos G. Borgialli............................... 4,062(5) * John R. Loprete................................... 1,700(6) * Gene Corrado...................................... 750(5) * Richard Flocco.................................... 1,750(7) * All officers and directors as a group (eleven people).......................................... 83,525 12.6% -------- * Less than l%. ** After giving effect to the one for 20 reverse stock split which is expected to occur immediately prior to the effective time of the merger. (1) Includes 8,750 shares, subject to presently exercisable options. (2) Includes 16,150 shares, subject to presently exercisable options. (3) All shares beneficially owned by Messrs. Goei, Burlinson and Fuchs reflect options issued in exchange for their services as directors. (4) All shares shown are subject to presently exercisable options. (5) All shares shown are subject to presently exercisable options. (6) Includes 1,500 shares, subject to presently exercisable options. (7) Includes 1,525 shares, subject to presently exercisable options. Certain Relationships and Related Transactions In June 1998, Ariel entered into an agreement to sell Ariel's Communications Systems Group to Cabletron Systems for approximately $33,500,000 net of amounts paid to engineers and other members of the group which were paid directly to them by Cabletron. As part of the transaction, Ariel paid bonuses to three directors who played an integral role in the transaction. These bonuses included $950,000 to Mr. Agnello, $140,000 to Theodore Coburn and $75,000 to Robert Ranalli, a director until September 1999. In addition, Ariel paid Etienne Perold a fee of $1,541,673 for his consulting services in the transaction. Mr. Perold was a director at the time he performed these services. Mr. Agnello, Ariel's chairman, entered into a consulting agreement with Ariel in January 1999 to provide management advisory services. Pursuant to that agreement Mr. Agnello was paid $54,166 for those services for the year ended December 31, 1999 and $25,000 for the year ended December 31, 2000. Paul & Rosen LLP, a law firm of which Mr. Paul, also one of Ariel's directors, is a partner, received fees of approximately $113,000, $120,000 and $124,000 for the years ended December 31, 2000, 1999 and 1998, respectively. These fees were for legal services which it performed on Ariel's behalf. 137
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Mr. Perold, who was a director until the 1999 annual stockholders meeting, has provided Ariel management advisory services. Fees incurred for the year ended December 31, 1998, 1997 and 1996 were approximately $450,000, $218,000 and $208,000, respectively, and $104,000 for the six months ended June 30, 1998. No fees were incurred for the six months ended June 30, 1999. In addition, in December 1998, Mr. Perold received 4,000 immediately exercisable stock options, after giving effect to the one for reverse stock split, for his management advisory services. Mr. Perold had an outstanding loan of $100,000 owed to Ariel as of December 31,1998, which was repaid in full in January 1999. Brown, Coburn & Co., of which Mr. Coburn, one of Ariel's directors until September 1999, is a co-founder and principal, received fees of $156,200, $88,000 and $23,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and $40,211 and $60,701 for the six months ended June 30, 1999 and 1998, respectively, in connection with investment banking advisory services. In addition, 2,000 stock options, after giving effect to the one for 20 reverse stock split, previously granted to Mr. Coburn for investment banking advisory services, 1,000 in each of July 1996 and May 1997, vested during 1998. In February 1999, Ariel entered into a consulting agreement with GIOS Incorporated to advise Ariel's senior management in connection with the installation of new product development process capabilities, including assessing process issues and providing strategic decision support. GIOS was co- founded in September 1998 by Dennis Schneider, Ariel's Senior Vice President-- Marketing. The agreement provides that Mr. Schneider will represent only Ariel's interests during the course of the consulting relationship. Compensation to GIOS under the agreement is $2,000 per day, three days per week for the first month of the agreement, and $1,750 per day for the remainder of the relationship, with specific time commitments to be negotiated by the parties. At December 31, 1999, Ariel had paid approximately $106,000 to GIOS for consulting services. Sales Consulting Services Mr. Atlas, a director and former executive officer of Ariel, entered into a consulting relationship with Ariel in June 2000 to provide sales consulting services. Fees received for those services for the year ended December 31, 2000 were approximately $137,000. Ariel believes that the transactions described above were on terms no less favorable than could have been obtained from unaffiliated third parties. 138
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ARIEL The discussion and analysis below should be read in conjunction with the Financial Statements of Ariel and the accompanying notes set forth on pages F-1 through F-33. Overview Ariel is a provider of open systems-based digital remote access equipment to ISPs. Ariel's remote access equipment is compatible with open systems platforms running a variety of popular operating systems, including Windows NT and Linux, and enables ISPs to build reliable, scalable and easy to manage networks at a cost that is significantly below other available alternatives. Historically, Ariel's core strength has been supplying digital signal processing-based (DSP) sub-systems to original equipment manufacturers and government contractors. Ariel's DSP original equipment manufacturer products are incorporated into a variety of applications, including medical instrumentation, machine vision, professional audio, sonar, radar and multimedia. In 1996, Ariel formed a communications systems group to begin development of an Asymmetrical Digital Subscriber Line ("ADSL") carrier-class product targeting the needs of major telecommunications and network service providers. As a result of Ariel's strategic decision to reposition itself in 1997, Ariel decided to sell its communications systems group, and in September 1998 Ariel completed the sale of the group's assets to Cabletron Systems, Inc. for approximately $30 million. In 1997, Ariel also announced its intention to focus on the remote access equipment market through product offerings that provide high density and cost- effective remote access solutions based on industry standard PC platforms. Ariel developed the T1 Modem and Tl Modem Plus products, Windows NT-based remote access solutions, for this market. Target customers for these products were original equipment manufacturers that wanted to integrate remote access capability into their computers. A major PC manufacturer, Compaq, adopted the Tl Modem Plus remote access solution in March 1998. By late 1998, widespread use of the Internet and improved Internet security led enterprises to outsource their remote access needs to ISPs. This led to the decline of Compaq's primary remote access market, the enterprise remote access market, and Ariel's revenues from Compaq decreased from a total of $4.4 million in 1998 to zero for the periods ended December 31, 2000 and December 31, 1999. Ariel's ability to successfully execute its new business strategy is critical to the future performance of its business. During the second quarter of 1999 Ariel changed its business strategy to focus on the ISP market following the decline of the enterprise remote access market and Ariel continued to focus on ISPs through 2000. Historically, Ariel has derived substantially all of its revenues from product sales to original equipment manufacturers and PC manufacturers. As Ariel focuses its efforts on the ISP market, Ariel expects sales to original equipment manufacturers to represent a declining percentage of its total revenue in the future if Ariel's business strategy is successful. Because the ISP market is a new market for Ariel, and the equipment Ariel has developed for that market has only recently been introduced, Ariel has limited experience in selling its products. Currently, only a limited number of ISPs have purchased Ariel's product. To expand Ariel's international operations, in November 1998 Ariel acquired all of the outstanding common stock of Solutions for Communications and International ISDN, S.A. (Scii) headquartered in Paris, France. The transaction was accounted for using the purchase method of accounting and consideration, including related transaction costs, consisted of $3,389,029 in cash. Revenue is derived from the sale of hardware and software products for DSP and remote access applications. Ariel's customers consist primarily of original equipment manufacturers, computer equipment distributors and ISPs. Ariel recognizes revenue at the time the product is shipped to the customer when there is no additional significant post-contract customer support obligation. 139
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Results of Operations The following table sets forth statements of operations data as a percentage of sales for the periods indicated. [Download Table] Three Months Ended March Year Ended December 31, 31, ----------------------------------- -------------- 1996 1997 1998 1999 2000 2000 2001 ----- ----- ----- ------ ------ ------ ------ Sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold....... 49.7 54.4 68.6 43.8 56.2 41.9 70.9 ----- ----- ----- ------ ------ ------ ------ Gross profit......... 50.3 45.6 31.4 56.2 43.8 58.1 29.1 Operating Expenses: Selling and marketing.. 30.3 33.3 30.2 48.5 71.0 61.1 120.8 General and administrative........ 49.0 46.5 55.7 62.9 78.3 70.9 219.5 Research and development........... 44.2 62.0 38.5 48.9 66.5 61.8 123.7 Restructuring charge... 0.0 2.9 0.0 3.2 29.4 0.0 0.0 ----- ----- ----- ------ ------ ------ ------ Total operating expenses............ 123.5 144.7 124.4 163.5 245.2 193.8 464.0 Loss from operations..... (73.3) (99.1) (93.0) (107.3) (201.4) (135.7) (434.9) Gain on sale of assets... 0.0 0.0 169.3 0.0 0.0 0.0 0.0 Total other income (expense)............... 5.7 2.5 (5.0) (0.2) 0.7 * (1.7) Income/(loss) before income taxes............ (67.5) (96.7) 71.3 (107.5) (200.7) (135.7) (436.6) Income tax expense (benefit)............... 0.0 0.0 2.1 0.0 (5.3) 0.0 0.0 Net income/(loss)........ (67.5) (96.7) 69.2 (107.5) (195.4) (135.7) (436.6) -------- * Less than 0.1% Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Worldwide sales were $8,007,074 for the year ended December 31, 2000, a decrease of $3,619,472 compared to net sales of $11,626,546 for the year ended December 31, 1999. Domestic sales were $7,075,431 for the year ended December 31, 2000 compared to $10,459,550 for the year ended December 31, 1999. In 1998 Ariel began a shift from digital signal processing (DSP) to products and markets for dial-up remote access equipment (RAS). Initially Ariel pursued the RAS market though sales to manufacturers that focused primarily on selling remote access equipment to business enterprises. During 1999 Ariel 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 $3,384,119 was due to reduced demand for Ariel's DSP products from original equipment manufacturers resulting from this shift. Those decreases were partially offset by sales of Ariel's RAS products to ISPs. International sales were $931,643 for the year ended December 31, 2000 including U.S. exports of $489,354 and sales from European operations of $442,289 as compared to $1,166,996 for the same period of 1999. The decrease of $235,353 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 decreased by $3,021,262 to $3,509,270 for the year ended December 31, 2000 from $6,530,532 for the year ended December 31, 1999. Gross profit was reduced by approximately $1,500,000 for additional inventory reserves recorded during the period. Ariel 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 $1,100,000 of excess RS2000 inventory have been recorded through the year ended December 31, 2000. The remaining value of RS2000's in inventory is approximately $200,000 at December 31, 2000. Ariel 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 reserves of $400,000 were recorded during the year ended December 31, 2000 to write-off excess material. The decrease in 140
