-----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, S1vCrgsswOfgzR+x1JrbnEIqwqDVLm3CaDonvIzkS7jJ56V+9R9OUUkmgHcnNf+U WDvcMs3BlSyKNxUC+uQPsg== 0001011034-97-000078.txt : 19970425 0001011034-97-000078.hdr.sgml : 19970425 ACCESSION NUMBER: 0001011034-97-000078 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970421 DATE AS OF CHANGE: 19970424 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED RESEARCH CORP CENTRAL INDEX KEY: 0000794876 STANDARD INDUSTRIAL CLASSIFICATION: 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: 97584612 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 28, 1997 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 14, 1997, 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 - February 28, 1997 (unaudited) and May 31, 1996 3-4 Condensed Consolidated Statements of Operations - Three months ended February 28, 1997 and February 29, 1996 (unaudited) 5 Condensed Consolidated Statements of Operations - Nine months ended February 28, 1997 and February 29, 1996 (unaudited) 6 Condensed Consolidated Statements of Cash Flows - Nine months ended February 28, 1997 and February 29, 1996 (unaudited) 7-8 Notes to Condensed Consolidated Financial Statements 9-15 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-23 Part II: OTHER INFORMATION Item 1 Legal Proceedings 25 Item 2 Changes in Securities 25 Item 3 Defaults Upon Senior Securities 25 Item 4 Submission of Matters to a Vote of Security Holders 25 Item 5 Other Information 25 Item 6 Exhibits and Reports on Form 8-K 25 Signatures 26 APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, May 31, 1997 1996 (Unaudited) (Audited) ------------ ------------ ASSETS - - ------ CURRENT ASSETS Cash $ 50,447 $ 78,689 Accounts receivable, net 1,421,019 1,524,685 Inventory, at cost 222 1,492 Other current assets 12,650 21,093 ------------ ------------ TOTAL CURRENT ASSETS 1,574,512 1,625,959 PROPERTY AND EQUIPMENT, AT COST Furniture and equipment 167,741 167,405 Computer equipment 484,285 462,206 Laboratory equipment 121,426 121,426 Leasehold improvements 22,322 22,322 ------------ ------------ 795,774 773,359 Less accumulated depreciation and amortization 697,441 640,589 ------------ ------------ NET PROPERTY AND EQUIPMENT 98,333 132,770 INTANGIBLE ASSETS, NET OF AMORTIZATION 27,309 32,276 OTHER ASSETS 7,359 6,615 ------------ ------------ TOTAL ASSETS $1,617,339 $1,797,620 =========== ===========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
February 28, May 31, 1997 1996 (Unaudited) (Audited) ------------ ------------ LIABILITIES - - ----------- CURRENT LIABILITIES Liabilities not subject to compromise: Notes payable, current maturities $ 434,763 $ 689,563 Notes payable to officers and directors, current maturities 33,500 4,000 Accounts payable 346,549 162,314 Accrued salaries and benefits 343,692 176,574 Accrued payroll taxes and withholdings 64,117 57,143 Other accrued liabilities 127,532 77,665 Billings in excess of costs and anticipated profits 9,179 9,999 Deferred revenue 30,035 27,635 Income taxes payable 381 1,411 Provision for contract losses 60,000 60,000 ------------ ------------ Total liabilities not subject to compromise 1,449,748 1,266,304 ------------ ------------ Liabilities subject to compromise: Accounts payable 336,557 403,812 Accrued salaries and benefits 832,475 861,151 Accrued payroll taxes and withholdings 770,406 930,794 Accrued interest and penalties 445,204 437,708 ------------ ------------ Total liabilities subject to compromise 2,384,642 2,633,465 ------------ ------------ TOTAL CURRENT LIABILITIES 3,834,390 3,899,769 ------------ ------------ 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 3,155 Capital in excess of par value 1,140,529 1,140,529 Accumulated deficit (3,360,735) (3,245,833) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (2,217,051) (2,102,149) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,617,339 $1,797,620 =========== ===========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
1997 1996 (Unaudited) (Unaudited) ----------- ----------- Revenue $142,413 $ 132,453 Operating costs and expenses: Direct cost of services 34,186 49,846 Indirect operating costs - 1,724 General & administrative expenses 94,671 133,631 ---------- ---------- Total operating costs and expenses 128,857 185,201 ---------- ---------- Operating income (loss) from continuing operations 13,556 (52,748) Other expense: Interest expense, net 1,035 (22) Penalties 790 2,567 Other, net (15) - ---------- ---------- Total other expense 1,810 2,545 ---------- ---------- Income (loss) before discontinued operations, reorganization items and income taxes 11,746 (55,293) Loss from discontinued operations before reorganization items (42,208) (74,220) Reorganization items: Professional fees (34,324) - ---------- ---------- Loss from discontinued operations (76,532) (74,220) ---------- ---------- Loss before income taxes (64,786) (129,513) Income taxes - - ---------- ---------- Net loss $ (64,786) $(129,513) ========== ========== Net loss per common share: Loss before discontinued operations $ - $ (0.01) Loss from discontinued operations (0.01) (0.01) ---------- ---------- Net loss per common share $ (0.01) $ (0.02) ========== ========== Weighted average number of shares outstanding 6,311,083 6,311,083 ========= =========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1997 and FEBRUARY 29, 1996
1997 1996 (Unaudited) (Unaudited) ----------- ----------- Revenue $413,454 $ 428,601 Operating costs and expenses: Direct cost of services 134,720 207,755 Indirect operating costs - 31,742 General & administrative expenses 300,754 458,453 ---------- ---------- Total operating costs and expenses 435,474 697,950 ---------- ---------- Operating loss from continuing operations (22,020) (269,349) Other expense: Interest expense, net 1,151 601 Consulting expense associated with stock awards - 89,063 Penalties 2,416 3,371 Other, net 451 - ---------- ---------- Total other expense 4,018 93,035 ---------- ---------- Loss before discontinued operations, reorganization items and income taxes (26,038) (362,384) Income (loss) from discontinued operations before reorganization items 36,029 (189,762) Reorganization items: Professional fees (124,893) - ------------ ------------ Loss from discontinued operations (88,864) (189,762) Loss before income taxes (114,902) (552,146) Income taxes - - ------------ ------------ Net loss $ (114,902) $ (552,146) ============ ============ Net loss per common share: Loss before discontinued operations $ - $ (0.06) Loss from discontinued operations (0.01) (0.03) ------------ ------------ Net loss per common share $ (0.02) $ (0.09) ============ ============ Weighted average number of shares outstanding 6,311,083 6,182,494 ========= =========
See accompanying notes to the condensed consolidated financial statements APPLIED RESEARCH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
