-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVsCnO9pROiYfndRBZshOsHDukUfYyT54RBuJxl26EijIxC8UTxO0owG1QbtaxNN DFpzY+zb/QZXWXVd7M1NKg== 0001011034-96-000006.txt : 19960422 0001011034-96-000006.hdr.sgml : 19960422 ACCESSION NUMBER: 0001011034-96-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960419 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED RESEARCH CORP CENTRAL INDEX KEY: 0000794876 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 860585693 STATE OF INCORPORATION: CO FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-10076 FILM NUMBER: 96548792 BUSINESS ADDRESS: STREET 1: 8201 CORPORATE DR STE 1120 CITY: LANDOVER STATE: MD ZIP: 20785 BUSINESS PHONE: 3014598442 MAIL ADDRESS: STREET 1: 8201 CORPORATE DR SUITE 1120 CITY: LANDOVER STATE: MD ZIP: 20785 FORMER COMPANY: FORMER CONFORMED NAME: DOLLAR VENTURES INC DATE OF NAME CHANGE: 19880417 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission file number 01-10076 APPLIED RESEARCH CORPORATION ______________________________________________ (Exact name of small business issuer as specified in its charter) Colorado 86-0585693 _________________________________ ______________________ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 8201 Corporate Drive, Suite 1120, Landover, Maryland 20785 _______________________________________________________ ___________ (Address of principal executive offices) (Zip Code) (301) 459-8442 ____________________ (Registrant's telephone number, including area code) ______________________________________________ (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of April 19, 1996, the Company had 6,311,083 shares of its $.01 par value common stock outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] FORM 10-QSB APPLIED RESEARCH CORPORATION INDEX Part I: FINANCIAL INFORMATION Page No. ______ _____________________ ________ Item 1 Financial Statements Condensed Consolidated Balance Sheets at February 29, 1996 (unaudited) and May 31, 1995 3-4 Condensed Consolidated Statements of Operations for the Three Months ended February 29, 1996 and February 28, 1995 (unaudited) 5 Condensed Consolidated Statements of Operations for the Nine Months ended February 29, 1996 and February 28, 1995 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 29, 1996 and February 28, 1995 (unaudited) 7-8 Notes to Condensed Consolidated Financial Statements (unaudited) 9-12 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Part II: OTHER INFORMATION _______ _________________ Item 1 Legal Proceedings 20 Item 2 Changes in Securities 20 Item 3 Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 20 Signatures 21 APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
February 29, May 31, 1996 1995 (Unaudited) (Audited) ____________ __________ ASSETS CURRENT ASSETS Cash $ 20,768 $ 15,028 Accounts receivable, net 1,768,860 1,792,853 Inventory, at cost 4,012 3,709 Other current assets 58,310 60,819 _________ _________ TOTAL CURRENT ASSETS 1,851,950 1,872,409 PROPERTY AND EQUIPMENT, AT COST Furniture and equipment 204,083 192,880 Computer equipment 494,773 464,557 Laboratory equipment 258,678 246,365 Leasehold improvements 22,322 22,322 _________ _________ 979,856 926,124 Less accumulated depreciation and amortization 835,947 776,807 _________ _________ NET PROPERTY AND EQUIPMENT 143,909 149,317 INTANGIBLE ASSETS, NET OF AMORTIZATION 42,825 57,357 OTHER 10,605 41,075 _________ _________ TOTAL ASSETS $2,049,289 $2,120,158 ========== ==========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
February 29, May 31, 1996 1995 (Unaudited) (Audited) ____________ __________ LIABILITIES CURRENT LIABILITIES Notes payable, current maturities $ 720,299 $ 911,681 Notes payable to officers and directors, current maturities 4,000 - Accounts payable 570,092 549,295 Accrued salaries and benefits 1,094,030 1,185,641 Accrued payroll taxes and withholdings 1,009,494 481,576 Other accrued liabilities 560,055 392,223 Billings in excess of costs and anticipated profits 19,223 59,594 Deferred revenue 27,924 14,444 Income taxes payable 1,411 19,860 Provision for contract losses 40,000 40,000 __________ __________ TOTAL CURRENT LIABILITIES 4,046,528 3,654,314 NOTES PAYABLE, NET OF CURRENT MATURITIES - 25,000 __________ __________ TOTAL LIABILITIES 4,046,528 3,679,314 __________ __________ STOCKHOLDERS' DEFICIT Preferred Stock, $.10 par value, 40,000,000 shares authorized, none issued - - Common Stock, $.0005 par value, 60,000,000 shares authorized, 6,811,083 shares issued and 6,311,083 shares outstanding 3,155 2,972 Capital in excess of par value 1,140,529 1,026,649 Accumulated deficit (3,140,923) (2,588,777) _________ _________ TOTAL STOCKHOLDERS' DEFICIT (1,997,239) (1,559,156) _________ _________ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,049,289 $2,120,158 ========== ==========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