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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 approximately $634,000 in products during the period, which had been previously written down, resulting in higher margins on those products for the current period. Gross profit percent for the year ended December 31, 2000 was 54.6% before giving effect to these write downs and sale of products previously reserved. Sales and marketing expenses were $5,683,349 for the year ended December 31, 2000 compared to $5,634,070 for the year ended December 31,1999. The increase of $49,279 includes a decrease in sales commission of approximately $274,000 due to lower revenues as well as a reduction in wages and recruiting costs of approximately $249,000 resulting from a restructuring of the sales organization completed in August of 1999. Those decreases were partially offset by increases in public relations and investor relations of approximately $566,000. General and administrative expenses were $6,277,270 for the year ended December 31, 2000 compared to $7,312,680 for the year ended December 31, 1999. The decrease of $1,035,409 reflects a reduction in amortization expense of approximately $447,000 for the year ended December 31, 2000 as compared to the year ago period. Those decreases were due to the write-down of goodwill related to Ariel's French subsidiary, taken in the second quarter of 2000. Additionally, reserves for un-collectible accounts decreased by $177,000 year over year and cost incurred for recruiting and investor relations were approximately $144,000 and $188,000 less, respectively, for the year ended December 31, 2000 versus the same period last year. During fiscal year 2000, Ariel further reduced costs related to its European operations, which contributed approximately $339,000 to the overall decrease in general and administrative expenses over the prior year period. Those decreases were partially offset by approximately $156,000 related to the amortization of non- cash financing cost; $45,000 in expenses related to the closing of Ariel's San Diego office and, $55,000 of additional rental charges related to Ariel's corporate headquarters in Cranbury, New Jersey. Research and development expenses were $5,321,127 for the year ended December 31, 2000 compared to $5,688,414 for the year ended December 31, 1999. The decrease of $367,287 is comprised primarily of decreases in salaries and related expenses of $469,000, as well as a reduction in cost for recruiting of approximately $54,000. Those decreases were offset by increases in research and development consultants of approximately $208,000. During fiscal year 2000, Ariel further reduced costs related to its European operations, which contributed approximately $263,000 to the overall decrease in research and development expenses over the prior year period. Those decreases were offset by increases in depreciation and maintenance of approximately $103,000 for test lab equipment acquired in October 1999, as well as labor and material costs of approximately $380,000 for engineers related to development of Linux related software and Ariel'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. In June 2000 the board of directors approved a plan to phase out Ariel's low end products and reduce ongoing investment in these products in Europe. The plan is expected to yield savings of approximately $185,000 and $330,000 in 2000 and 2001, respectively. Accordingly, Ariel recorded a special charge of approximately $1,546,000 for the impairment of goodwill associated with Ariel's 1998 acquisition of SCii Telecom, S.A. (see note 3 to the financial statements). In addition, effective May 31, 2000 Ariel 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, Ariel 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 December 31, 2000, $157,597 of the accrued severance has been paid. 141
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Interest expense was $373,092 for the year ended December 31, 2000 as compared to interest expense of $527,611 for the year ended December 31, 1999. Interest expense in both periods consisted primarily of interest on the term and revolving credit notes outstanding under Ariel's credit facility with Transamerica. The reduction in interest expenses was due to a reduction in debt of approximately $1.9 million during 2000. Interest income for the year ended December 31, 2000 of $372,984 was down from $440,477 for the year ending December 31, 1999 due to lower investment income as a result of declining cash balances in 2000. There was no tax provision for the year ended December 31, 2000 and 1999 due to losses reported for that period. Ariel qualified for the sale of certain net operating tax losses and research and development credits under a New Jersey economic incentive program. A benefit of $423,938 was recognized in November 2000 upon the sale of research and development credits under the program. For the foregoing reasons Ariel incurred a net loss of $15,648,052 for the year ended December 31, 2000 as compared to losses of $12,499,815 for year ended December 31, 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Worldwide sales were $11,626,546 for the year ended December 31, 1999, a decrease of $5,819,283 compared to net sales of $17,445,829 for the year ended December 31, 1998. Domestic sales were $10,459,550 for the year ended December 31, 1999 compared to $15,720,887 for the year ended December 31, 1998, a decrease of $5,207,214. The decrease is related to widespread use of the Internet and improved Internet security by late 1998. As a result, enterprises, who had met remote access needs through PC Integrators such as Compaq Computers, outsourced their remote access need to Internet Service Providers (ISPs). The decrease in sales attributable to this shift included a decrease of approximately $4.2 million in sales to Compaq, a major PC Integrator customer, who had discontinued its networking group. Other PC Integrators selling to the enterprise market comprised the remaining 1999 domestic sales variances from the previous year. International sales were $1,166,996 for the year ended December 31, 1999 including U.S. exports of $769,531 and sales from European subsidiaries of $397,465 compared to international sales of $1,724,942 for 1998. The decrease is attributable to a reduction in demand by Merging Technologies, Inc. an original equipment manufacturer customer for Ariel's audio mixing product, as well as a reduction in sales of T1 Modem Plus products due to the release of Ariel's RS2000 product. Those decreases were partially offset by sales from Ariel's European subsidiaries. Gross profit increased by $1,049,923 or 19% to $6,530,532 for the year ended December 31, 1999 from $5,480,609 for the year ended December 31, 1998. Gross profit margin was 56% for the year ended December 31, 1999 compared to 31% for the year ended December 31, 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 original equipment manufacturer's customers that carry higher gross margins. 1999 gross profit was reduced by $195,000 for the write-down of RS2000 inventory. Ariel introduced the RS4200 in the fall of 1999 which has improved price and performance compared to the RS2000. Consequently, sales of the RS2000 may be affected. As a result, price reductions are planned and a write-down to affect lower of cost or market valuation was applied. Additionally, 1998 profit margins reflect a charge of approximately $2.0 million for the write-down of certain inventory primarily related to T1 Modem+ and RS1000 products. The write-down was the result of a substantial reduction in demand from several major customers including Compaq. Ariel negotiated additional sales with Compaq in the fourth quarter of 1998 and has sought new markets for these products. However, due to the introduction of Ariel's next generation RS2000 product family in September 1998, and Ariel's change in focus from enterprise customers to ISPs, management expected substantially reduced demand for these products from Compaq and other T1-Modem+ customers in 1999 and beyond. Consequently, current inventory levels are projected to be in excess of expected future consumption. 1998 gross profit margins were 42.9% before this write-down. 142
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Sales and marketing expenses were $5,634,070 or 48% of sales for the year ended December 31, 1999 compared to $5,265,542 or 30% of sales for the year ended December 31,1998. The increase of $368,528 reflects incremental spending in 1999 of $391,331 for advertising, and marketing programs related primarily to the launch of Ariel's ISP PowerPOP architecture and $459,598 for European operations. Those increases were offset by decreases in commissions of $128,383 and related sales travel of $25,046 due to lower sales volume. Additionally, depreciation was reduced by $214,289 due to the disposition of certain trade show and demonstration material resulting from Ariel's market shift. General and administrative expenses were $7,312,680 for the year ended December 31, 1999 compared to $9,710,275 for the year ended December 31, 1998. The decrease of $2,397,595 is due in part to infrequent expenses recorded in 1998. Those expenses included bonuses paid in September 1998 of $1.1 million in connection with the sale of Ariel's CSG group in that month and a reduction in staff salaries as a result of the sale. Other non-recurring expenses in 1998 included approximately $842,000 related to severance and separation agreements with respect to an officer of Ariel and a consultant, $175,000 related to the settlement of a licensing dispute and $292,923 of warranty expense related to the return of certain equipment from a major customer. Additionally, 1998 general and administrative expenses included a provision for doubtful accounts for Hayes Microcomputer, Inc. and its affiliates when Hayes filed for bankruptcy protection. Accordingly, provisions for doubtful accounts decreased by approximately $231,000 as compared to the year ended December 31, 1999. Additional expense reductions include a decrease of approximately $1,170,000 in consulting fees resulting from the termination of consulting agreements early in 1999. Those decreases were partially offset by an increase of $588,734 in general and administrative expenses and $918,572 in amortization of goodwill related to Ariel's European subsidiaries acquired in November 1998, (see Note 3 to the financial statements). Research and development expenses were $5,688,414 or 49% of sales for the year ended December 31, 1999 compared to $6,722,905 or 39% of sales for the year ended December 31, 1998, a decrease of $1,034,491. Expenses declined by $2,309,430 from the same period in 1998 due to the sale of Ariel's Communications Systems Group (CSG) to Cabletron in September 1998. 1998 R&D expenses also included in-process research and development costs of $297,330 related to the acquisition of SCii Telecom, SA in November 1998, (see Note 3 to the financial statements). These decreases were offset by an increase in research and development of $667,932 resulting from investments in products and technologies at this subsidiary. Additionally, expenses increased due to bonuses paid to engineers in conjunction with employment contracts of approximately $885,000. With Ariel's decision to focus on the ISP market and in combination with its newly created sales channel through KeyLink Systems, Ariel terminated the employment agreement of Brian Hoerl, its Vice-President of original equipment manufacturer Sales and entered into a termination agreement with Mr. Hoerl effective August 20, 1999. Two additional field sales-reps were also terminated in the third quarter of 1999. As a result, Ariel recorded a restructuring charge in September 1999 of $369,528, which reflects severance and related benefits payments. Interest expense of $527,611 for the year ended December 31, 1999 consisted primarily of interest on the term and revolving credit notes outstanding under Ariel's credit facility with Transamerica. Interest expense of $1,371,970 for the year ended December 31, 1998 included interest related to the Transamerica facility as well as a one-time charge of $750,000 in accordance with the terms of a $2.0 million bridge loan drawn down on February 19, 1998 against the anticipated proceeds of the sale of the Communications Systems Group. Interest income of $440,477 and $432,596 for the years ended December 31, 1999 and 1998 respectively consisted of income from the investment of Ariel's cash. There was no tax provision for the year ended December 31, 1999 due to losses reported for that period. For the year ended December 31, 1998 a tax provision of $368,632 was recorded to reflect Ariel's estimated federal and state income tax liability for 1998 income. This liability was partially offset by the use of the net operating losses Ariel incurred in previous years. Alternative minimum tax rules limit the use of those operating losses to entirely offset Ariel's 1998 income tax liability. 143