1997 1996 (Unaudited) (Unaudited) ------------ ------------ Cash flows from operating activities: Cash received from customers $6,348,416 $6,779,377 Cash paid to suppliers and employees (5,886,122) (6,303,926) Interest paid (116,898) (210,148) Income taxes paid (1,030) (18,449) ------------ ------------ Net cash provided from operating activities before reorganization items 344,366 246,854 ------------ ------------ Operating cash flows from reorganization items: Professional fees paid for services rendered in connection with the Chapter 11 proceeding (124,893) - ------------ ------------ Net cash used by reorganization items (124,893) - ------------ ------------ Net cash provided from operating activities 219,473 246,854 ------------ ------------ Cash flows from investing activities: Capital expenditures (22,415) (53,732) ------------ ------------ Net cash used in investing activities (22,415) (53,732) ------------ ------------ Cash flows from financing activities: Proceeds from loans from officers and directors 29,500 4,000 Proceeds of loans from receivables assignment - pre-petition - 5,685,182 Proceeds of loans from receivables assignment - post-petition 4,622,829 - Repayment of loans from receivables assignment - pre-petition - (5,835,026) Repayment of loans from receivables assignment - post-petition (4,877,629) - Repayment of equipment loan - pre-petition - (41,538) ------------ ------------ Net cash used in financing activities (225,300) (187,382) ------------ ------------ Net increase (decrease) in cash (28,242) 5,740 Cash at the beginning of period 78,689 15,028 ------------ ------------ Cash at the end of period $ 50,447 $ 20,768 =========== =========== 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 28, 1996 and FEBRUARY 29, 1997
1997 1996 (Unaudited) (Unaudited) ---------- ----------- Reconciliation of net loss to net cash provided from operating activities: Net loss $(114,902) $(552,146) Adjustments to reconcile net loss to net cash provided from operating activities: Depreciation 56,852 59,140 Amortization 4,967 15,227 Consulting expense associated with stock awards - 89,063 Changes in assets and liabilities: Decrease in accounts receivable 103,666 23,993 Increase (decrease) in inventory 1,270 (303) Decrease in other current assets 8,443 2,509 Increase in intangible assets - (695) Increase (decrease) in other assets (744) 30,470 Increase (decrease) in accounts payable - pre-petition (67,255) 20,797 Increase in accounts payable - post-petition 184,235 - Decrease in accrued salaries and benefits - pre-petition (28,676) (91,611) Increase in accrued salaries and benefits - post-petition 167,118 - Increase (decrease) in accrued payroll taxes and withholdings - pre-petition (160,388) 527,918 Increase in accrued payroll taxes and withholdings - post-petition 6,974 - Increase in other accrued liabilities - pre-petition 7,496 167,832 Increase in other accrued liabilities - post-petition 49,867 - Decrease in billings in excess of costs and anticipated profits (820) (40,371) Increase in deferred revenue 2,400 13,480 Decrease in income taxes payable (1,030) (18,449) ------------ ------------ Net cash provided from operating activities $ 219,473 $ 246,854 ========= =========
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 28, 1997, the condensed consolidated statements of operations for the three months and nine months ended February 28, 1997 and February 29, 1996, and the consolidated statements of cash flows for the nine months ended February 28, 1997 and February 29, 1996, 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 28, 1997, 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 28, 1997, 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-KSB for the fiscal year ended May 31, 1996. The results of operations for the period ended February 28, 1997, 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 loss 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, 1996, the condensed consolidated statements of operations for the three and nine months ended February 29, 1996, and the condensed consolidated statements of cash flows for the nine months then ended have been reclassified to conform to the February 28, 1997, presentation. 4. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11/SALE OF APPLIED RESEARCH OF MARYLAND, INC. AND MANAGEMENT'S PLANS TO CONTINUE AS A GOING CONCERN ----------------------------------------------------------------------- On April 2, 1996, Applied Research of Maryland, Inc. ("ARM", also referred to as "the Debtor") filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of Maryland (the "Bankruptcy Filing"). ARC, ARS and ARInternet have not filed for relief under the federal bankruptcy laws. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-In-Possession. These claims are reflected in the condensed financial statements for February 28, 1997 as "liabilities subject to compromise". Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from the rejection of executory contracts, including leases, and from the determination by the court (or agreement of the parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured primarily by liens on the Debtor's property, including the Debtor's accounts receivable. 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 to continue to operate the business. Prior to the emergency hearing, ARM reached an agreement with the IRS and CFC (its lender - see Note 5) to allow the company to continue to operate and borrow money from CFC against its billed receivables. Under this agreement, ARM agreed to pay $15,000 a month starting April 1996, towards its arrearage with the IRS. The April payment consisted of the $13,600 of cash seized by the IRS on April 1, 1996. Future monthly payments have been and continue to be made directly to the IRS by CFC from borrowings made by ARM. ARM was also required to remit to the IRS collections on certain billed receivables that were outstanding as of April 2, 1996 (which totaled approximately $136,700 and consisted of final vouchers on 14 old contracts). In addition, as part of the agreement with the IRS and as required by the Bankruptcy Court, ARM was required to remit its post-petition taxes when due and provide proof of such payments to the IRS and the Bankruptcy Court on a timely basis. The Bankruptcy Court approved the agreements with the IRS and CFC, and approved ARM's operating budget for 15 days through April 21, 1996. These agreements have continued to be renewed by the Bankruptcy Court. The Debtor has determined that there exists insufficient collateral to cover the interest portion of scheduled payments on its pre-petition debt obligations, most notably the installment obligation due to the IRS prior to the filing of the petition. However, as a result of the Bankruptcy Filing, the Debtor is not longer accruing interest on pre-petition obligations, except the amounts owed CFC. SALE OF ARM'S GOVERNMENT CONTRACTS ---------------------------------- On June 24, 1996, the Company accepted a contract for the sale of certain of ARM's assets for approximately $1.5 Million. The sale was subject to Bankruptcy Court approval, a hearing on which was originally scheduled for July 26, 1996. This hearing was subsequently moved to July 30, 1996. On July 30, 1996, the hearing was conducted. At the hearing, a total of four qualified bidders attended, and after extensive bidding, an offer was accepted for $2.1 Million. During