1996 1995 (Unaudited) (Unaudited) __________ __________ Revenue $2,188,578 $2,367,962 Operating costs and expenses: Direct cost of services 1,292,070 1,445,576 Indirect operating cost 466,699 604,513 General & administrative expenses 343,261 338,723 _________ _________ Total operating costs and expenses 2,102,030 2,388,812 _________ _________ Operating income (loss) 86,548 (20,850) Other expense: Interest expense, net 120,782 87,413 Penalties 76,939 41,016 Other, net 18,340 (4,992) _________ _________ Total other expense 216,061 123,437 _________ _________ Loss before income taxes (129,513) (144,287) Income taxes - - _________ _________ Net loss $ (129,513) $ (144,287) =========== ========== Net loss per share $ (0.02) $ (0.02) =========== =========== Weighted average number of shares outstanding 6,311,083 5,944,416 ========= =========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
1996 1995 (Unaudited) (Unaudited) ___________ ___________ Revenue $6,782,276 $7,241,879 Operating costs and expenses: Direct cost of services 4,116,346 4,444,835 Indirect operating cost 1,513,039 1,821,236 General & administrative expenses 1,141,772 1,094,065 _________ _________ Total operating costs and expenses 6,771,157 7,360,136 _________ _________ Operating income (loss) 11,119 (118,257) Other expense: Interest expense, net 306,276 246,321 Compensation expense associated with stock awards 89,063 - Penalties 129,132 103,660 Other, net 38,794 (2,462) _________ _________ Total other expense 563,265 347,519 _________ _________ Loss before income taxes (552,146) (465,776) Income taxes - - _________ _________ Net loss $ (552,146) $ (465,776) =========== =========== Net loss per share $ (0.09) $ (0.08) =========== =========== Weighted average number of shares outstanding 6,182,494 5,944,416 ========= =========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
1996 1995 (Unaudited) (Unaudited) ___________ ___________ Cash flows from operating activities: Net loss $ (552,146) $ (465,776) Adjustments to reconcile net loss to net cash provided (used) in operating activities: Depreciation 59,140 47,799 Amortization 15,227 62,044 Increase in provision for contract losses - 40,000 Compensation expense associated with common stock awards 89,063 - Changes in assets and liabilities: Decrease in accounts receivable 23,993 365,324 (Increase) decrease in inventory (303) 4,815 Decrease in other current assets 2,509 35,843 Increase in intangible assets (695) (26,661) (Increase) decrease in other assets 30,470 (40,035) Increase (decrease) in accounts payable 20,797 (170,019) Increase (decrease) in accrued salaries and benefits (91,611) 183,792 Increase in accrued payroll taxes and withholdings 527,918 409,299 Increase in other accrued liabilities 167,832 69,709 Decrease in billings in excess of costs and anticipated profits (40,371) (84,150) Increase in deferred revenue 13,480 3,651 Decrease in income taxes payable (18,449) - _________ _________ Total adjustments 799,000 901,411 _________ _________ Net cash provided in operating activities 246,854 435,635 _________ _________ CONTINUED
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
1996 1995 (Unaudited) (Unaudited) ____________ ____________ Cash flows from investing activities: Capital expenditures (53,732) (77,677) _________ _________ Net cash used in investing activities (53,732) (77,677) _________ _________ Cash flows from financing activities: Proceeds from equipment loan - 50,515 Proceeds of loans from officers and directors 4,000 - Proceeds of loans from receivables assignment 5,685,182 5,354,420 Repayment of loans from receivables assignment (5,835,026) (5,701,489) Repayment of notes payable to bank - (25,000) Repayment of equipment loan (41,538) (5,303) Repayment of common stock warrants - (5,625) _________ _________ Net cash used in financing activities (187,382) (332,482) _________ _________ Net increase in cash 5,740 25,476 Cash at the beginning of period 15,028 32,804 _________ _________ Cash at the end of period $ 20,768 $ 58,280 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the quarter for interest $ 258,689 $ 220,596 ========== ========== During the quarter ended November 30, 1995, the holder of a $25,000 note converted the note into 66,667 shares of common stock of the Company.