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For the foregoing reasons Ariel reported a net loss of ($12,499,815) for the year ended December 31, 1999 as compared to net income of $12,076,506 for the year ended December 31, 1998. Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Worldwide sales were $881,656 for the three months ended March 31, 2001, a decrease of $1,190,565 compared to net sales of $2,072,221 for the three months ended March 31, 2000. Domestic sales were $797,346 for the three months ended March 31, 2001 compared to $1,797,907 for the three months ended March 31, 2000. The decrease in sales of $1,000,561 was attributable to a decrease in sales of older DSP products to original equipment manufacturers. In June 2000 Ariel notified its customers that it would no longer offer certain older DSP products due to the lack of availability of component parts and the prohibitive cost of production, testing and technical support for these older products. Therefore, these products could no longer be made generally available after December 31, 2000. This caused a one-time increase in orders and sales for these products in the second half of 2000 and a larger relative decline in original equipment manufacturer revenue in 2001. New original equipment manufacturer projects typically require 18-24 months from the award of a project to the realization of a ramp in revenue. From 1997 through 1998 Ariel curtailed pursuit of new original equipment manufacturer projects while it focused on PC manufacturers. This additionally contributed to decreases in overall original equipment manufacturer revenues. Decreases in original equipment manufacturer revenue were only partially offset by sales of Ariel's RAS products to ISPs due to a sudden and sharp decrease in capital expenditures by Internet Service Providers and telecommunications vendors. International sales were $84,310 for the three months ended March 31, 2001 including U.S. exports of $32,576 and sales from European operations of $51,734 compared to $274,314 for the same period of 2000. In June 2000, Ariel decided to phase out low-end basic rate ISDN (BRI) products of its French subsidiary, SCii Telecom SA. The decision was based on reduced sales of BRI products due to the loss of major customers and advances in competing technologies. Accordingly, the decrease of $190,004 reflects a decrease in sales of BRI products. Gross profit decreased by $947,699 to $256,148 for the three months ended March 31, 2001 from $1,203,847 for the three months ended March 31, 2000. Gross profit was 29% of sales for the three months ended March 31, 2001 compared to 58% for the three months ended March 31, 2000. The decrease in gross profit was due to the reduced sales of older DSP products. The decrease in gross profit as a percentage of sales is primarily due to the loss of higher gross margin sales to original equipment manufacturer customers for both RAS and DSP products as well as the impact of fixed manufacturing overhead on reduced sales for the period. Reserves for inventory in excess of expected demand did not materially impact gross profit for the three months ended March 31, 2001, however, Ariel continues to review expected demand and adjust the carrying value of inventory as necessary. Sales and marketing expenses were $1,064,854 for the three months ended March 31, 2001 compared to $1,266,834 for the three months ended March 31, 2000. The decrease of $201,980 or 16% is primarily due to decreased participation in trade shows during the three months ended March 31, 2001 as compared to the prior year period. Such decreases were related to booth space and travel of approximately $76,000 and $37,000, respectively. Additionally, expenses related to public and investor relations were approximately $63,000 less in the three months ended March 31, 2001 over the prior year period. Decreases in European sales and marketing expenses of approximately $80,000 reflect the discontinuance of both DSP and SCii's BRI products. Such decreases were partially offset by increased salaries and the deployment of product demonstration units of approximately $20,000 and $27,000, respectively. General and administrative expenses were $1,935,011 for the three months ended March 31, 2001 compared to $1,468,396 for the three months ended March 31, 2000. The increase of $466,075 is due to the accrual of approximately $582,000 for professional fees related to the merger of Ariel with MAYAN Networks of San Jose, CA (see Note 5 to the financial statements). Other increases included increased directors and officers insurance premiums of $33,330 and increases in reserves for future warranty costs of $40,000. Such 144
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increases were partially offset by a reduction in amortization expense of approximately $183,000, related to Ariel's November 1998 acquisition of Scii. In February 2001, Ariel reached a settlement totaling $930,000 with SCii's former parent, Alis Technologies, and received approximately $600,000 towards the settlement during the quarter ended March 31, 2001. Proceeds of approximately $565,000 were reflected as an adjustment to the purchase price and offset against remaining goodwill and intangibles at March 31, 2001. Research and development expenses were $1,090,516 for the three months ended March 31, 2001 compared to $1,281,626 for the three months ended March 31, 2000, a decrease of $191,110. The decrease is primarily due to the reduction in salaries and related expenses of $196,220 and savings of $66,000 resulting from the discontinuance of both DSP and SCii's BRI products. Such decreases were offset by increases in contract labor and material costs of approximately $72,000 for engineers related to development of Ariel's SS7 Gateway enabled remote access products. For the foregoing reasons Ariel incurred a net loss of $3,848,834 for the three months ended March 31, 2001 as compared to losses of $2,960,245 for the three months ended March 31, 2000. Liquidity and Capital Resources Ariel has incurred net losses of approximately $15.6 million and $12.5 million for the years ended December 31, 2000 and 1999, respectively, and $3.8 million for the three months ended March 31, 2001 and expect to incur costs and expenses in excess of revenues as Ariel continues to execute its business strategy in the ISP and original equipment manufacturer markets. Absent the pending transaction with MAYAN Networks Corporation described in Note 20 to the financial statements (which is contingent upon a number of factors), Ariel has limited financial resources available to support its ongoing operations, fund product development programs to develop and market new competitive remote access technology, and pay its obligations as they become due. These factors raise substantial doubt concerning Ariel's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should Ariel be unable to continue as a going concern. Ariel's ability to continue as a going concern is dependent upon the ongoing support of Ariel's stockholders, creditors, and certain key customers, the consummation of the pending transaction with MAYAN Networks Corporation (or the closing of similar debt or equity transactions), and/or Ariel's ability to successfully develop and market its remote access products and technology at economically feasible levels in a highly competitive and rapidly changing technology environment. Ariel maintains a credit facility with Transamerica Business Credit Corporation. Currently Ariel has a five-year, $3 million term loan ("Term Loan"). As of March 31, 2001, there was $1,653,048 outstanding under the Term Loan. (See Note 3 to the financial statements.) Ariel drew down $4 million under the Term Loan on June 12, 1997 when Ariel 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 December 31, 2000, the interest rate in effect was 12.10%. On March 28, 2001 Ariel entered into a definitive agreement and plan of merger with MAYAN Networks which upon consummation requires Ariel to, among other things, effect a reverse stock split and to issue additional shares to MAYAN's shareholders immediately after the reverse stock split. Upon consummation of the transaction, MAYAN shareholders will control approximately 90% of Ariel's outstanding voting stock. 145
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The consummation of the transaction requires, among other things, the approval of the plan of merger by shareholders of both companies, the effective registration with the SEC of the shares to be issued and the listing of those shares with NASDAQ. The agreement and plan of merger also provides for a Promissory Note (the "Note"). The Note calls for MAYAN to provide up to $2 million in debt financing to Ariel on an as needed basis until the transaction is consummated or otherwise terminated. In June 2001 the Note was increased to provide up to $4 million. In the event MAYAN chooses to terminate the merger agreement due to a superior offer, the Note becomes a term note with any principal and accrued interest payable on the one year anniversary of the termination. Should the merger agreement otherwise terminate amounts due on the Note would be due and payable upon termination. Ariel must maintain compliance with certain representations and warranties and not be in breach of the covenants of the merger agreement to draw down funds against the Note. The Note has an annual interest rate of 8% and is secured by subordinated security agreements on Ariel's tangible and intellectual property. Ariel had drawn down $300,000 as of March 31, 2001. As of July 23, 2001 there was a total of $3,700,000 outstanding. On February 24, 2000 Ariel entered into an agreement to sell 2,151,000 shares of its common stock at $4.00 per share in a private placement. On March 2, 2000 this transaction was completed resulting in net proceeds of approximately $7.8 million. In addition to the sale of its common stock Ariel also issued 2,151,000 warrants to purchase common stock at $6.875. Under the terms of the agreement, Ariel agreed to file a registration statement on or before April 4, 2000 to register the shares sold and those underlying the warrants. During the year ended December 31, 2000, there was a net decrease in cash and cash equivalents of $5,959,185. At December 31, 2000, cash and cash equivalents amounted to $1,129,246. Working capital amounted to $2,385,855 at December 31, 2000. This as compared to working capital of $7,827,522 at December 31, 1999. Net cash used in operating activities for the year ended December 31, 2000 amounted to $11,469,679. The negative cash flows from operations were the due primarily to Ariel's net loss of $15,648,052 which was offset by non-cash expenditures related to depreciation, amortization, reserves and allowances of $3,637,957 and impairment of goodwill and restructuring charges of $2,050,511. Increases in operating cash due to collections of accounts receivables accounted for $614,457. Operating cash uses included decreases in accounts payable and accrued liabilities of $1,189,935 as Ariel paid down obligations of its subsidiary and accrued costs related to the sale of CSG and executive bonuses. Additionally, increases in inventory related to the introduction of the RS4200 and SS7 Gateway products resulted in a decrease in operating cash of $206,176. Net cash used in investing activities for the year ended December 31, 2000 amounted to $758,931 due to the purchases of computer and peripheral equipment related mainly to a research and development test lab and final test and assembly equipment in manufacturing. Cash from financing activities increased $6,251,456 for the year ended December 31, 2000 as a result of proceeds of $8,067,216 from the issuance of common stock and exercise of outstanding stock options and warrants. Those increases were offset by principal payments on debt of $1,815,760. During the year ended December 31, 1999, there was a net decrease in cash and cash equivalents of $10,908,144. At December 31, 1999, cash and cash equivalents amounted to $7,088,431. Working capital amounted to $7,827,522 at December 31, 1999 as compared to working capital of $12,632,033 at December 31, 1998. Net cash used in operating activities for the year ended December 31, 1999 amounted to $12,567,511. The negative cash flows from operations were due primarily to Ariel's net loss of $12,499,815 which was offset by non-cash expenditures related to depreciation, amortization, reserves and allowances of $2,938,550. Other 146