August 1996, management and ARM's bankruptcy attorney negotiated a contract, which was signed on August 30, 1996. A court order documenting the bidding procedure as well as the contract was submitted to the Bankruptcy Court on September 26, 1996, and was approved on October 4, 1996. The sale also required the approval of a majority of the Company's shareholders. On October 30, 1996, at the Company's Annual Meeting of Shareholders, a majority of the Company's shareholders approved the sale. The sale was also subject to the successful novation of ARM's government contracts, which request was submitted to the Government in October 1996, with the information supporting the request for novation submitted in early November 1996. Approval of the novation was expected to take approximately 60 to 90 days from submission. On January 31, 1997, because novation by the government had not occurred, the purchaser choose to terminate the purchase agreement. During February 1997, management meet with several other interested purchasers, including the other three bidders that had attended the July 1996, hearing. On March 3, 1997, the Company accepted a new contract for the sale of certain of ARM's assets for approximately $1.5 Million from Space Applications Corporation ("SAC"). The sale was subject to Bankruptcy Court approval, which was scheduled for April 11, 1997. On April 11, 1997, the hearing was conducted. At the hearing, a total of three qualified bidders attended, and after extensive bidding, an offer was accepted for $1.75 Million from SAC. Because of the change in the purchase price as well as in the distribution of funds, the original SAC contract required modifications. An amendment to the contract reflecting these changes was signed on April 16, 1997. A court order documenting the bidding procedure is also expected to be finalized within the 10 days of the hearing. The sale is subject to the successful novation of ARM's government contracts, which request is expected to be submitted to the Government within 5 to 10 days of the hearing. It is hoped that approval of the novation will take place within 45 to 60 days from submission, although this is not certain. Upon notification of the government's novation approval the sale will be completed, although there can be no assurances that the government will approve the novation. The following is a list of the purchased and excluded assets: PURCHASED ASSETS EXCLUDED ASSETS ---------------- --------------- - - - All contract rights (including - ARM's charter and status as a project contracts), corporation, its minute book, - - - All inventory, stock transfer records, and - - - All books and records, similar records relating to ARM's - - - All furniture, fixtures and organization, existence or equipment, capitalization, and the - - - All proprietary rights (patents, capital stock of ARM, etc.), - Billed accounts receivable as - - - All unbilled accounts receivable of closing, relating to expired contracts - Intercompany receivables, as of January 31, 1997, - All ARM's cash accounts, - - - All other unbilled accounts receivable - ARM's rights to occupy real as of the closing date property pursuant to leases of real property and any lease- hold improvements made thereto, - Any other property identified by the Purchaser prior to the closing. PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES ----------------------------------------------------------- In the event that the sale referenced above is completed, ARM (the "Debtor") will file a Plan of Reorganization, which will, among other things, specify how much of the outstanding pre-petition liabilities will be paid and over what period of time. It is expected that a Plan of Reorganization will be filed with the Bankruptcy Court within 30 days of completing the sale. This Plan is expected to take several months to receive Bankruptcy Court approval. It is also expected that between the monies generated from the sale of ARM's contract rights plus the collection of outstanding accounts receivable (which are not part of the sale), there will not be sufficient monies to liquidate all of ARM's pre-petition liabilities. Furthermore, it appears that the unsecured creditors (accounts payable) will receive little or nothing towards their pre-petition claims. Specifically, it appears that the following will be paid in full as a result of the Plan of Reorganization: 1) the secured claim of CFC, ARM's pre-petition and post-petition lender, 2) the principal portions of the tax amounts owed to the IRS, 3) approximately $255,200 of the $343,361 owed to the employees for accrued vacation, $530,917 of the $676,000 owed to the 401(k) Plan as of April 2, 1996, as well as certain employees' pre-petition claims for unreimbursed travel expenses of approximately $50,000, and, 4) approximately 90% of the principal portions of the tax amounts owed to the various state authorities. Although these are the current expectations, there can be no assurance that these amounts will be paid until the Plan of Reorganization is submitted and confirmed by the Bankruptcy Court. COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM --------------------------------------------------- As of April 2, 1996, ARSoftware ("ARS") owed ARM approximately $1.2 Million and ARInternet owed ARM $0.4 Million. These amounts resulted from ARM paying certain operating expenses of ARS and ARInternet during their start-up phases and providing continued money thereafter to fund operations. Since these amounts are owed to ARM, the ultimate collection of these advances will be supervised and controlled by the Bankruptcy Court. As of February 28, 1997, ARS has only one part-time employee and its assets and sales are minimal. As a result, ARS still has not achieved breakeven operations. Therefore payment of any of the amount it owes ARM is extremely doubtful. On the other hand, ARInternet has essentially achieved breakeven operations during the current fiscal year. Therefore, it can reasonably be expected that ARInternet will be required to repay some amount to liquidate its debt to ARM. The ultimate amount will be determined by the Bankruptcy Court. IMPACT ON ARC AFTER THE SALE OF ARM IS COMPLETED ------------------------------------------------ During the fiscal year ended May 31, 1996, ARM's operations constituted 94% of ARC's total revenue. The sale currently contemplated will sell essentially all of ARM's operations and eliminate all of ARM's revenues. Therefore, ARS and ARInternet will be the only remaining operating entities. Up until the bankruptcy filing, ARM had been forced to continue to fund ARS's and ARInternet's operations. During the fiscal year ended May 31, 1996, (through April 2, 1996), ARM funded approximately $204,600 of ARS and ARInternet expenses. From April 2, 1996 on, because of the ARM bankruptcy proceedings, ARM ceased all such advances and ARS and ARInternet were forced to fund their own operations. ARS is still not operating at cash flow breakeven, so it is doubtful that it can survive without an infusion of cash or a substantial increase in revenues. Management is considering several options for