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated balance sheet as of February 29, 1996, the condensed consolidated statements of operations for the three and nine months ended February 29, 1996 and February 28, 1995, and the condensed consolidated statements of cash flows for the nine months ended February 29, 1996 and February 28, 1995, have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at February 29, 1996, and for all periods presented, have been made. The Company owns 95% of ARInternet which was formed during November, 1994. However, because the minority interest in net losses of ARInternet exceeded the carrying value of the minority interest amount at February 29, 1996, no minority interest has been provided. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended May 31, 1995. The results of operations for the period ended February 29, 1996, are not necessarily indicative of the operating results for the full year. 2. LOSS PER COMMON SHARE Loss per share of common stock has been computed by dividing the net income by the weighted average number of shares of common stock outstanding during each of the periods presented. Common stock equivalent shares relating to stock options and warrants are included in the weighted average only when the effect is dilutive. 3. RECLASSIFICATIONS Certain amounts in the condensed consolidated balance sheet as of May 31, 1995, the condensed consolidated statements of operations for the three and nine months ended February 28, 1995, and the condensed consolidated statements of cash flows for the nine months then ended have been reclassified to conform to the February 29, 1996, presentation. APPLIED RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. NOTES PAYABLE On November 17, 1995, the Company entered into an agreement with a new lender ("CFC"), and on December 4, 1995, CFC paid off the remaining outstanding PrinCap loan balance of $651,491, plus $18,288 of accrued interest and other charges. The agreement with CFC allows the Company to borrow 90% against billed receivables on all assigned contracts. Since the new financing agreement did not allow the Company to borrow against unbilled receivables, the Company was required to pay off the $250,000 unbilled loan advance and the approximate $35,000 equipment loan due to PrinCap at the time of closing the new loan. To accommodate this, CFC allowed the Company a one-time advance of approximately 97% against eligible billed receivables. The new financing agreement provides an interest rate of prime plus 4%, calculated on the mid-month and end-of-month balances. There is also a 0.65% service charge for each 15 day period on outstanding invoices. The IRS agreed to give CFC a priority security interest with regards to its loans against billed receivables. The IRS and CFC initially operated under an interim subordination agreement while the Company applied for a formal subordination from the IRS. On January 30, 1996, the IRS issued a Certificate of Subordination. Additionally, as part of the installment agreement entered into with the IRS on December 1, 1995, CFC agreed to deduct the monthly payment due to the IRS from the amounts the Company borrows against its current billings, and remit this directly to the IRS (See Note 6 for additional information). 5. RETIREMENT PLAN At February 29, 1996, the Company had not remitted employee contributions of $353,110. During 1995, the Company had an agreement with its previous Lender ("PrinCap"), pursuant to which PrinCap had been authorized to, and had remitted the 1995 employee contributions as they become due. This arrangement continued until mid-November 1995 when PrinCap issued a default letter. Because of the shortfall of cash caused by the refinancing, the Company was and unable to remit the remaining 1995 employee contributions totaling $61,331 (included in the above total number). The Company began remitting the 1996 employee contributions as they became due and as of March 29, 1996, remained current with the 1996 employee contributions. The Company has informed its employees that it intends to pay interest at the rate of 15% per annum on the unpaid employee withholdings. At February 29, 1996, the Company had accrued interest payable of approximately $87,900. APPLIED RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS At February 29, 1996, the Company had not remitted employer contributions of $203,106. The Company has informed its employees that it intends to pay interest on these amounts at the prevailing statutory rates (approximately 5%). At February 29, 1996, the Company had accrued interest payable of approximately $9,400. During July, 1995, the Company agreed to and signed contract modifications on its two largest contracts with NASA. The contract modifications require the Company to remit an increasing portion of its fee earned on these two contracts directly to the 401(k) plan in order to reduce the past due amounts owed. The portion of the fees applied to the plan was 25% for the fees earned beginning January 1, 1995 and increased to 75% during calendar year 1995. Effective January 1, 1996, the percentage increased to 100%. The contract modifications will remain in effect until all past due amounts owed the 401(k) plan have been repaid. Through February 29, 1996, $59,319 of fees earned under these contracts had been remitted to the 401(k) plan in accordance with the contract modifications. During March 1996, an additional $20,955 was remitted to the plan. Although the fees generated by these contracts will ultimately liquidate the past due amounts owed to the 401(k) plan, these modifications have and will continue to reduce the cash flow available to meet the Company's remaining obligations. Based on the current level of work being performed on these two contracts, both contracts together generate approximately $150,000 in fees per year. As of February 29, 1996, the Company was in compliance with the terms of these contracts, as modified. 