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operating cash uses included decreases in accounts payable and accrued liabilities of $2,683,382 as Ariel paid down obligations of its subsidiary and accrued costs related to the sale of CSG and executive bonuses. Additionally, increases in inventory related to the introduction of the RS2000 and RS4200 resulted in a decrease in operating cash of $729,945. Those decreases were partially offset by increases in accounts receivable of $69,335. Net cash used in investing activities for year ended December 31, 1999 amounted to $593,851 due to the purchases of computer and peripheral equipment related mainly to a research and development test lab and final test and assembly equipment in manufacturing. Cash from financing activities increased $2,215,963 for the year ended December 31, 1999 as a result of proceeds of $4,326,540 from the exercise of outstanding stock options and warrants. Those increases were offset by principal payments on debt of $2,085,316 and capital lease obligation payments of $25,261. During the year ended December 31, 1998, there was a net increase in cash and cash equivalents of $15,350,711, including an amount of $31,348,753 in proceeds net of transaction costs from the sale of assets related to the Communications Systems Group. On July 27, 1998 Ariel received a deposit of $5,000,000 on the sale and on September 1, 1998 Ariel received the remaining gross proceeds of $28,500,000. At December 31, 1998, cash and cash equivalents amounted to $17,996,575. Working capital amounted to $12,632,033 at December 31, 1998 compared to $4,329,018 at December 31,1997, an increase of $8,303,015. Net cash used in operating activities for 1998 amounted to $16,176,526. The negative cash flow from operations was primarily the result of Ariel's net operating loss of $16,218,113. Additional operating decreases include accounts receivable of $2,813,966, reflecting an increase in collection days, and increases in inventory balances of $1,700,796 related to slow moving and excess inventory. Net cash provided by investing activities for 1998 amounted to $27,284,599. This included proceeds net of transaction costs of $31,348,753 from the sale of the Communications Systems Group and a decrease due to acquisitions of $3,340,122 net of cash acquired of $48,908. Capital expenditures of $724,032 reflected purchases of computer and peripheral equipment for the engineering staff and final test and assembly in manufacturing. Net cash provided by financing activities for the year ended December 31, 1998 amounted to $4,242,638, reflecting proceeds of $4,500,000 received as a result of a draw on the Transamerica revolving credit facility and $2,051,412 in proceeds from the exercise of common stock options. Additionally, decreases of $2,308,774 were incurred on principal payments of long-term debt. During the three months ended March 31, 2001, there was a net decrease in cash and cash equivalents of $705,769. At March 31, 2001, cash and cash equivalents amounted to $423,477. Working capital deficit amounted to $732,648 at March 31, 2001. This as compared to working capital of $2,385,855 at December 31, 2000. Net cash used in operating activities for the three months ended March 31, 2001 amounted to $1,503,422. The negative cash flows from operations were due primarily to Ariel's net loss of $3,848,834, before non-cash expenditures related to depreciation, amortization, reserves and allowances of $440,221. Increases in cash due to collections of trade and other receivables accounted for approximately $1,998,000. Net cash provided by investing activities for the three months ended March 31, 2001 amounted to $690,810 due to proceeds of approximately $565,000 received in connection with the settlement of a dispute with Alis Technologies, the seller of SCii, and net proceeds of $130,000 from investments that matured during the period. The proceeds from the Alis Technologies settlement were recorded as an adjustment to the SCii purchase price. 147
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Cash from financing activities increased by $107,341 for the three months ended March 31, 2001. The increase was due to proceeds received under the terms of a Bridge Loan with MAYAN in the amount of $300,000. Such increase was offset by principal payments on Ariel's capital lease obligations and its Term Note with Transamerica in the amounts of $28,907 and $163,752, respectively. Qualitative and Quantitative Disclosures About Market Risk The results of Ariel's operations and the valuation of some of Ariel's assets and liabilities are sensitive to changes in the general level of interest rates in the United States and foreign exchange rate fluctuations. Ariel's interest income is sensitive to changes in the general level of interest rates in the United States, as Ariel's investments are in United States dollar cash equivalents and short-term instruments. Ariel's interest expense is sensitive to changes in the general level of interest rates in the United States, because the computation of interest due on Ariel's debt in the United States is based on key interest rate indicators used in the United States such as the prime rate. Ariel currently has 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 Ariel's foreign subsidiaries to its results of operations and the short-term nature of Ariel's cash equivalents, investments and debt, Ariel does not believe it has material market risk exposure. Recent Pronouncements In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The interpretation provides guidance for certain issues relating to stock compensation involving employees that arose in applying APB Opinion No. 25. Among other things, this interpretation clarifies (a) the definition of an employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of FIN No. 44 are effective July 1, 2000, except for the provisions regarding modifications to fixed stock options or awards that reduce the exercise price of an award, which apply to modifications made after December 15, 1998. Provisions regarding modifications to fixed stock options or awards to add reload features apply to modifications made after January 12, 2000. The effect of adopting FIN No. 44 did not have a material impact on Ariel's financial statements. In December 1999, the staff of the SEC issued SAB 101, which summarizes the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. The staff provided this guidance due in part to the large number of revenue recognition issues that it has encountered in registrant filings. In June 2000, SAB 101B, "Amendment: Revenue Recognition in Financial Statements," was issued, which deferred the effective date of SAB 101 until the fourth fiscal quarter of 2000. The effect of adopting SAB 101 did not have a material impact on Ariel's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other 148
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contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. If certain conditions are met, a derivative may be designated specifically as: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge), (b) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge), or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign- currency-denominated forecasted transaction. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, delaying the effective date of SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 by Ariel, effective January 1, 2001, had no effect on Ariel. 149
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INFORMATION ABOUT MAYAN MAYAN focuses on telecommunications networking solutions for service providers. MAYAN historically developed hardware solutions. Recently, MAYAN has begun to transition to a business based primarily on software and services for networks at the metropolitan edge. Industry Background Growth in Network Traffic The volume of data traffic over communications networks has grown dramatically, fueled primarily by the emergence of the Internet as an essential communications and transaction medium. According to Ryan Hankin & Kent, total Internet traffic in U.S. metropolitan areas is expected to increase by a factor of 43 from 1999 to 2003, growing from 350,000 terabytes, or trillions of bytes, per month at the end of 1999, to over 15,000,000 terabytes per month during 2003. As access to and use of the Internet has proliferated, Internet-based data applications such as e-commerce, streaming video, remote access for telecommuters, remote data backup storage and application hosting have consumed a growing amount of network bandwidth. To accommodate the increase in data traffic as well as to meet the demand for bandwidth intensive applications and enhanced services, service providers have recognized the need to upgrade their communications networks. MAYAN believes that in order to remain competitive, service providers must provide new, cost effective solutions to accommodate growth in network traffic and generate additional revenues from the increasing data traffic, as well as retaining current voice revenues. Overview of the Communications Network Service provider communications networks generally consist of several interlinking networks: the public switched telephone network, which was designed only for voice communications, and the Internet and private corporate networks, which were designed primarily for data communications. While voice and data traffic travel together over copper, cable, wireless or fiber optics, they generally use different network equipment and rely on different protocols specifically designed for either voice or data traffic. The public switched telephone network was designed as a circuit switched network in order to guarantee the quality of each call with a fixed amount of bandwidth dedicated to each connection, or circuit, whether utilized or not. The network equipment designed for the public switched telephone network, however, does not transport data traffic efficiently because Internet traffic is divided into much smaller packet-based units of information. As data has consumed an increasing amount of the total network bandwidth, new network equipment and a number of new protocols have evolved to allow data traffic to be carried over the voice network. Data protocols such as internet protocol, frame relay, asynchronous transfer mode and ethernet ride on top of the legacy voice network and carry the bulk of network traffic today. Data network equipment such as routers and asynchronous transfer mode, frame relay and ethernet switches are different from their voice counterparts because they have been optimized for the small data packets that make up data traffic on the network. Once voice and data traffic pass from the end user to the service providers' network, it can be transported over fiber optic cables using a standard for fiber-optic transmission called synchronous optical network, Synchronous optical network specifies the electronics and the network architecture that enable transmission of traffic across optical fiber. The key benefit of the synchronous optical network architecture is that it is a reliable and uniform standard. Synchronous optical network is expected to remain the dominant means of transport in the metro edge network, making up approximately 75% of the optical systems metro edge market during the period from 2000 to 2004, according to Pioneer Consulting. While synchronous optical network provides many benefits, the existing transmission equipment based on synchronous optical network deployed in metropolitan edge networks was not designed to support the increases in complex and varied data traffic. This has resulted in inefficiency in the transmission of data over the network, and service providers have often undertaken costly capital improvements to upgrade their existing networks. 150
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Current Topology of the Network The current public telecommunications network infrastructure can be divided into three segments: long-haul networks, metropolitan core networks and metropolitan edge networks. Long-Haul Networks. Long-haul networks move large amounts of traffic from point-to-point over long distances, such as from San Francisco to Boston. Long- haul networks connect points of presence of long distance carriers within North America and metropolitan core networks around the world. The long distance carriers, commonly known as InterExchange Carriers, have historically included AT&T, Worldcom, Sprint and international carriers such as NTT and British Telecom. Metropolitan Core Networks. Metropolitan core networks connect long-haul networks to metropolitan edge networks and service providers' central offices to each other over distances of a few miles in dense urban business corridors or a few hundred miles in regional urban and suburban settings. Metropolitan core networks aggregate metropolitan edge traffic and transport it throughout the metropolitan area and to and from long-haul networks. Metropolitan Edge Networks. Voice and data traffic enters and exits the public telecommunications network at the metropolitan edge. Metropolitan edge networks aggregate traffic from businesses and consumers and switch it to the metropolitan core network. The bulk of the existing synchronous optical network infrastructure is deployed in metropolitan edge networks. These edge networks are more complex and difficult to manage than long-haul and metropolitan core networks due to the wide variety of services and protocols configured over diverse equipment and platforms. Optical technologies were first deployed in long-haul networks, where the capacity constraints of the existing infrastructure were first encountered and the simple architecture and homogeneous traffic made it technically feasible and cost effective. Eventually, optical technology advanced to permit a similar solution in the metropolitan core network. MAYAN's Product and Services Mayan initially developed and marketed telecommunications networking solutions designed to address the bandwidth constraints, complexity and service limitations of metro edge networks. MAYAN'S initial product is a hardware device called the Unifier SMX. To date, MAYAN has not sold the Unifier SMX, except to certain test customers. MAYAN has since decided to cease all further feature development of the Unifier SMX and instead refocus its development resources. In addition, MAYAN has taken steps to develop its products offshore in Singapore and India. To this end, MAYAN has incorporated a subsidiary in Singapore and is in negotiations with an Indian engineering subcontracting company to undertake product development efforts. MAYAN intends to continue to develop solutions that are intended to ease the growing traffic bottleneck at the metro edge and offer additional revenue-generating services while decreasing operational expenses. MAYAN has, to date, focused on hardware development of the Unifier SMX. In the future, MAYAN may develop other aspects of its business, including its services business, and in particular, providing systems integration services for customers' networks and applications development. Should MAYAN choose to pursue this strategy, it would entail a substantial change in its business. For example, MAYAN would have to manage a significant number of geographically- dispersed employees. Also, the financial model of a services oriented business is unlike MAYAN's current hardware product development business. MAYAN may choose to enter the services business through an acquisition or series of acquisitions. MAYAN's Strategy MAYAN's objective is to become a leading provider of next generation networking solutions. In order to achieve this objective, MAYAN must provide customers with solutions that allow them to carry increasing 151