ARS, including ceasing its operations. ARInternet on the other hand, has steadily increased its revenues and as of February 28, 1997, had approximately 1,000 subscribers and had essentially reached breakeven operations. Management believes that ARInternet's revenues and business will continue to grow and that ARInternet will ultimately be a successful business on its own, however there can be no assurance of this. The space currently occupied by ARM is not covered by the Bankruptcy proceeding, since the lease is held by ARC. Management of ARC has enlisted the services of a real estate broker to find a tenant to take over this space when ARM's operations are sold. The landlord has also been apprised of the ARM sale and is attempting to find an alternate tenant, but is under no obligation to release ARC from its obligation under the lease. On December 1, 1996, ARM vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM. Effective January 1, 1997, the Company signed a lease amendment that reduced its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes 5,011 of the 6,349 sq. ft. vacated on December 1, 1996. The landlord and the Company have been negotiating to relieve the Company of all obligations related to the space vacated by the Company on December 1, 1996, as well as the remainder of the leased space when the ARM sale is completed. The landlord's last offer in this regard was that it would do so for a total payment of approximately $56,000, $13,600 of which would be due at the time of signing the lease amendment and the balance in equal installments over the remainder of the lease. The Company countered this proposal, which counteroffer is currently being considered by the Landlord. In addition to the continuing lease costs, ARC will continue to incur expenses to maintain its status as a public company. The sale of ARM, if completed, will dramatically change the Company's balance sheet and statement of operations. Through the bankruptcy proceeding, all of ARM's debts, which total $3.5 million at February 28, 1997, will be either liquidated or discharged. This will decrease the interest and penalty costs the Company has been incurring. If ARS and ARInternet's revenues can be increased to produce net profits and a positive cash flow, the Company may in fact benefit from the sale of ARM. However, unless and until this occurs, the Company may not have sufficient capital to achieve its current business plan, which raises substantial doubt as to the Company's ability to continue as a going concern after the sale of ARM is completed. 5. DISCONTINUED OPERATIONS ----------------------- Because the Bankruptcy Court has approved the sale of substantially all of the assets of ARM, results from operations for ARM have been shown as discontinued operations for the three and nine months ended February 28, 1997 and February 29, 1996. A summary of ARM's results from operations for the three and nine months ended February 28, 1997 and February 29, 1996 are shown on the next page:
1997 1996 (Unaudited) (Unaudited) ------------ ------------ THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996: Revenue $1,861,484 $2,056,125 Operating costs and expenses: Direct cost of services 1,147,950 1,242,225 Indirect operating costs 468,313 464,975 General & administrative expenses 237,896 209,629 ------------ ------------ Total operating costs and expenses 1,854,159 1,916,829 ------------ ------------ Operating profit from discontinued operations 7,325 139,296 Other expense: Interest expense, net 38,463 120,804 Other, net 11,070 92,712 ------------ ------------ Total other expense 49,533 213,516 ------------ ------------ Profit (loss) from discontinued operations before reorganization items (42,208) (74,220) Reorganization items - professional fees (34,324) - ------------ ------------ Profit (loss) from discontinued operations $ (76,532) $ (74,220) =========== ============ NINE MONTHS ENDED FEBRUAERY 28, 1997 AND FEBRUARY 29, 1996: Revenue $5,829,716 $6,353,675 Operating costs and expenses: Direct cost of services 3,647,246 3,908,592 Indirect operating costs 1,312,983 1,481,297 General & administrative expenses 699,130 683,318 ------------ ------------ Total operating costs and expenses 5,659,359 6,073,207 ------------ ------------ Operating profit from discontinued operations 170,357 280,468 Other expense: Interest expense, net 113,223 305,675 Other, net 21,105 164,555 ------------ ------------ Total other expense 134,328 470,230 ------------ ------------ Income (loss) from discontinued operations before reorganization items 36,029 (189,762) Reorganization items - professional fees (124,893) - ------------ ------------ Loss from discontinued operations $ (88,864) $ (189,762) ============ ============
6. SUPPLEMENTAL SEGMENT INFORMATION The Company's continuing operations have been classified into two business segments:
ARS ARInternet Consolidated ---------- ---------- ------------ SALES TO UNAFFILIATED CUSTOMERS: - - ------------------------------- QUARTER ENDED: ------------- February 28, 1997 $ 6,113 $ 136,300 $ 142,413 February 29, 1996 $ 37,379 $ 95,074 $ 132,453 NINE MONTHS ENDED: ---------------- February 28, 1997 $ 59,558 $ 353,896 $ 413,454 February 29, 1996 $ 224,449 $ 204,152 $ 428,601 OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES: - - -------------------------------------------------- QUARTER ENDED: ------------- February 28, 1997 $ (7,166) $ 20,722 $ 13,556 February 29, 1996 $ (28,555) $ (24,193) $ (52,748) NINE MONTHS ENDED: ---------------- February 28, 1997 $ (28,021) $ 6,001 $ (22,020) February 29, 1996 $ (95,041) $ (174,308) $ (269,349)
Operating income (loss) equals total net revenues less operating expenses. ARM's results have been reported as discontinued operations in the accompanying condensed consolidated financial statements, since the Company has accepted and the Bankruptcy Court has approved of an offer to sell substantially all of the operating assets of ARM (see Note 5). 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 Company's Condensed Consolidated Financial Statements, including the footnotes thereto. RESULTS FROM OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995 - - ------------------------------------------------------------------------------ FROM CONTINUING OPERATIONS -------------------------- The Company's revenues for the quarter ended February 28, 1997, were $142,413, or 8% above revenues of $132,453 for the same period during 1996. The increase of $9,960 in revenues during the quarter ended February 28, 1997, is primarily attributable to the increase in ARInternet's revenues of $136,300, an increase of $41,226 or 43% over revenues of $95,074 generated during the same period in 1996. ARS' revenues were $6,113, a decrease of $(31,266) over the previous year. The Company's direct cost of services decreased $15,660 or 31%, from $49,846 during the quarter ended February 29, 1996, to $34,186 during the same period in 1997. Of this amount, ARS decreased $19,900 while ARInternet's cost of services increased $4,240. The decrease in direct costs of ARS was primarily related to the lower sales for the quarter and a decrease in the