6. WITHHOLDING TAXES As of February 29, 1996, the Company had not remitted federal payroll tax withholdings totaling approximately $855,270 relating to the fourth calendar quarter of 1994, the second and fourth calendar quarters of 1995, as well as the first calendar quarter of 1996. The Company has accrued penalties and interest on those delinquent amounts totaling approximately $300,000 through February 29, 1996. During September, 1995, the Company remitted a $50,000 payment to the IRS. The Company was unable to meet the October, 1995, payment requested by the IRS, and as a result, the IRS filed a lien against the Company on November 7, 1995. On December 1, 1995, the Company entered into a new installment agreement with the IRS which specifies a $75,000 monthly payment to be made by the 15th of each month starting with December, 1995, and continuing until the total liability has been paid. As part of this agreement, the IRS has agreed to give the Company's new lender ("CFC") a priority security interest with regards to its loans against billed receivables. The interim subordination agreement continued while the Company applied for a formal subordination from the IRS. APPLIED RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On January 30, 1996, the IRS issued the Certificate of Subordination. As a condition of the new installment agreement, CFC is required to deduct the monthly payment from the Company's borrowings against billed receivables and remit this directly to the IRS. CFC has remitted the first four installment payments through March 1996, totaling $300,000. However, because of the refinancing the Company underwent in December 1995, the Company fell behind on its current federal payroll taxes due. Between December 4, 1995 and February 29, 1996, the Company did not remit approximately $404,800 of federal payroll withholding taxes. As a result, the Company is in default of the new installment agreement. On April 1, 1996, the IRS issued Levy Notices to ARM's bank, financing company and the majority of its customers. On April 2, 1996, the IRS attempted to close the business. As a result, ARM was forced to file for protection under Chapter 11 of the United States Bankruptcy Code on April 2, 1996. (See further discussion under the liquidity and capital resources discussion on page 19.) As of February 29, 1996, the Company was also delinquent in remitting $124,286 of 1995 and 1996 state withholding taxes. As of April 2, 1996, this amount remained unremitted. 7. COMMON STOCK ISSUED During August, 1995, the Company entered into two (2) agreements with New York- based companies to provide public relations services for the Company and to find and attract market makers for the Company's common stock. As compensation, the Companies will each receive up to a total of 400,000 shares of the Company's common stock. The Company has registered with the Securities and Exchange Commission the issuance of stock pursuant to these agreements. Both agreements can be canceled by the Company at any time. All of the stock represented by these two agreements (800,000 shares) has been issued and is being held in escrow pending its release, as specified in the agreements. Upon the release of the stock, the Company records compensation expense equal to the average of the bid and asked prices (approximately $0.30 a share) on the date the agreements were signed. Through February 29, 1996, a total of 150,000 shares had been released to each of these Companies. 8. SUPPLEMENTAL SEGMENT INFORMATION The Company's operations have been classified into three business segments: Sales to unaffiliated customers: APPLIED RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARM ARS ARI Consolidated __________ ___________ __________ ____________ QUARTER ENDED: February 29, 1996 $2,056,125 $37,379 $95,074 $2,188,578 February 28, 1995 $2,280,616 $80,988 $ 6,358 $2,367,962 NINE MONTHS ENDED: February 29, 1996 $6,353,675 $224,449 $204,152 $6,782,276 February 28, 1995 $6,930,382 $305,139 $ 6,358 $7,241,879 Operating income (loss) from continuing operations before other (income) expense and income taxes: QUARTER ENDED: February 29, 1996 $139,296 $(28,555) $(24,193) $ 86,548 February 28, 1995 $105,723 $(58,731) $(67,842) $(20,850) NINE MONTHS ENDED: February 29, 1996 $280,468 $ (95,041) $(174,308) $ 11,119 February 28, 1995 $208,888 $(225,844) $(101,301) $(118,257) Operating income (loss) equals total net revenues less operating expenses. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS OVERVIEW Applied Research Corporation ("the Company") is comprised of two wholly owned subsidiaries, Applied Research of Maryland, Inc. ("ARM") and ARSoftware Corporation ("ARS"), and a majority owned subsidiary, ARInternet Corporation ("ARInternet"). ARM currently consists of three unincorporated divisions: Technical Services Division, Instruments Division and ARInstruments Division ("ARInstruments"). Management's discussion and analysis of financial condition and results of operations takes into consideration the activities of the Company as a whole and each individual operating entity where necessary. Management's discussion and analysis should be read in conjunction with the Selected Financial Information, and the Company's Condensed Consolidated Financial Statements, including the footnotes thereto. RESULTS FROM OPERATIONS - THREE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO 1995 The Company's revenues for the quarter ended February 29, 1996, were $2,188,578, or (8)% below revenues of $2,367,962 for the same period during 1995. The decrease in revenues during the quarter ended February 29, 1996, of $179,384 is primarily attributable to the decrease in ARM's revenues of $224,491 or 10% when compared with revenues of $2,280,616 generated during the same period in 1995. ARM's revenues decreased as a result of a decrease in the number of contracts, and therefore, the number of direct employees generating revenue during the current fiscal quarter compared to the quarter ended February 28, 1995. Also contributing to the overall decease in revenues was a decrease in product sales by ARS of $43,609 or 54%, from revenues of $80,988 generated during the same period in 1995. ARInternet's revenues were $95,074, an increase of $88,716 over the previous year, and partially offset the declines experienced by ARM and ARS. The Company's direct cost of services decreased $153,506 or 11%, from $1,445,576 during the quarter ended February 28, 1995, to $1,292,070 during the same period in 1996. Of this amount, ARM and ARS contributed decreases of $126,598 and $39,487, respectively, while ARInternet's cost of services increased $12,579. ARM's decrease in direct costs