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amounts of data traffic on metro edge networks while decreasing operating costs and providing opportunities for incremental revenue from new services. MAYAN intends to: Establish Strategic Partnerships. To accelerate the time to market and reduce engineering development risk, MAYAN may develop original equipment manufacturer or other business relationships to acquire solutions for MAYAN's market. MAYAN also intends to establish relationships with next generation equipment providers focused on metro core and long-haul networks in order to present its customers with complete networking solutions. In addition, MAYAN will seek to establish partnerships with new technology vendors to complement MAYAN's capabilities and provide additional value added services. Acquire Complementary Businesses, Products, Technologies and Services. To better compete against larger companies in a market where increasing competition and industry consolidation prevail, MAYAN may acquire complementary businesses, products, technologies and services which will enable it to extend its product and service offerings, gain critical mass and expand its resources. Architecture MAYAN's initial product, the Unifier SMX, was designed to make more efficient use of existing bandwidth, decrease operating costs, simplify complexity at the metro edge, and serve as a platform for new service offerings. The Unifier SMX was designed to eliminate the wasted bandwidth associated with traditional metro edge products. Its architecture breaks incoming traffic down to its simplest form, processes it, and then packs it into traditional synchronous optical network circuits destined for the metro core or long haul networks. It employs an architecture with the following features: . the separation of physical interfaces from protocol processing; . voice and data buses; . scalability; . an integrated administrative processor; . a redundant design; and . adherence to strict standards. With this architecture, the Unifier SMX can incorporate the functions of many previously separate products and enable service providers to offer several of the different user traffic types and services from one platform. Products The Unifier SMX was designed to be a carrier-class, multi-service optical platform that addresses the bottleneck and complexity at the metro edge. The Unifier SMX was designed to groom, route and switch time division multiplexing, internet protocol, frame relay and ethernet traffic at the smallest (DS0) packet level across the network, effectively eliminating the need for many existing products. The Unifier SMX was also designed to scale to handle new protocols, speeds and ports, providing customers with the flexibility to offer many current and future services quickly and cost- effectively. MAYAN has completed the first release of its Unifier SMX product and has sold it in limited quantities. Customers MAYAN's Unifier SMX customers are telecommunications service providers. MAYAN has sold only limited quantities of its Unifier SMX product and intends to limit additional sales only to specified vertical market accounts. MAYAN currently has deployed Unifiers for lab trials with prospective customers, and 152
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MAYAN is in discussions with other companies. Initially, MAYAN expects its revenue to be derived from a relatively small number of customers. MAYAN's future customers are expected to be in vertical markets as well as traditional service providers. Sales and Marketing MAYAN previously focused its sales and marketing efforts primarily on the major metropolitan networks in the United States and Japan. MAYAN's marketing efforts were designed to create brand awareness and to demonstrate MAYAN's technological leadership in the metro edge equipment market. Competition MAYAN competes in a rapidly evolving and highly competitive market. The metropolitan area telecommunication networking equipment market is dominated by manufacturers of legacy synchronous optical network equipment, including Nortel Networks, Lucent Technologies and Fujitsu. In addition to legacy synchronous optical network equipment suppliers, a number of companies recently acquired by Cisco Systems, and Siara, which was recently acquired by Redback Networks, offer or are developing metro edge access multi-service optical platforms, which are likely to compete with MAYAN's products and services. MAYAN believes that the principal factors that will determine competitive success include: . cost-effectiveness; . support for multiple access technologies and network protocols; . flexibility and interoperability with existing network designs and equipment; . ability to efficiently aggregate different traffic types; . scalability without interruption of service; and . reliability Many of MAYAN's competitors are large companies with greater name recognition and technical, financial and marketing resources than MAYAN has which may give them a substantial advantage over MAYAN in developing and selling their products. Further, some of MAYAN's competitors have gained a significant share of the market for next-generation metropolitan area telecommunications networking equipment. Some are in a position to offer and have previously provided significant financing to MAYAN's potential customers. In addition, many of MAYAN's competitors have long-standing relationships with MAYAN's prospective customers, which may give them an advantage in selling competing products. In additional, MAYAN expects to compete with a number of small companies and new market entrants that are developing products that may compete with MAYAN's. Research and Development MAYAN's future success depends on its ability to develop and introduce new products, product enhancements and technology that can support a broad range of its customers' communications needs. Given its limited resources, MAYAN intends to use a smaller core engineering team in the U.S. and offshore contract engineers in India to supplement its development efforts. The core team will continue to architecture and features of products but development of the actual products are expected to be performed in India. As part of that strategy, MAYAN is establishing a regional presence in Singapore that will oversee the development work in India. Patents and Intellectual Property MAYAN currently relies on a combination of patent, copyright and trademark and trade secret laws, confidentiality procedures and contractual provisions to protect MAYAN's proprietary rights with respect to its technology and proprietary information. MAYAN has filed three patent applications and intends to file 153
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additional patent applications. MAYAN's patent strategy is designed to protect corporate technology assets, to create access to additional technology through cross licensing opportunities, and to create opportunities for additional revenue through technology licensing. While MAYAN will use patent, copyright, trademark and trade secret laws to protect its technology, MAYAN also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. In addition, MAYAN has and will continue to license technologies from third parties when necessary or useful. Manufacturing MAYAN currently outsources significant portions of its manufacturing operations to third-parties. One of MAYAN's manufacturing partners, Solectron, provides services, which include material procurement and board level assembly, testing and quality control. MAYAN designs, specifies and monitors all of the tests that are required to meet internal and external quality standards. Solectron has built MAYAN's interface cards and systems being utilized in field trials and internal testing. MAYAN cannot assure you that its relationship with Solectron and the associated benefits to MAYAN will continue, or that MAYAN will be able to find substitute third-party manufacturers if this relationship does not continue. Employees As of June 30, 2001, MAYAN had 46 full-time employees, 12 of whom were engaged in research and development, 20 in sales and marketing and 14 in finance and administration. None of its employees are represented by a labor union. MAYAN has not experienced any work stoppages and MAYAN considers its relations with its employees to be good. Facilities MAYAN's corporate headquarters are located in San Jose, California where it leases approximately 95,000 square feet of office space pursuant to a lease that expires in December, 2004. MAYAN currently only occupies a portion of this space and have subleased the remaining space, approximately 32,000 square feet. MAYAN believes that this arrangement provides it with sufficient space and flexibility to accommodate its anticipated growth. MAYAN also leases approximately 26,000 square feet of office space in Phoenix, Arizona and approximately 9,200 square feet of office space in Richardson, Texas. These leases expire in December, 2004 and November, 2001, respectively. Subsequent to March 31, 2001, MAYAN terminated its personnel at its Phoenix and Richardson locations. In June 2001, MAYAN closed its Phoenix and Richardson facilities. MAYAN is attempting to sublease the Phoenix location. The commercial real estate market is volatile and unpredictable in terms of available space, rental fees, and occupancy rates and preferred locations. MAYAN cannot be certain that it will be able to sublease this space and may be required to continue to pay for this facility until the lease expires. MAYAN will continue to pay for the Richardson facility until the lease expires as MAYAN management believes that it will not be able to sublease this facility due to the short duration of the remaining lease term. Legal Proceedings A complaint was filed in February 2000 in the United States District Court, of Arizona against MAYAN and one of its former officers alleging unfair hiring practices. The complaint alleges that MAYAN, with the help of its former officer and confidential information obtained through this officer, recruited the complainant's employees. The complaint seeks unspecified damages and equitable relief. MAYAN intends to defend this claim vigorously. MAYAN is currently not a party to any other material legal proceedings. 154
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MANAGEMENT OF MAYAN Executive Officers and Directors The following table sets forth information regarding the executive officers and directors of MAYAN as of June 30, 2001: [Download Table] Name Age Position ---- --- -------- Esmond T. Goei.......... 50 Chief Executive Officer and Chairman of the Board John R. Tingleff........ 49 Chief Financial Officer, Secretary and Senior Vice President Alan R. Brown........... 46 Vice President of Engineering Daniel W. Brown......... 34 Vice President of Product Marketing Sullivan J. Bookataub... 52 Vice President of Operations James B. Linkous........ 44 Senior Vice President of Worldwide Sales Farooq M. Raza.......... 49 Vice President of Competitive Marketing Andrew White............ 51 Vice President of Corporate Resources Thomas C. Edrington(2).. 62 Director Steven M. Krausz(2)..... 46 Director James Mongiello(1)...... 60 Director Peter T. Morris(1)...... 45 Director -------- (1) Member of the compensation committee (2) Member of the audit committee Esmond T. Goei co-founded MAYAN in October 1997, has served as its Chairman of the Board of Directors since October 1997 and its Chief Executive Officer since March 2001. Prior to founding MAYAN, Mr. Goei worked at Northern Telecom, where he last served as Director of the Corporate Venture Capital Division. Prior to that, he was Vice President of the Venture Capital Division at Toronto Dominion Bank and a Senior Systems Consultant at Touche Ross (now Deloitte & Touche). Mr. Goei has served as the Chief Executive Officer and President and Chairman of the Board of Directors of XiMnet Corporation, a web services company, from April 1999 to March 2001 and has served as its Chairman of the Board of Directors since April 1999. From July 1994 to January 1999, Mr. Goei served as the Chief Executive Officer, President and Chairman of the Board of Directors of Nhancement Technologies, Inc., a communications systems integration company. He currently serves on the board of directors of Ariel. Mr. Goei has a BS in Electrical Engineering from Queen's University at Kingston and an MBA from the University of Western Ontario. 155