amount of amortization of previously capitalized software development costs, compared to the same period in 1996. The increase in ARInternet's direct costs of sales was the direct result of increased sales during the current period. Indirect operating costs decreased $1,724 or 100%, from $1,724 during the quarter ended February 29, 1996, to $0 during the quarter ended February 28, 1997. The entire decrease was directly related to a decrease by ARS in technical staff which occurred during the second half of the previous fiscal year. General and administrative ("G&A") expenses decreased $38,960 or 29%, from $133,631 in 1996, to $94,671 during 1997. Most notably, the G&A expenses associated with ARS decreased $31,029, while ARInternet's G&A expenses decreased $7,931 during the quarter. The decrease in ARS's G&A expenses was predominantly attributable to a reduction in personnel and marketing related expenses during the period. The decrease in ARInternet's G&A expenses related to a reduction in staffing during 1997 when compared to the same period in 1996. As a result of the foregoing, the Company realized operating income from continuing operations for the quarter ended February 28, 1997, of $13,556 compared to an operating loss of $(52,748) for the same period during 1996. ARS posted an operating loss of $(7,166) for the quarter ended February 28, 1997, which loss represented an improvement of $21,389 or 75% from the operating loss of $(28,555) during the same period in 1996. 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 operating income of $20,722 for the quarter ended February 28, 1997, which represented an improvement of $44,915 from the operating loss of $(24,193) during the same period in 1996. This net improvement for ARInternet was directly attributable to an increase in the overall revenue levels from the previous year due to increases in the number of subscribers to ARInternet. Interest and other expenses decreased $735 or 29%, from $2,545 for the quarter ended February 29, 1996, to $1,810 during the quarter ended February 28, 1997. The decrease was primarily related to the fact that the Company reduced the amount of penalties it had incurred during the quarter ended February 28, 1997 when compared to the same period in 1996. The Company realized income from continuing operations of $11,746 for the quarter ended February 28, 1997, compared to a loss from continuing operations of $(55,293) during the same period in 1996. This change in results from continuing operations was the result of improved operating margins from both ARS and ARInternet. Loss per common share from continuing operations decreased from $(0.01) in 1996 to $0.00 in 1997, as a result of the income for the current fiscal quarter when compared to loss for the same period in 1996. FROM DISCONTINUED OPERATIONS ---------------------------- ARM's revenues for the quarter ended February 28, 1997, were $1,861,484, or (9)% below revenues of $2,056,125 for the same period during 1996. The decrease in revenues during the quarter ended February 28, 1997, of $194,641 is primarily attributable to 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 29, 1996. ARM's direct cost of services decreased $94,275 or 8%, from $1,242,225 during the quarter ended February 29, 1996, to $1,147,950 during the same period in 1997. ARM's decrease in direct costs consisted of a decrease in direct labor and a 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. ARM's indirect operating costs increased $3,338 or 1%, from $464,975 during the quarter ended February 29, 1996, to $468,313 during the quarter ended February 28, 1997. This increase is directly related to a increase in the amount in fringe benefit costs incurred. ARM's general and administrative ("G&A") expenses increased $28,267 or 13%, from $209,629 in 1996, to $237,896 during 1997. The increase in ARM's G&A expenses was directly attributable to the increase in professional fees. This was partially offset by a reduction in ARM's G&A staff for the current fiscal period when compared to the previous year. As a result of the foregoing, ARM realized operating income for the quarter ended February 28, 1997, of $7,325 compared to operating income of $139,296 for the same period during 1996. The $131,971 decrease in ARM's 1997 operating margin was primarily related to a decrease in fees realized on ARM's contracts, due to the higher indirect rates realized by ARM during 1997, in particular its general and administrative expenses, as well as a decrease in award fees being realized on the Company's largest contract, related to the performance on the contract of the prime contractor. A portion of the Company's award fees on this contract are directly tied to that received by the prime contractor. ARM's interest and other expenses decreased $163,983 or 77%, from $213,516 for the quarter ended February 29, 1996, to $49,533 during the quarter ended February 28, 1997. Net interest expense decreased $82,341 or 68% from 1996. The decrease in interest costs was the result of ARM not accruing any interest on either the delinquent employee 401(k) contributions nor the unpaid federal withholding taxes (on its pre-petition liabilities) during the quarter ended February 28, 1997, when compared to the same period in 1996. Other expenses also decreased $81,642 during the quarter ended February 28, 1997. This was primarily due to the fact that ARM did not record any penalties during the current period because the accrual of penalties and interest is stayed as a result of the Company filing for protection under Chapter 11 of the United States Bankruptcy Code. ARM sustained a net loss before income taxes of $(76,532) for the quarter ended February 28, 1997, compared to a net loss of $(74,220) during the same period last year. RESULTS FROM OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO 1995 - - ----------------------------------------------------------------------------- FROM CONTINUING OPERATIONS -------------------------- The Company's revenues for the nine months ended February 28, 1997, were $413,454, or (4)% below revenues of $428,601 for the same period during 1996. The decrease in revenues during the nine months ended February 28, 1997, of $15,147 is primarily attributable to the decrease in ARS's revenues of $164,891 or 74% when compared with revenues of $224,449 generated during the same period in 1996. ARInternet's revenues were $353,896, an increase of $149,744 or 73%, over the previous year, and partially offset the declines experienced by ARS. The Company's direct cost of services decreased 73,035 or 35%, from $207,755 during the nine months ended February 29, 1996, to $134,720 during the same period in 1996. Of this amount, ARS decreased $95,876 while ARInternet's cost of services increased $22,841. The decrease in direct costs of ARS was primarily related to the lower sales for the period and a decrease in the amount of amortization of previously capitalized software development costs, compared to the same period in 1996. The increase in ARInternet's direct costs of sales was the direct result of increased sales during the current period. Indirect operating