consisted of a $66,819 decrease in direct labor and a $59,779 decrease in subcontract, material and equipment charges. The decrease in direct labor related primarily to a decrease in the number of contracts being performed at the Company's headquarters. The decrease in direct costs of ARS was primarily related to a $21,684 decrease in the cost of goods sold associated with lower sales for the quarter and a decrease in the amount of amortization of previously capitalized software development costs, which was $17,803 less in the quarter ended February 29, 1996 than the same period in 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS Indirect operating costs decreased $137,814 or 23%, from $604,513 during the quarter ended February 28, 1995, to $466,699 during the quarter ended February 29, 1996. Of this amount, ARM's indirect operating costs decreased $130,418 or 22%, while ARS's decreased $7,396 or 81%. ARM's decrease is directly related to a decrease in the amount of indirect labor being charged to overhead, as well as a decrease in fringe benefit costs incurred as a result of fewer staff. ARS's decrease was directly related to a decrease in technical staff which occurred during the second half of the previous fiscal year and a reduction in existing staff during the current fiscal quarter. General and administrative ("G&A") expenses increased $4,538 or 1%, from $338,723 in 1995, to $343,261 during 1996. Most notably, the G&A expenses associated with ARInternet increased $30,068 during the quarter. In addition, ARM's G&A expenses increased $1,373, offset by the decrease in ARS's G&A expenses of $26,903 or 40%. The decrease in ARS's G&A expenses was predominantly attributable to a reduction in marketing related expenses during the period. As a result of the foregoing, the Company realized operating income for the quarter ended February 29, 1996, of $86,548 compared to an operating loss of $(20,850) for the same period during 1995. ARM posted an operating profit of $139,296 for the quarter ended February 29, 1996 compared to $105,723 during the same period in 1995. The increase in ARM's operating margin was primarily related to an increase in fees realized on one of ARM's largest contracts. ARS posted an operating loss of $(28,555) for the quarter ended February 29, 1996, which loss represented an improvement of $30,176 or 51% from the operating loss of $(58,731) during the same period in 1995. This net improvement for ARS is directly attributable to a decrease in salary and related fringe benefit expenses and reductions in marketing and other expenses. ARInternet posted an operating loss of $(24,193) for the quarter ended February 29, 1996, which loss represented an improvement of $43,649 or 64% from the operating loss of $(67,842) during the same period in 1995. This net improvement for ARInternet was directly attributable to an increase in the overall revenue levels from the previous year. Interest and other expenses increased $92,624 or 75%, from $123,437 for the quarter ended February 28, 1995, to $216,061 during the quarter ended February 29, 1996. Net interest expense increased $33,369 or 38% from 1995. The increase in interest costs was the result of increased interest on unremitted employee 401(k) contributions and unpaid federal withholding taxes during the quarter ended February 29, 1996, when compared to the same period in 1995. Penalties increased $35,923 or 88% from $41,016 for the quarter ended February 28, 1995, to $76,939 during the quarter ended February 29, 1996. (See Notes 5 and 6 to the Condensed Consolidated Financial Statements). Other expenses also increased $23,332 during the quarter ended February 29, 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS This was primarily due to the write-off of $33,500 of offering related expenses which were paid during January 1995 in anticipation of raising equity capital. As the Company has been unsuccessful in raising additional capital, management decided to write these expenses off in the current quarter. Until such time as the Company is able to increase its working capital, either through increased income from operations, or through additional equity financing, the likelihood of which is extremely uncertain, it is anticipated that interest and other expenses will continue to exert significant pressure on the Company's ability to generate positive earnings and cash flow. The Company sustained a net loss of $(129,513) for the quarter ended February 29, 1996, compared to a net loss of $(144,287) during the same period last year. This loss reflects an increase in ARM's operating margins of $33,573, an increase in ARS's operating margin of $30,176, and the increase in ARInternet's operating margin of $43,649, which, when offset by the increase in interest and other costs of $92,624, impacted overall margins by $14,774 when compared to same quarter in 1995. Loss per common share was unchanged for the current fiscal quarter compared to the same period in 1995. RESULTS FROM OPERATIONS - NINE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO 1995 The Company's revenues for the nine months ended February 29, 1996, were $6,782,276, or (6)% below revenues of $7,241,879 for the same period during 1995. The decrease in revenues during the nine months ended February 29, 1996, of $459,603 is primarily attributable to the decrease in ARM's revenues of $576,707 or 8% when compared with revenues of $6,930,382 during the same period in 1995. ARM's revenues decreased as a result of a decrease in the number of contracts, and therefore, the number of direct employees generating revenue during the current fiscal period compared to the nine months ended February 28, 1995. Also contributing to the overall decease in revenues was a decrease in product sales by ARS of $80,690 or 26%, from revenues of $305,139 during the same period in 1995. ARInternet's revenues increased $197,794 and partially offset the declines experienced by ARM and ARS. The Company's direct cost of services decreased $328,489 or 7%, from $4,444,835 during the nine months ended February 28, 1995, to $4,116,346 during the same period in 1996. Of this amount, ARM and ARS contributed decreases of $298,749 and $87,800, respectively, while ARInternet's cost of services increased $58,060. ARM's decrease in direct costs consisted of a $130,167 decrease