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John R. Tingleff joined MAYAN in July 1998 as Chief Financial Officer and Secretary and was appointed Senior Vice President in March 2001. Prior to joining MAYAN, from October 1997 to June 1998, Mr. Tingleff was the managing principal with John Tingleff and Associates, a consulting firm. Prior to October 1997, he was the Chief Financial Officer of InterActual Technologies, Inc., a video compression technology company, from October 1996 to October 1997, the Chief Executive Officer of Pinterra Inc., a developer of position location technology, from June 1995 to July 1996, and the Chief Executive Officer of S-TRON, a defense contractor, from June 1993 to June 1995. Prior to June 1993, he was a Partner with Technology Funding, a venture capital firm. Mr. Tingleff holds a BA and MA in Economics from San Francisco State University. Alan R. Brown joined MAYAN in November 1999, served as its General Manager of Engineering from November 1999 to July 2000 and currently serves as its Vice President of Engineering. Prior to joining MAYAN, from September 1982 to November 1999, Mr. Brown worked at AG Communication Systems, a subsidiary of Lucent Technologies Inc., a communications and networking solutions provider, most recently as its Vice President of Engineering. Earlier, he held several development and management positions at Plessey PLC, a telecommunications company. Mr. Brown earned a BS in Electrical and Electronic Engineering from Edinburgh with honors. Daniel W. Brown joined MAYAN in August 1999 as its Vice President of Product Marketing. Prior to joining MAYAN, from June 1997 to July 1999, Mr. Brown served as Vice President of Engineering at FirstWorld Communications, Inc., a network services provider. Prior to June 1997, Mr. Brown served as the directing engineer-ATM at 3Com from February 1996 to May 1997 and a systems engineer at Onstream Networks, Inc., a provider of ATM and broadband WAN access products, from February 1994 to January 1996. Earlier, he was the supervisor of the Global Network Management Center at British Telecom North America Inc. Sullivan Bookataub joined MAYAN in February 2001 as its Vice President of Operations. Prior to joining MAYAN, Mr. Bookataub served as Principal for Qualitivity, Inc., a consulting firm specializing in lean manufacturing and supply chain management, from January 1998 to March 1999. Prior to his service at Qualitivity, Inc., he served as Vice President of Operations for Logistix, Inc. from February 1997 to January 1998. Earlier, he served as Vice President of Operations and Quality for Pyramid Technology, Inc. Mr. Bookataub has a BS in Electrical Engineering from University of Rhode Island, a Masters in Business Administration from James Madison University of Virginia and an Executive MBA from Stanford University. James B. Linkous joined MAYAN in March 2001 as its Senior Vice President of Worldwide Sales. Prior to joining MAYAN, Mr. Linkous served as Executive Vice President of Ivendor, Inc., an electronic commerce company, from May 2000 to October 2000. From April 1998 to March 2000, he served as President of North American Division of Nhancement Technologies, a telecommunications software development and product distribution company. From September 1994 to April 1998, he served as Vice President and General Manager for Nexus Integrated Solutions, which was acquired by EXPANET Communications. Earlier, Mr. Linkous held numerous management positions in the National Accounts Group with US WEST Communications. Farooq M. Raza co-founded MAYAN in October 1997 and has served as its Vice President of Competitive Marketing since that time. Prior to co-founding MAYAN, Mr. Raza was the Senior Business Development Manager and Senior Product Line Manager at Verilink Corporation, a communications company, from June 1996 to September 1997. Prior to that, he served as the Senior Business Development Manager at Siemens AG, an electronics and electrical engineering company, from October 1994 to May 1996. Earlier, he held various product management, business development and systems architect positions in other companies, including, Amdahl and Hewlett-Packard Company, a business services and computer company. Mr. Raza was the Vice-Chair of the Residential and Small Business Workgroup of the ATM Forum. Mr. Raza has an MS in Communications Engineering from Manchester University, UK. Andrew White joined MAYAN in October 1999 as its Vice President of Corporate Resources. Prior to joining MAYAN, Mr. White served as the Chief Executive Officer at Selborne, Inc., a consulting firm 156
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specializing in human resource services, from May 1997 to September 1999. Prior to his service at Selborne, Inc., he worked at Amdahl from October 1983 to May 1997, where he held a number of senior positions, including Group Director of Human Resources. Mr. White graduated as a member of Institute of Personnel Management from Glasgow College of Commerce in Scotland. Thomas C. Edrington has served as a director of MAYAN since July 1998. Mr. Edrington has been an independent consultant since May 1999. From September 1994 to May 1999, he served as the Chief Executive Officer of Alaska Communications Systems Group, Inc., formerly ATU Telecommunications, a communications company. Mr. Edrington received a BA in Business Administration from UCLA and an MBA from the Stanford University Business School SEP program. Steven M. Krausz has served as a director of MAYAN since July 1998. Mr. Krausz has been a general partner of a number of venture capital firms, including U.S. Venture Partners III, IV, V, VI and VII, U.S. V Entrepreneur Partners and BHMS Partners III since 1985. He currently serves on the board of directors of Accelerated Networks Inc., a developer of multiservice over broadband access products, and Verity, Inc., a business portal powering company. Mr. Krausz received a BS in Electrical Engineering and an MBA from Stanford University. James Mongiello has served as a director of MAYAN since July 1998. Mr. Mongiello has been a Venture Partner of Redpoint Ventures since October 1999 and a Venture Partner of Brentwood Venture Capital since June 1998. From July 1998 to March 2000, Mr. Mongiello was Chief Executive Officer of FreeGate Corporation, a provider of broadband access services. Prior to July 1998, he served as Vice President of 3Com, from November 1996 to June 1998. From June 1994 to October 1996, Mr. Mongiello served as Chief Executive Officer of OnStream. He currently serves on the board of directors of Avici Systems, Inc., a developer of routers that transmit data over fiber optic networks. Mr. Mongiello attended Lowell University and received an MBA from Stanford University. Peter T. Morris has served as a director of MAYAN since August 1998. Mr. Morris been a general partner of New Enterprise Associates, a venture capital investment firm, since 1992. He currently serves on the board of directors of Accelerated Networks, Gadzoox Networks, Inc., a storage area network company, iAsiaWorks, Inc., an Internet data center and hosting services provider, Packeteer, Inc., a provider of Internet application infrastructure systems, and Virata Corporation, a provider of communications processors to digital subscriber line equipment manufacturers. Mr. Morris received a BS in Electrical Engineering and an MBA from Stanford University. Certain of MAYAN's directors are elected to its board pursuant to a voting agreement. See "Description of Capital Stock and Comparison of Shareholder Rights." Board Committees Compensation Committee. MAYAN's compensation committee currently consists of Messrs. Mongiello and Morris. It makes recommendations concerning salaries, stock options, incentives and other forms of compensation for directors, officers and other employees of MAYAN. The compensation committee also administers MAYAN's stock options plans. Audit Committee. MAYAN's audit committee currently consists of Messrs. Edrington and Krausz. It reviews MAYAN's annual audit and supervises independent auditors that review MAYAN's internal accounting procedures and financial management practices. Compensation of Directors MAYAN directors do not receive cash for services they provide as directors. MAYAN's 1998 Stock Option/Stock Issuance Plan provides for grants of options to purchase common stock to MAYAN's directors. In addition, MAYAN directors are reimbursed for expenses incurred in connection with attending board meetings. 157
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On December 14, 1999, MAYAN granted Mr. Thomas Edrington an option to purchase 50,000 shares of MAYAN common stock at an exercise price of $0.50 per share under the MAYAN 1998 Stock Option/Stock Issuance Plan. Compensation Committee Interlocks and Insider Participation MAYAN's entire board of directors is responsible for reviewing and approving the compensation and benefits of MAYAN's executive officers and administering MAYAN's stock plans. No executive officer of MAYAN serves as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of MAYAN's board of directors. Executive Compensation The following table presents information concerning all compensation earned during the year ended June 30, 2000 by MAYAN's Chief Executive Officer and the four other most highly compensated executive officers during the year ended June 30, 2000 whose combined salary and bonus exceeded $100,000 for services rendered during the fiscal year. These executive officers are referred to below as the "Named Executive Officers." The compensation set forth in the table below does not include medical, group life or other benefits that are available to all of MAYAN's salaried employees, and perquisites and other benefits, securities or property that do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. Summary Compensation Table [Download Table] Annual Compensation All Other Compensation ------------------------- ---------------------------- Securities Name And Principal Underlying Other Position Year Salary ($) Bonus ($) Options (#) Compensation ($) ------------------ ---- ---------- --------- ----------- ---------------- Daniel J. Gatti........ 2000 250,000 88,159 600,000 -- Former President, Director and Chief Executive Officer(1) Daniel W. Brown........ 2000 146,667 36,667 300,000 -- Vice President of Product Marketing Julian C. Thomson...... 2000 175,000 -- -- -- Former Vice President of Technology(2) Robert A. Hernandez.... 2000 175,000 -- 350,000 -- Former Vice President of Operations(3) Andrew M. Lovit........ 2000 137,500 -- 350,000 91,667(4) Former Vice President of Worldwide Sales(5) -------- (1) Esmond Goei was appointed as the Chief Executive Officer of MAYAN in March 2001. Mr. Gatti's service as President and Director of MAYAN ceased in May 2001. (2) Mr. Thomson's service as Vice President of Technology and employment with MAYAN ceased in March 2001. (3) Sullivan Bookataub was appointed as Vice President of Operations of MAYAN in March 2001 and succeeded Mr. Hernandez in that position at that time. (4) Consists of a non-recoverable draw on commissions. (5) James Linkous was appointed as Senior Vice President of Worldwide Sales of MAYAN in March 2001 and Mr. Lovit's employment with MAYAN ceased in March 2001. 158
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Option Grants in Last Fiscal Year The following table sets forth information with respect to stock options granted to each of the Named Executive Officers in 2000. MAYAN granted options to purchase up to a total of 5,039,800 shares to employees during the year, and the table's percentage column shows how much of that total went to the Named Executive Officers. No stock appreciation rights were granted to the Named Executive Officers during 2000. The table includes the potential realizable value over the 10-year term of the options, based on assumed rates of stock price appreciation of 5% and 10%, compounded annually. The potential realizable value is calculated based on the initial exercise price assuming the aggregate exercise price on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised and sold on the last day of its term at the appreciated price. All options listed have a term of 10 years. The stock price appreciation rates of 5% and 10% are assumed pursuant to the rules of the Securities and Exchange Commission. MAYAN can give no assurance that the actual stock price will appreciate over the 10-year option term at the assumed 5% and 10% levels or at any other defined level. Actual gains, if any, on stock option exercises will be dependent on the future performance of MAYAN's common stock. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the Named Executive Officers. The option grants to the Named Executive Officers were made under MAYAN's 1998 Stock Option/Stock Issuance Plan. The exercise price for each option grant is equal to the fair market value of MAYAN's common stock on the grant, as determined in good faith by the board of directors. All options were immediately exercisable in full, but MAYAN can buy back any shares purchased under those options, at the exercise price paid per share, to the extent the shares are not vested when the officer leaves MAYAN. MAYAN's repurchase rights will lapse on an accelerated basis under certain conditions in conjunction with a change of control. See "Management of MAYAN--Benefit Plans." Option Grants in Fiscal 2000* [Enlarge/Download Table] Potential Realizable Value at Assumed Annual Rates of Stock Price Number of Percent of Appreciation Securities Total Fair Market for Option Term Underlying Options Exercise Value ($) Options Granted in Price Per Expiration at Date of --------------- Name Granted(#) 2000 Share ($) Date Grant ($) 5% 10% ---- ---------- ---------- --------- ---------- ----------- ------- ------- Daniel J. Gatti......... 