costs decreased $31,742 or 100%, from $31,742 during the nine months ended February 29, 1996, to $0 during the nine months ended February 28, 1997. The entire decrease was directly related to a decrease by ARS in technical staff which occurred during the second half of the previous fiscal year. General and administrative ("G&A") expenses decreased $157,699 or 34%, from $458,453 in 1996, to $300,754 during 1997. Most notably, the G&A expenses associated with ARS decreased $104,293 or 68%, while ARInternet's G&A expenses decreased $53,406 or 17%, during the nine months ended February 28, 1997. The decrease in ARS's G&A expenses was predominantly attributable to a reduction in personnel and marketing related expenses during the period. The decrease in ARInternet's G&A expenses related to a reduction in staffing during 1997 when compared to the same period in 1996. As a result of the foregoing, the Company realized an operating loss from continuing operations for the nine months ended February 28, 1997, of $(22,020) compared to an operating loss of $(269,349) for the same period during 1996. ARS posted an operating loss of $(28,021) for the nine months ended February 28, 1997, which loss represented an improvement of $67,020 or 71% from the operating loss of $(95,041) during the same period in 1996. 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 operating income of $6,001 for the nine months ended February 28, 1997, which represented an improvement of $180,309 from the operating loss of $(174,308) during the same period in 1996. This net improvement for ARInternet was directly attributable to an increase in the overall revenue levels from the previous year due to increases in the number of subscribers to ARInternet. Interest and other expenses decreased $89,017 or 96%, from $93,035 for the nine months ended February 29, 1996, to $4,018 during the nine months ended February 28, 1997. The decrease was primarily related to the fact that the Company eliminated consulting expenses incurred during the same period in 1996 in conjunction with the issuance of common stock by the Company. The Company sustained a loss from continuing operations of $(26,038) for the nine months ended February 28, 1997, compared to a loss from continuing operations of $(362,384) during the same period in 1995. This reduction in losses from continuing operations was the result of improved operating margins from both ARS and ARInternet, as well as the lack of any consulting expenses related to the issuance of stock awards. Loss per common share from continuing operations decreased from $(0.06) in 1996 to $(0.00) in 1997, as a result of the reduced loss for the current fiscal quarter when compared to the same period in 1996. FROM DISCONTINUED OPERATIONS ---------------------------- ARM's revenues for the nine months ended February 28, 1997, were $5,829,716, or (8)% below revenues of $6,353,675 for the same period during 1996. The decrease in revenues during the nine months ended February 28, 1997, of $523,959 is primarily attributable to 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 29, 1996. ARM's direct cost of services decreased $261,346 or 7%, from $3,908,592 during the nine months ended February 29, 1996, to $3,647,246 during the same period in 1996. ARM's decrease in direct costs consisted of a decrease in direct labor and a 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. ARM's indirect operating costs decreased $168,314 or 11%, from $1,481,297 during the nine months ended February 29, 1996, to $1,312,983 during the nine months ended February 28, 1997. This 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. ARM's general and administrative ("G&A") expenses increased $15,812 or 2%, from $683,318 in 1996, to $699,130 during 1997. The increase in ARM's G&A expenses was directly attributable to the increase in professional fees. This was partially offset by a reduction in ARM's G&A staff for the current fiscal period when compared to the previous year. As a result of the foregoing, ARM realized operating income for the nine months ended February 28, 1997, of $170,357 compared to operating income of $280,468 for the same period during 1996. The $110,111 decrease in ARM's 1997 operating margin was primarily related to a decrease in fees realized on ARM's contracts due to the higher indirect rates realized by ARM during 1997, in particular its general and administrative expenses, as well as, a decrease in award fees being realized on the Company's largest contract. ARM's interest and other expenses decreased $335,902 or 71%, from $470,230 for the nine months ended February 29, 1996, to $134,328 during the nine months ended February 28, 1997. Net interest expense decreased $192,452 or 63% from 1996. The decrease in interest costs was the result of ARM not accruing any interest on either the delinquent employee 401(k) contributions nor the unpaid federal withholding taxes (relating to its pre-petition liabilities) during the nine months ended February 28, 1997, when compared to the same period in 1996. Other expenses also decreased $143,450 during the nine months ended February 28, 1997. This was primarily due the fact that ARM did not record any penalties during the current period because the accrual of penalties and interest is stayed as a result of the Company filing for protection under Chapter 11 of the United States Bankruptcy Code. ARM sustained a net loss before income taxes of $(88,864) for the nine months ended February 28, 1997, compared to a net loss of $(189,762) during the same period last year. The primary reasons for this improvement were the increase in operating margins together with lower interest and penalty costs realized during 1997, offset by the increase in bankruptcy related professional fees. LIQUIDITY AND CAPITAL RESOURCES - 1996 COMPARED TO 1995 - - ------------------------------------------------------- Total assets decreased $180,281 or 10%, from $1,797,620 at May 31, 1996, to $1,617,339 at February 28, 1997. Total liabilities on the other hand decreased from $3,899,769 to $3,834,390 over the same period, an decrease of $65,379, or 2%. The most significant reason for the decrease in total assets was the decrease in accounts receivable. At February 28, 1997, the Company had $679,880 and $741,139 in billed and unbilled receivables, respectively. Billed receivables decreased $410,981 or 37% from May 31, 1996, while unbilled receivables increased $307,315 or 71% from May 31, 1996. The decrease in billed accounts receivable was primarily the result of the decreases in the average amount billed due to decreases in revenues and increases in unbilled receivables. The increase in unbilled accounts receivable related to an increase in the amount of work that was unbilled at February 28, 1997, which was 10 days as compared to the 3 days at May 31, 1996. The most significant reasons for the $183,444 increase in post-petition liabilities collectively, were increases: in accounts payable of $184,235, accrued salaries and benefits of $167,118 and other accrued expenses of $49,687, while notes payable decreased by $254,800. The increase in accounts payable