in direct labor and a $168,582 decrease in subcontract, material and equipment charges. The decrease in direct labor related primarily to a decrease in the number of contracts being performed at the Company's headquarters. The decrease MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS in direct costs of ARS was primarily due to a decrease in the amount of amortization of previously capitalized software development costs, which were $47,787 less during the nine months ended February 29, 1996 than during the same period in 1995, in addition to a $40,013 decrease in the cost of goods sold resulting from the reduced sales level. Indirect operating costs decreased $308,197 or 17%, from $1,821,237 during the nine months ended February 28, 1995, to $1,513,039 during the same period in 1996. Of this amount, ARM's indirect operating costs decreased $285,317 or 16%, while ARS's decreased $22,880 or 42%. ARM's decrease is directly related to a decrease in the amount of indirect labor being charged to overhead, as well as a decrease in fringe benefit costs incurred as a result of fewer staff. ARS's decrease was directly related to a decrease in technical staff which occurred during the second half of the previous fiscal year and a reduction in existing staff during the current fiscal quarter. General and administrative ("G&A") expenses increased $47,707 or 4%, from $1,094,065 during the nine months ended February 28, 1995, to $1,141,772 during the same period in 1996. Most notably, the G&A expenses associated with ARInternet increased $212,741. Offset against this increase were decreases in ARM's and ARS' G&A expenses of $64,221 or 9% and $100,813 or 40%, respectively. ARM's decrease related primarily to a decrease in bids and proposal and research and development costs incurred during the nine months ended February 29, 1996 when compared to same nine-month period in 1995. The decrease in ARS's G&A expenses was predominantly attributable to a reduction in marketing related expenses during the period. As a result of the foregoing, the Company realized an operating margin for the nine months ended February 29, 1996, of $11,119 compared to an operating loss of $(118,257) for the same period during 1995. ARM posted an operating profit of $280,468 during the nine months ended February 29, 1996 compared to $208,888 during the same period in 1995. The increase in ARM's operating margin was primarily related to a $75,000 decrease in ARM's 1995 operating margin which was the result of a $40,000 reduction to previously recorded revenues resulting from the routine Government audit of its FY 90 costs, and a cost overrun of approximately $35,000 on one of its five year Government contracts which expired during the November 30, 1994, quarter. ARS posted an operating loss of $(95,041) for the nine months ended February 29, 1996, which loss represented an improvement of $130,803 or 58% from the operating loss of $(225,844) during the same period in 1995. This net improvement for ARS is directly attributable to a decrease in salary and related fringe benefit expenses and reductions in marketing and other expenses. ARInternet's operating loss of $(174,308) during the nine months ended February 29, 1996, an increase of $73,007 from the previous year, also decreased the Company's operating margins. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS Interest and other expenses increased $215,746 or 62%, from $347,519 during the nine months ended February 28, 1995, to $563,265 during the nine months ended February 29, 1996. Net interest expense increased $59,954 or 24%. The increase in interest costs was the result of increased interest on unremitted employee 401(k) contributions and unpaid federal withholding taxes during the nine months ended February 29, 1996, when compared to the same period in 1995. Penalties increased $25,472 or 25%, relating to the increased unremitted federal withholding taxes. Other expenses also increased $41,256 during the same nine- month period in 1996. This was primarily due to the write-off of $33,500 of offering related expenses which were paid during January 1995 in anticipation of raising equity capital. As the Company has been unsuccessful in raising additional capital, management decided to write these expenses off in the current quarter. In addition, during the nine months ended February 29, 1996, the Company recorded $89,064 of compensation expense associated with stock released in conjunction with agreements with two New York based companies. (See Note 7 to the Condensed Consolidated Financial Statements). The Company sustained a net loss of $(552,146) for the nine months February 29, 1996, compared to a net loss of $(465,776) during the same period last year. This loss reflects an increase in ARM's operating margins of $71,580, an increase in ARS's operating margin of $130,803, and the decrease in the operating margin associated with ARInternet of $(73,007), which, in addition to the increase in interest and other costs of $215,746, negatively impacted overall margins by $(86,370) when compared to same nine-month period in 1995. Loss per common share increased to $(0.09) during the nine months ended February 29, 1996, compared to $(0.08) during the same period 1995, as a direct result of the increase in net loss during the nine months ended February 29, 1996. LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995 Total assets decreased $70,869 or 3%, from $2,120,158 at May 31, 1995, to $2,049,289 at February 29, 1996. Total liabilities on the other hand increased from $3,679,314 to $4,046,258 over the same period, an increase of $326,944. The most significant reason for the decrease in total assets was the $33,570 write off of deferred offering expenses during the current quarter. Another reason for the decrease in total assets was the decrease in billed and unbilled accounts receivable of $23,993. At February 29, 1996, the Company had $1,090,902 and $677,958 in billed and unbilled receivables, respectively. Billed receivables increased $22,474 or 2% from May 31, 1995, while unbilled receivables decreased $46,467 or 6% from May 31, 1995. The increase in billed accounts receivable was primarily the result of an increase in the amount of MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS closeout billings prepared during November, 