600,000 11.56% 0.50 12/13/09 0.50 188,668 478,122 Daniel W. Brown......... 300,000 5.78% (1) (2) (3) (4) (5) Julian C. Thomson....... -- -- -- -- -- -- -- Robert A. Hernandez..... 350,000 6.74% 0.17 7/12/09 0.17 37,419 94,827 Andrew M. Lovit......... 350,000 6.74% 0.17 8/23/09 0.17 37,419 94,827 -------- * If the merger is effected, these options will be converted into options to purchase approximately 3.13 times the number of shares indicated on this table, and the exercise price will be decreased by a proportionate amount before giving effect to the reverse stock split. (1) Mr. Brown was granted 200,000 stock options in August 1999 with an exercise price of $0.17 per share and he was granted 100,000 stock options in December 1999 with an exercise of $0.50 per share. (2) The stock options granted to Mr. Brown in August 1999 have an expiration date of August 23, 2009 and the stock options granted to Mr. Brown in December 1999 have an expiration date of December 13, 2009. (3) The fair market value of the stock options granted to Mr. Brown in August 1999 was $0.17 per share and the fair market value of the stock options granted to Mr. Brown in December 1999 was $0.50 per share. (4) The potential realizable gain for the stock options granted to Mr. Brown in August 1999 is $21,382 and the potential realizable gain for the stock options granted to Mr. Brown in December 1999 is $31,444. (5) The potential realizable gain for the stock options granted to Mr. Brown in August 1999 is $54,187 and the potential realizable gain for the stock options granted to Mr. Brown in December 1999 is $79,687. 159
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MAYAN granted options from January 1, 2001 to June 30, 2001 to its executive officers to purchase up to a total of 2,183,170 shares of its common stock. This amount includes grants of 250,000 shares each to Sullivan J. Bookataub and James B. Linkous, on March 13, 2001 at an exercise price of $0.75 per share, and a grant of 1,208,170 shares to Esmond T. Goei on March 13, 2001 at an exercise price of $0.75 per share and grants of 325,000 shares to John Tingleff and 150,000 shares to Jim Linkous on May 28, 2001, each at an exercise price of $0.75 per share. Option Exercises in Last Fiscal Year The following table sets forth the number of shares the Named Executive Officers purchased in connection with option exercises during the 2000 fiscal year and the value they realized on those exercises. None of the Named Executive Officers held any unexercised options at the end of the 2000 fiscal year or exercised any stock appreciation rights during 2000, and none held any stock appreciation rights at the end of the year. The value realized is based on the fair market value of MAYAN's common stock on the date of exercise, minus the exercise price payable for the shares. The fair market value was determined in good faith by the Board. The exercise price for each grant equaled the fair market value on the date of exercise, so the Named Executive Officers who exercised did not realize any value on the exercises. [Enlarge/Download Table] # of Securities Underlying Unexercised Value of Unexercised Number of Options/SARs at Fiscal In-the-Money Options/SARs Shares Year End at Fiscal Year End ($) Acquired Value ------------------------- ------------------------- Name on Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------ ----------- ------------- ----------- ------------- Daniel J. Gatti......... 1,725,000 0 0 0 0 0 Daniel W. Brown......... 300,000 0 0 0 0 0 Julian C. Thomson....... 0 0 0 0 0 0 Robert A. Hernandez..... 350,000 0 0 0 0 0 Andrew M. Lovit......... 350,000 0 0 0 0 0 Benefit Plans 1998 Stock Option/Stock Issuance Plan MAYAN's 1998 Stock Option/Stock Issuance Plan became effective upon adoption by its board and approval by its shareholders in December 1998. MAYAN has authorized 12,985,937 shares of common stock for issuance under the plan, and 3,461,164 options were outstanding under the plan as of June 30, 2001. The 1998 Stock Option/Stock Issuance Plan provides for the granting to MAYAN employees of incentive stock options at an exercise price of not less than 100% of the fair market value of the common stock on the option grant date and to employees, non-employee members of the board and consultants who provide services to MAYAN, non-statutory stock options to purchase shares of MAYAN common stock at an exercise price of not less than 85% of the fair market value of the common stock on the grant date. Options may be exercised for unvested shares which may be repurchased by MAYAN when the optionee ceases to provide services to MAYAN. Options may be exercised for cash and through the issuance of full recourse promissory notes. In the event that MAYAN is acquired by merger or asset sale, the shares subject to each outstanding option under the 1998 Stock Option/Stock Issuance Plan which are not assumed or continued by the successor corporation shall automatically vest in full, so that immediately prior to the effective time of that transaction, each option shall become fully exercisable for all of the shares of common stock subject to that option at that time. The 1998 Stock Option/Issuance Plan also enables MAYAN to issue to employees, non-employee members of MAYAN's board and consultants who provide services to MAYAN, shares of common stock either directly, through the purchase of shares at a price not less than 85% of their fair market value on the issue date or as a bonus for services. Cancellation and Regrant of Options. The Plan Administrator has the authority to effect the cancellation of any or all options outstanding under the 1998 Stock Option/Stock Issuance Plan and to grant in substitution 160
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therefor new options covering the same or different numbers of shares of common stock but with an exercise price per share based upon the fair market value of the common stock on the new grant date. On March 13, 2001, MAYAN cancelled options to purchase 110,500 shares of MAYAN's common stock previously granted to certain employees. These options had an original exercise price of $5.30. MAYAN replaced the cancelled options with new options for the same number of shares but with an exercise price of $0.75. The new options granted in replacement of the original options will become exercisable for those option shares in one or more installments over the optionee's period of continued service, with each such installment to vest on the same vesting date in effect for that installment under the cancelled higher-priced option. Under the FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation," and Interpretation of APB No. 25, these options will be accounted for as variable grants. Accordingly, MAYAN will be required to recognize compensation expense equal to the intrinsic value, the difference between the exercise price of $0.75 and the fair value of MAYAN's common stock until the options are exercised, forfeited, or expire unexercised. 401(k) Plan MAYAN sponsors a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who are at least 21 years old are generally eligible to participate. Participants may make pre- tax contributions to the plan of up to 20% of their eligible earnings, subject to a statutory prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. Although MAYAN may make discretionary contributions to the 401(k) plan, none have been made to date. Contributions by the participants to the plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Participant contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements Except for an employment agreement with Mr. Gatti and Esmond Goei, MAYAN does not currently have any employment agreements or severance arrangements in effect for any of its executive officers. MAYAN provides incentives such as salary, cash bonuses and option grants, which typically vest over a four-year period, to attract and retain qualified executives. Mr. Gatti's employment agreement provides that his employment is terminable at will, but if he is terminated for any reason other than for cause, he will receive six months of severance pay based on his salary for that year. Mr. Goei's employment agreement is effective for one year following February 7, 2001 and provides that if he is terminated for any reason other than for cause, he will receive the greater of the salary payable to the conclusion of the agreement or six months pay in lieu of severance. In addition, if any executive officer is terminated, or his role is materially diminished, within 18 months of a change in control or acquisition of MAYAN, all of his unvested options will vest in full. Each of the stock options issued to MAYAN's directors, Messrs. Mongiello and Edrington, contain similar change of control provisions. Limitation of Liability and Indemnification MAYAN's bylaws provide that MAYAN will indemnify its directors and officers to the fullest extent permitted by California law. MAYAN is also empowered under its articles of incorporation to enter into indemnification agreements with its directors, officers, employees and agents. Pursuant to this provision, MAYAN has entered into an indemnification agreement with each of its directors and officers. MAYAN's bylaws also permit it to purchase insurance on behalf of any person that MAYAN is required or permitted to indemnify. 161
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In addition, MAYAN's articles of incorporation provide that to the fullest extent permitted by California law, the liability of MAYAN's directors for monetary damages will be eliminated to the fullest extent permissible. This provision in MAYAN's articles of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies, including an injunction or other forms of non-monetary relief, would remain available under California law. Each director will continue to be subject to liability for: . acts or omissions involving intentional misconduct or knowing and culpable violations of law; . acts or omissions that the director believes to be contrary to MAYAN's best interests or its shareholders' best interests or that involve the absence of good faith on the part of the director; . any transaction from which the director derived an improper personal benefit; . acts or omissions that show a reckless disregard for the directors' duty to MAYAN or its shareholders when the director was aware or should have been aware of a risk of serious injury to MAYAN or its shareholders; . acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to MAYAN or its shareholders; . improper transactions between the director and MAYAN; . improper distributions to shareholders and loans to directors and officers; . any act or omission occurring prior to the time the indemnification became effective; or . acts or omissions by the director also serving as an officer. This provision also does not affect a director's responsibilities under any other laws, including the federal securities laws or state or federal environmental laws. Except as noted in "Legal Proceedings," there is no litigation or proceeding involving directors or officers where indemnification will be required or permitted. MAYAN is not aware of any threatened litigation or proceeding that may result in a claim for that indemnification. 162
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF MAYAN Since MAYAN's inception in July 1997, MAYAN has been a party to the transactions listed below in which the amount involved exceeded $60,000 and in which the following persons had a direct or indirect material interest: . any of MAYAN's directors or executive officers; . any nominee for election as one of MAYAN's directors; . any person who owns beneficially more than five percent of MAYAN's common stock or preferred stock; or . any member of the immediate family of any of the foregoing persons. Common Stock Issuances The executive officers, directors and employees of MAYAN can exercise options prior to the date upon which the options vest. However, exercised shares are subject to a right of repurchase by MAYAN until the shares have vested. As of June 30, 2001, MAYAN's executive officers and directors exercised options to purchase an aggregate of 1,683,000 shares of common stock at a weighted average exercise price of approximately $0.33 per share. Preferred Stock Issuances Since MAYAN's inception in July 1997, MAYAN has issued and sold shares of convertible preferred stock to the following persons and entities who are MAYAN's executive officers, directors or principal shareholders. For more detail on each of these purchasers, see "Principal Shareholders of MAYAN." [Download Table] Series A Series B Series C Series D Preferred Preferred Preferred Preferred Investor Stock Stock Stock Stock -------- --------- --------- --------- --------- Esmond T. Goei.......... 62,500(1) -- -- -- Daniel J. Gatti......... 62,500(2) -- 8,982 48,078(3) Steven M. Krausz........ -- 3,921,568(4) 1,916,167(5) 961,538(6) James Mongiello......... -- -- 4,491,018(7) 980,769(8) Peter T. Morris......... -- 3,921,569(9) 1,916,168(10) 1,923,077(11) New Enterprise Associates............. -- 3,921,569(9) 1,916,168(10) 1,923,077(11) U.S. Venture Partners... -- 3,921,568(4) 1,916,167(5) 961,538(6) Brentwood Venture Capital................ -- -- 4,491,018(7) 961,538(12) Oak Investment Partners............... -- -- 3,353,293(13) 961,538(14) London Pacific Assurance Limited................ -- -- -- 5,052,580(15) -------- (1) Mr. Goei currently owns 2,500 of these shares. The balance was transferred. (2) Represents the following shares beneficially owned by Mr. Gatti's brothers: 25,000 shares held by Robert Gatti and 37,500 shares held by Walter J. Gatti Trustee. (3) Includes the following shares beneficially owned by Mr. Gatti's brothers: 18,029 shares held by Walter J. Gatti and 18,029 shares held by Robert Gatti. (4) Represents 3,529,412 shares held by U.S. Venture Partners V, L.P., 196,078 shares held by USVP V International, L.P., 109,804 shares held by 2180 Associates Fund V, L.P. and 86,274 shares held by USVP V Entrepreneur Partners, L.P. (5) Represents 1,724,550 shares held by U.S. Venture Partners V, L.P., 95,808 shares held by USVP International, L.P., 53,653 shares held by 2180 Associates Fund V, L.P. and 42,156 shares held by USVP V Entrepreneur Partners, L.P. 163