related primarily to unpaid professional fees related to the bankruptcy proceeding, which must be court approved before they can be paid. The primary reason for the increase in accrued salaries and benefits was the increase in accrued wages earned by employees (10 days as compared to 4 days at May 31, 1996). The decrease in pre-petition liabilities of $(248,823) consisted of decreases of: $(67,255) in accounts payable, $(28,676) in accrued salaries and related benefits, and $(160,388) of accrued payroll taxes and withholdings. The decrease in pre-petition accounts payable resulted from two customers offsetting their pre-petition receivable claims against their pre- petition payable claims. These two customers were both customers and vendors of ARM, and according to bankruptcy rules, have the right to offset amounts owed to them by the amounts owed by them. The decrease in pre-petition accrued salaries and benefits related to the decrease in pre-petition accrued vacation, the payment for which was authorized by a bankruptcy court order. The decrease in pre-petition accrued taxes and withholdings represented $135,000 of monthly payments being made by ARM to the IRS under court order, plus the collection of a $29,442 pre-petition account receivables which was to be paid to the IRS as part of the same court order. The Company's working capital deficit remained relatively the same during the nine months ended February 28, 1997. At February 28, 1997, the working capital deficit was $(2,350,052) compared to a deficit of $(2,273,810) at May 31, 1996. FILING OF CHAPTER 11 PETITION BY ARM - - ------------------------------------ Because ARM was in default under its December 1, 1995, installment agreement with the IRS, the Company's assets were 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 ARM. As a result, on April 2, 1996, ARM was forced to file for protection under Chapter 11 of the United States Bankruptcy Code. 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 agreed to pay $15,000 a month starting April, 1996, towards its arrearage with the IRS. The April payment consisted of $13,600 in cash seized by the IRS on April 1, 1996. Future monthly payments have been and will continue to be made directly to the IRS by CFC from borrowings made by ARM. ARM was also required to remit to the IRS collections on certain billed receivables that were outstanding as of April 2, 1996 (which totaled approximately $139,700 and consisted of final vouchers on 14 old contracts). In addition, as part of the agreement with the IRS and as required by the Bankruptcy Court, ARM was required to remit its post-petition taxes when due and provide proof of such payments to the IRS and the Bankruptcy Court on a timely basis. The Bankruptcy Court approved the agreements with the IRS and CFC, and approved ARM's operating budget for 15 days through April 21, 1996. These agreements have continued to be renewed by the Bankruptcy Court. SALE OF ARM'S GOVERNMENT CONTRACTS - - ---------------------------------- ARM informed the Bankruptcy Court and the IRS that it would continue to pursue the sale of ARM's business. To that end, ARM placed ads in several newspapers, including The Wall Street Journal. ARM received approximately 34 inquires to these ads. During May and June 1996, the Company sent information about ARM to 18 Companies and held serious discussions with 7 Companies concerning the sale of ARM's assets. On June 24, 1996, the Company accepted a contract for the sale of certain of ARM's assets for approximately $1.5 Million. The sale was subject to Bankruptcy Court approval, a hearing on which was originally scheduled for July 26, 1996. This hearing was subsequently moved to July 30, 1996. On July 30, 1996, the hearing was conducted. At the hearing, a total of four qualified bidders attended, and after extensive bidding, an offer was accepted for $2.1 Million. During August 1996, management and ARM's bankruptcy attorney negotiated a contract, which was signed on August 30, 1996. A court order documenting the bidding procedure as well as the contract was submitted to the Bankruptcy Court on September 26, 1996, and was approved on October 4, 1996. The sale also required the approval of a majority of the Company's shareholders. On October 30, 1996, at the Company's Annual Meeting of Shareholders, a majority of the Company's shareholders approved the sale. The sale was also subject to the successful novation of ARM's government contracts, which request was submitted to the Government in October 1996, with the information supporting the request for novation submitted in early November 1996. Approval of the novation was expected to take approximately 60 to 90 days from submission. On January 31, 1997, because novation by the government had not occurred, the purchaser choose to terminate the purchase agreement. During February 1997, management meet with several other interested purchasers, including the other three bidders that had attended the July 1996, hearing. On March 3, 1997, the Company accepted a new contract for the sale of certain of ARM's assets for approximately $1.5 Million from Space Applications Corporation ("SAC"). The sale was subject to Bankruptcy Court approval, which was scheduled for April 11, 1997. On April 11, 1997, the hearing was conducted. At the hearing, a total of three qualified bidders attended, and after extensive bidding, an offer was accepted for $1.75 Million from SAC. Because of the change in the purchase price as well as in the distribution of funds, the original SAC contract required modifications. An amendment to the contract reflecting these changes was signed on April 16, 1997. A court order documenting the bidding procedure is also expected to finalized within the 10 days of the hearing. The sale is subject to the successful novation of ARM's government contracts, which request is expected to be submitted to the Government within 5 to 10 days of the hearing. Is it is hoped that approval of the novation will take place within 45 to 60 days from submission, although this is not certain. Upon notification of the government's novation approval the sale will be completed, although there can be no assurances that the government will approve the novation. The following is a list of the purchased and excluded assets: PURCHASED ASSETS EXCLUDED ASSETS ---------------- --------------- - - - All contract rights (including - ARM's charter and status as a project contracts), corporation, its minute book, - - - All inventory, stock transfer records, and - - - All books and records, similar records relating to - - - All furniture, fixtures and ARM's organization, existence equipment, or capitalization, and the - - - All proprietary rights (patents, capital stock of ARM, etc.), - Billed accounts receivable as - - - All unbilled accounts receivables of closing relating to expired contracts as - Intercompany receivables, January 31, 1997, - All ARM's cash accounts, - - - All other unbilled accounts receivable - ARM's rights to occupy real as of the closing date property pursuant to leases of real property and any lease- hold improvements made thereto, - Any other property