1995, offset by a decrease in the average amount billed due to the decrease in revenues. The decrease in unbilled accounts receivable related to preparing final invoices on 14 old contracts during November, 1995, as a result of completing government audits for FY 1991 through FY 1993 during the quarter then ended. This decrease was offset by an increase in the amount of work that was unbilled (nine days) at February 29, 1996, when compared to May 31, 1995 (only two days). The most significant reason for the increase in liabilities was the increase in payroll taxes and withholdings which increased $527,918 from May 31, 1995 to February 29, 1996. In addition, other accrued expenses increased $167,832 during the nine-month period, as a result of the increased penalties and interest associated with the unpaid payroll taxes and 401(k) contributions. On the other hand notes payable decreased $191,382, primarily as the result of refinancing during the current quarter. The Company refinanced its accounts receivable financing on December 4, 1995. The new agreement allows the Company to borrow 90% against billed receivables on all assigned contracts. Since the new financing agreement did not allow the Company to borrow against unbilled receivables, the Company was required to pay off the $250,000 unbilled loan advance and the approximate $35,000 equipment loan due to PrinCap at the time of closing the new loan. To accommodate this, the Company's new financing company, CFC, allowed the Company a one-time advance of approximately 97% against eligible billed receivables, however this adversely impacted cash flow for the quarter ended February 29, 1996. The Company's working capital deficit continued to grow during the nine months ended February 29, 1996, increasing from a deficit of $(1,781,905) to a deficit of $(2,194,578). Adding to the Company's working capital deficit during the nine months ended February 29, 1996, was an increase in unremitted payroll taxes withheld of $527,918, from $481,576 at May 31 1995, to $1,009,494 at February 29, 1996. Of the February 29, 1996, balance, approximately $855,270 of federal withholding taxes and $124,286 of state withholding taxes were past due. In addition, the following also impacted the Company's liquidity and capital resources: - During the nine months ended February 29, 1996, the Company purchased approximately $53,700 of property and equipment. Included in total purchases is approximately $30,000 of equipment for ARInternet, representing computer hardware and software required to provide ARInternet with the capability of offering Internet access and services. The remaining $23,700 of purchases represented ARM purchases of additional computer hardware as well as a repair of its laser equipment. The Company does not plan any major additional equipment purchases unless ARInternet's growth warrants them, and is also seeking alternate equipment financing to help finance ARInternet's equipment purchases. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS - During July, 1995, the Company executed contract modifications on its two largest contracts with NASA. The contract modifications require the Company to remit an increasing portion of its fees earned on these two contracts directly to its 401(k) plan ("the Plan") in order to reduce the past due amounts owed. (See Note 5 to the Condensed Consolidated Financial Statements). The portion of fees applied to the Plan was 25% for fees earned from January 1, 1995, and increased to 75% during calendar year 1995. Effective January 1, 1996, the percentage increased to 100%. The contract modifications will remain in effect until all past due amounts owed the Plan have been repaid. Through February 29, 1996, $59,319 of fees earned under these contracts had been remitted to the Plan in accordance with the contract modifications. Although the fees generated by these contracts will ultimately liquidate the past due amounts owed to the Plan, these modifications will reduce the cash flow available to meet the Company's remaining obligations. Based on the current level of work being performed on these two contracts (both contracts together generate approximately $150,000 in fees per year) it will take approximately 4.5 years to bring all past due amounts owed the Plan current absent additional payments from other sources. - As discussed in Note 6 to the Condensed Consolidated Financial Statements, the Company has not remitted certain federal payroll tax withholdings. During September, 1995, the Company remitted a $50,000 payment to the IRS. The IRS had demanded a $250,000 payment be made on October 27, 1995, and when the Company was unable to meet the October, 1995, payment, and as a result, the IRS filed a lien against the Company on November 7, 1995. On December 1, 1995, the Company entered into a new installment agreement with the IRS which specifies a $75,000 monthly payment to be made starting with December, 1995, and continuing until the liability has been paid. As a condition of this installment agreement, the Company's new lender is required to deduct the monthly payment from the Company's borrowings against billed receivables and remit this directly to the IRS. Through March 9, 1996, the Company's lender has remitted the first four payments. (See additional comments on pages 19 and 20.) During the next 12 months, the Company's anticipated cash expenditures include: payment of federal withholding taxes which together with interest and penalties total approximately $1,155,300 at February 29, 1996, payment of past due employee and employer contributions, and accrued interest, due to the Company's 401(k) plan totaling $633,800 at February 29, 1996, past due state withholding taxes of $124,300 and supplying the Company with operating funds to cover losses. Given the Company's current working capital deficit, absent a significant improvement in the Company's operations or a large infusion of capital or a sale of a significant component of the business, the Company may not have sufficient capital to achieve its current business plan. Additionally, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS the continued increase in the Company's working capital deficit, together with the Company's net capital deficit, raise substantial doubt as to the Company's ability to continue as a going