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(6) Represents 865,384 shares held by U.S. Venture Partners V, L.P., 48,077 shares held by USVP V International, L.P., 26,923 shares held by 2180 Associates Fund V, L.P. and 21,154 shares held by USVP V Entrepreneur Partners, L.P. (7) Represents 4,401,198 shares held by Brentwood Associates IX, L.P. and 89,820 shares held by Brentwood Affiliates Fund II, L.P. (8) Includes 942,307 shares held by Brentwood Associates IX, L.P. and 19,231 shares held by Brentwood Affiliates Fund II, L.P. (9) Represents 3,857,844 shares held by New Enterprise Associates VII, L.P., 58,823 shares held by New Enterprise Associates President's Fund, L.P. and 4,902 shares held by New Enterprise Associates Ventures 1998, L.P. (10) Represents 1,892,216 shares held by New Enterprise Associates VIII, L.P. and 23,952 shares held by New Enterprise Associates President's Fund, L.P. (11) Represents 1,923,077 shares held by New Enterprise Associates VIII, L.P. (12) Represents 942,307 shares held by Brentwood Associates IX, L.P. and 19,231 shares held by Brentwood Affiliates Fund II, L.P. (13) Represents 3,289,580 shares held by Oak Associates VIII, LLC and 63,713 shares held by Oak VII Affiliates Fund, Limited Partnership. (14) Represents 943,269 shares held by Oak Investment Partners VIII, L.P. and 18,269 shares held by Oak VIII Affiliates Fund, L.P. (15) Represents shares transferred from London Pacific Assurance Limited to an affiliated subsidiary. Series A Financing. Between February and June 1998 MAYAN issued an aggregate of 1,907,500 shares of Series A preferred stock to various investors, including one of MAYAN's directors, co-founder and Chief Executive Officer, Esmond T. Goei, at a purchase price of $0.80 per share. Series B Financing. In August 1998, MAYAN issued an aggregate of 7,843,137 shares of Series B preferred stock to various investors including entities affiliated with New Enterprise Associates and U.S. Venture Partners at a purchase price of $1.02 per share. Series C Financing. In April 1999 MAYAN issued an aggregate of 11,826,346 shares of its Series C preferred stock to various investors including entities affiliated with New Enterprise Associates, U.S. Venture Partners, Oak Investment Partners and Brentwood Venture Capital at a purchase price of $1.67 per share. Series D Financing. From October 1999 through April 2000, MAYAN issued an aggregate of 14,423,077 shares of Series D preferred stock to various investors, including one of its directors, James Mongiello, and entities affiliated with New Enterprise Associates, U.S. Venture Partners, Oak Investment Partners and Brentwood Venture Capital at a purchase price of $4.16 per share. 164
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Loans to Officers From inception to June 30, 2001, MAYAN has lent the following officers and former officers money in exchange for promissory notes carrying the following terms: [Download Table] Loan Due Officer Amount ($) Date Interest (%) ------- ---------- ----- ------------ Alan R. Brown.................................. 70,000 12/04 5.98 Andrew M. Lovit................................ 108,000 (1) 6.00 110,000 (2) 5.00 Julian C. Thomson.............................. 70,000 (3) 6.00 30,000 (4) 5.00 48,000 (5) 5.98 Kevin W. Williams.............................. 40,000 (6) 5.98 Daniel J. Gatti................................ 11,000 (7) n/a -------- (1) Balance due totaling $108,000 was forgiven over a period of time ending in May 2001. (2) Repaid in May 2001. (3) Balance due totaling $9,215.76 was forgiven over a period of time ending in July 2000. (4) Loan was forgiven in July 2000. (5) Loan was forgiven in July 2000. (6) Balance due totaling $22,006 was forgiven over a period of time ending in March 2001. (7) Balance due totaling $3,784 was forgiven over a period of time ending in June 1999. In connection with option exercises, the following officers, former officers and directors delivered five-year full recourse promissory notes bearing an interest rate of 5.98%, compounded annually, with the following terms. The indebtedness is secured by the stock purchased on the exercise of the options. [Download Table] Due Loan Name Date Amount ($) ---- ----- ---------- Daniel W. Brown............................................. 10/04 34,000 3/05 50,000 Daniel J. Gatti............................................. 10/04 100,000 3/05 300,000 Robert A. Hernandez......................................... 10/04 59,500 Farooq M. Raza.............................................. 10/04 18,750 John R. Tingleff............................................ 10/04 44,600 9/05 75,000 Andrew White................................................ 12/04 34,000 Alan R. Brown............................................... 10/05 247,500 165
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PRINCIPAL SHAREHOLDERS OF MAYAN The following table sets forth information regarding beneficial ownership of MAYAN's common stock as of June 30, 2001, by: . each person who owns beneficially more than 5% of MAYAN's common stock or preferred stock; . each of MAYAN's directors and the Named Executive Officers; and . all of MAYAN's directors and executive officers as a group. This table assumes conversion of all the outstanding preferred stock into common stock effective at the closing of the merger. [Download Table] Total Percent of Beneficial Owner Shares(1) Total (%) ---------------- ---------- ---------- Esmond T. Goei.................................. 1,835,670(2) 4.0 Daniel J. Gatti................................. 1,046,156(3) 2.32 Daniel W. Brown................................. 310,000(4) * Julian C. Thomson............................... 175,000 * Robert A. Hernandez............................. 356,010(5) * Andrew M. Lovit................................. 354,808(6) * Thomas Edrington................................ 110,000(7) * Steven M. Krausz................................ 6,799,273(8) 15.3 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 James Mongiello................................. 5,552,556(9),(10) 12.5 3000 Sand Hill Road Bldg. 1, Suite 260 Menlo Park, CA 94025 Peter T. Morris................................. 7,760,814(11) 17.5 2490 Sand Hill Road Menlo Park, CA 94025 New Enterprise Associates....................... 7,760,814(11) 17.5 2490 Sand Hill Road Menlo Park, CA 94025 U.S. Venture Partners........................... 6,799,273(8) 15.3 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Brentwood Venture Capital....................... 5,452,556(12) 12.3 3000 Sand Hill Road Bldg. 1, Suite 260 Menlo Park, CA 94025 Oak Investment Partners......................... 4,314,831(13) 9.7 525 University Avenue Suite 1300 Palo Alto, CA 94301 London Pacific Assurance Limited................ 5,052,580(14) 11.4 Minden House 6 Minden Place St. Heiler Jersey, Channel Islands Directors and Executive Officers as a group (12 persons)....................................... 25,788,813(15) 55.2 166
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-------- * Less than one percent. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to those shares, subject to community property laws where applicable. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or member of a group to acquire them within 60 days are treated as outstanding only when determining the amount and percent owned by that person or group. Each shareholder's percentage of ownership in the following table is based on 44,480,454 shares of stock outstanding as of June 30, 2001, assuming the conversion of all of MAYAN's outstanding shares of preferred stock into one share of common stock. Unless otherwise indicated, the principal address of each of the shareholders below is c/o MAYAN Networks Corporation, 2115 O'Nel Drive, San Jose, California 95135. (1) MAYAN has issued shares of Series A, Series B, Series C and Series D preferred stock all of which is required to convert into common stock at the effective time of the merger. (2) Includes 2,500 shares of Series A Preferred Stock. Also includes 180,000 shares of common stock held by Evelyn Goei and 114,500 shares held by Esmond Goei, Mr. Goei's wife, 26,668 shares of common stock held by Estella Fung, Trustee of the AAA Goei Trust fbo Angela Lynn Goei, 26,666 shares of common stock held by Estella Fung, Trustee of the AAA Goei Trust fbo Amanda Susan Goei, 26,666 shares of common stock held by Estella Fung, Trustee of the AAA Goei Trust fbo Andrew Esmond Goei, includes 250,000 shares of common stock held by Archangel Capital Investments, L.P. Also includes 1,208,170 shares of common stock issuable upon the exercise of stock options which are exercisable within 60 days of March 31, 2001. (3) Includes 8,982 shares of Series C preferred stock and 12,020 shares of Series D preferred stock. Also, includes 741,666 shares of common stock which are subject to a right of repurchase by MAYAN. (4) Includes 183,541 shares of common stock which are subject to a right of repurchase by MAYAN. Also includes 10,000 shares of common stock issuable upon the exercise of stock options which are exercisable within 60 days of June 30, 2001. (5) Includes 6,010 shares of Series D preferred stock. Also includes 189,583 shares of common stock which are subject to a right of repurchase by MAYAN. (6) Includes 4,808 shares of Series D preferred stock. Also includes 211,458 shares of common stock which are subject to a right of repurchase by MAYAN. (7) Represents 110,000 shares of common stock issuable upon the exercise of stock options which are exercisable within 60 days of June 30, 2001. (8) Represents 6,119,346 shares of preferred stock held by U.S. Venture Partners V, L.P., 291,886 shares of preferred stock held by USVP V International, L.P., 190,380 shares of preferred stock held by 2180 Associates Fund V, L.P., 48,077 shares of preferred stock held by USVP International V, L.P. and 149,584 shares of preferred stock held by USVP V Entrepreneur Partners, L.P. Mr. Krausz disclaims beneficial ownership in such shares except to the extent of his pecuniary interest therein. (9) Includes 52,083 shares of common stock which are subject to a right of repurchase by MAYAN. (10) Represents 5,343,505 shares of preferred stock held by Brentwood Associates IX, L.P. and 109,051 shares of preferred stock held by Brentwood Affiliates Fund II, L.P. Mr. Mongiello disclaims beneficial ownership in such shares except to the extent of his pecuniary interest therein. (11) Represents 3,857,844 shares of preferred stock held by New Enterprise Associates VII, L.P., 82,775 shares of preferred stock held by New Enterprise Associates President's Fund, L.P., 4,902 shares of preferred stock held by New Enterprise Associates Ventures 1998, L.P., and 3,815,293 shares of preferred stock held by New Enterprise Associates VIII, L.P. Mr. Morris disclaims beneficial ownership in such shares except to the extent of his pecuniary interest therein. (12) Represents 5,343,505 shares of preferred stock held by Brentwood Associates IX, L.P. and 109,051 shares of preferred stock held by Brentwood Affiliates Fund II, L.P. 167
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(13) Represents 3,289,580 shares of preferred stock held by Oak Associates VIII, LLC, 63,713 shares of preferred stock held by Oak VIII Affiliates, LLC, 943,269 shares of preferred stock held by Oak Investment Partners VIII, L.P. and 18,269 shares of preferred stock held by Oak VIII Affiliates Fund, L.P. (14) Includes 5,052,580 shares of preferred stock transferred from London Pacific Assurance Limited to affiliated subsidiary. (15) Includes 1,378,331 shares of common stock which are subject of repurchase by MAYAN. Also includes 1,328,170 shares which are issuable upon the exercise of stock options exercisable within 60 days of March 31, 2001. 168
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