identi- fied by the Purchaser prior to the closing. PLAN OF REORGANIZATION/PAYMENT AND PRE-PETITION LIABILITIES - - ----------------------------------------------------------- In the event that the sale referenced above is completed, ARM (the "Debtor") will file a Plan of Reorganization, which will, among other things, specify how much of the outstanding pre-petition liabilities will be paid and over what period of time. It is expected that a Plan of Reorganization will be filed with the Bankruptcy Court within 30 days of completing the sale. This Plan is expected to take several months to receive Bankruptcy Court approval. It is also expected that between the monies generated from the sale of ARM's contract rights plus the collection of outstanding accounts receivable (which are not part of the sale), there will not be sufficient monies to liquidate all of ARM's pre-petition liabilities. Furthermore, it appears that the unsecured creditors (accounts payable) will receive little or nothing towards their pre-petition claims. Specifically, it appears that the following will be paid in full as a result of the Plan of Reorganization: 1) the secured claim of CFC, ARM's pre-petition and post-petition lender, 2) the principal portions of the tax amounts owed to the IRS, 3) approximately $255,200 of the $343,361 owed to the employees for accrued vacation, $530,917 of the $676,000 owed to the 401(k) Plan as of April 2, 1996, as well as certain employees' pre-petition claims for unreimbursed travel expenses of approximately $50,000, and, 4) approximately 90% of the principal portions of the tax amounts owed to the various state authorities. Although these are the current expectations, there can be no assurance that these amounts will be paid until the Plan of Reorganization is submitted and confirmed by the Bankruptcy Court. COLLECTION OF THE INTER-COMPANY AMOUNTS OWED TO ARM - - --------------------------------------------------- As of April 2, 1996, ARS owed ARM approximately $1.2 Million and ARInternet owed ARM $0.4 Million. These amounts resulted from ARM paying certain operating expenses of ARS's and ARInternet during their start-up phases and providing continued money thereafter to fund operations. Since these amounts are owed to ARM, the ultimate collection of these advances will be supervised and controlled by the Bankruptcy Court. As of February 28, 1997, ARS has only one part-time employee and its assets and sales are minimal. As a result, ARS has still not achieved breakeven operations. Therefore payment of any of the amount it owes ARM is extremely doubtful. On the other hand, ARInternet has essentially achieved breakeven operations as of May 31, 1996. Therefore, it can reasonably be expected that ARInternet will be required to repay some amount to liquidate its debt to ARM. The ultimate amount will be determined by the Bankruptcy Court. IMPACT ON ARC AFTER THE SALE OF ARM IS COMPLETED - - ------------------------------------------------ During the fiscal year ended May 31, 1996, ARM's operations constituted 94% of ARC's total revenue. The sale currently contemplated will sell essentially all of ARM's operations to the Purchaser and eliminate all of ARM's revenues. Therefore, ARS and ARInternet will be the only remaining operating entities. Up until the bankruptcy filing, ARM had been forced to continue to fund ARS's and ARInternet's operations. During the fiscal year ended May 31, 1996, (through April 2, 1996), ARM funded approximately $204,600 of ARS and ARInternet expenses. From April 2, 1996 on, because of the ARM bankruptcy proceedings, ARM ceased all such advances and ARS and ARInternet were forced to fund their own operations. ARS is still not operating at cash flow breakeven, so it is doubtful that it can survive without a substantial infusion of cash or a significant increase in revenues. Management is considering several options for ARS, including ceasing its operations. ARInternet on the other hand, has steadily increased its revenues and as of February 28, 1997, had approximately 1,000 subscribers and had essentially reached breakeven operations. Management believes that ARInternet's revenues and business will continue to grow and that ARInternet will ultimately be a successful business on its own, however there can be no assurance of this. The space currently occupied by ARM is not covered by the Bankruptcy proceeding, since the lease is held by ARC. Management of ARC has enlisted the services of a real estate broker to find a tenant to take over this space when ARM's operation are sold. The landlord has also been apprised of the ARM sale and is attempting to find an alternate tenant, but is under no obligation to release ARC from its obligation under the lease. On December 1, 1996, ARM vacated 6,349 sq. ft. or 64% of the 10,072 sq. ft. previously occupied by ARM. Effective January 1, 1997, the Company signed a lease amendment that reduced its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes the 5,011 of the 6,349 sq. ft. vacated on December 1, 1996. Effective January 1, 1997, the Company signed a lease amendment that reduced its rental obligation by 1,338 sq. ft. to 8,734 sq. ft., which includes 5,011 of the 6,349 sq. ft. vacated on December 1, 1996. The landlord and the Company have been negotiating to relieve the Company of all obligations related to the space vacated by the Company on December 1, 1996 as well as the remainder of the leased space when the ARM sale is completed. The landlord's last offer in this regard was that it would do so for a total payment of approximately $56,000, $13,600 of which would be due at the time of signing the lease amendment and the balance in equal installments over the remainder of the lease. The Company countered this proposal, which counteroffer is currently being considered by the Landlord. In addition to the continuing lease costs, ARC will continue to incur expenses to maintain its status as a public company. The sale of ARM, if completed, will dramatically change the Company's balance sheet and statement of operations. Through the bankruptcy proceeding, all of ARM's debts, which total $3.6 million at February 28, 1997, will be either liquidated or discharged. This will decrease interest and penalty costs that the Company has been incurring. If ARS and ARInternet's revenues can be increased to produce net profits and a positive cash flow, the Company may in fact benefit from the sale of ARM. However, unless and until this occurs, the Company may not have sufficient capital to achieve its current business plan, which raises substantial doubt as to the Company's ability to continue as a going concern after the sale of ARM is completed. 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. 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 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 21, 1997 By: Dr. S.P.S. Anand ---------------- ------------------------------------- Dr. S.P.S. Anand President and Chief Executive Officer Date: April 21, 1997 By: Dennis H. O'Brien ----------------- ------------------------------------- Dennis H. O'Brien Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----