concern. In order to reduce the Company's working capital deficit the Company has taken the following actions: - During fiscal 1995, the Company completed design of its BIO-UVB Meter instrument and was granted two (2) patents by the United State Patent and Trademark Office. Since the patents sought by the Company were granted during 1995, the Company is now focusing on licensing or selling this product to a commercial company with has established marketing and distribution channels. During October, 1995, the Company further reduced the expenditures on this project by 75% from $45,000 to approximately $11,000 a quarter. - During December, 1995, through attrition, ARS reduced its staff in half to two. - During the quarter ended August 31, 1995, ARInternet began to pay for all of its non-payroll expenses. During January, 1996, ARInternet began to pay for its own payroll expenses, thus further reducing its cash dependence on ARM. In addition, during January, 1996, ARInternet eliminated one member of its staff, which will save approximately $57,000 annually. - During November, 1995, and March, 1996, ARM eliminated two of its indirect staff, which will save the Company approximately $145,000 annually. - During October, 1995, management started pursuing the possible sale of ARM, the Company's government contracting subsidiary. The Company has enlisted a broker which has made contacts with several companies who appear to be interested. Three companies expressed interest in acquiring essentially all of the operating assets of ARM (principally the government contracts). Discussions are ongoing with these parties and as of April 2, 1996, no offers acceptable to the company have been made. Management is continuing these discussions and hopes to have a firm letter of intent or purchase agreement within the next 45 days. However, there can be no guarantee that the Company's efforts to sell ARM will be successful. While there can be no assurance, management believes that the foregoing actions should positively impact the Company's financial condition, and in particular, reduce the Company's working capital deficit in the short-term. However, absent a significant reduction in the Company's working capital deficit, together with a marked improvement in the Company's operations, a large infusion of capital or a sale of a significant component of the business, the likelihood of which MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS cannot be guaranteed, the Company's ability to continue as a going concern is questionable. This is particularly true given the Company's current federal withholding tax deficit and apparent inability to bring this obligation current within a reasonable time frame without a significant infusion of capital. Because the Company is currently in default of its installment agreement with the IRS, all or a portion of the Company's assets are subject to immediate seizure and possible sale by the IRS. To that end, on April 1, 1996, the IRS issued Levy Notices to ARM's bank, financing company and the majority of its customers. On April 2, 1996, the IRS attempted to close the business. As a result, ARM was forced to file for protection under Chapter 11 of the United States Bankruptcy Code on April 2, 1996. On April 5, 1996, ARM received an emergency hearing with the Bankruptcy Court to determine its request to pay its employees their pre-petition wages as well as continue to operate the business. Prior to the emergency hearing, ARM reached an agreement with the IRS and CFC (its lender) to allow the company to continue to operate and borrow money from CFC against its billed receivables. Under this agreement, ARM has agreed to pay $15,000 a month starting April, 1996 towards its arrearage with the IRS. The April payment will consist of the $13,600 of cash seized by the IRS on April 1, 1996. These payments will be made directly to the IRS by CFC against its borrowings. As part of the agreement with the IRS and as required by the Bankruptcy Court, ARM is required to remit its post-petition taxes when due and provide proof of such payments to the IRS and the Court on a timely basis. The Bankruptcy Court approved the agreements with the IRS and CFC, and has approved ARM's operating budget for 15 days through April 21, 1996, pending a full hearing by the Court which has not yet been scheduled. On April 18, 1996, the company reached an agreement with the IRS to extend its agreement for sixty days through June 19, 1996. A Consent Order containing the terms of this extension will be filed with the Bankruptcy Court on April 19, 1996. 1885, Furthermore, ARM has informed the court and the IRS that it has and will continue to pursue sale of the ARM's business. INFLATION The Company anticipates increases in costs associated with the operation of the business and reflects this in the cost of living escalation factors proposed on all new work. In addition, the Company is continually researching areas to minimize cost increases and strives for improved efficiencies in all aspects of its business environment. Except as set forth above, and beyond routine capital investments in its operations, management knows of no other significant trends or events that are likely to have a material effort on the Company's liquidity or capital reserves. PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 2: CHANGES IN SECURITIES None ITEM 3: DEFAULTS UPON SENIOR SECURITIES None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K None APPLIED RESEARCH CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLIED RESEARCH CORPORATION Date: April 19, 1996 By: Dr. S.P.S. Anand ______________ ___________________________ Dr. S.P.S. Anand President and Chief Executive Officer Date: April 19, 1996 By: Dennis H. O'Brien ______________ ___________________________ Dennis H. O'Brien Vice President and Chief Financial Officer
EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 3 - 6 OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED FEBRUARY 29, 1996 0000794876 APPLIED RESEARCH CORP 9-MOS MAY-31-1995 JUN-01-1995 FEB-29-1996 20,768 0 1,768,860 0 4,012 1,851,950 979,856 835,947 2,049,289 4,046,528 0 0 0 3,155 (1,997,239) 2,049,289 6,782,276 6,782,276 6,771,157 6,771,157 563,265 0 306,276 (552,146) 0 (552,146) 0 0 0 (552,146) (0.09) (0.09)
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