<PAGE>
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 August 31, 1995
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 October 16, 1995, the Company had 6,811,083 shares of its $.01 par
value common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes _____ No ______
<PAGE>
FORM 10-QSB
APPLIED RESEARCH CORPORATION
INDEX
Part I: FINANCIAL INFORMATION Page No.
- ------------------------------------ --------
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1995 and May 31, 1995 3-4
Condensed Consolidated Statements of Operations -
Three months ended August 31, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows -
Three months ended August 31, 1995 and 1994 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Part II: OTHER INFORMATION
--------------------------
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
1995 1995
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 30,724 $ 15,028
Accounts receivable, net 1,568,773 1,792,853
Inventory, at cost 2,919 3,709
Other current assets 60,507 60,819
---------- ----------
TOTAL CURRENT ASSETS 1,662,923 1,872,409
PROPERTY AND EQUIPMENT, AT COST
Furniture and equipment 201,750 192,880
Computer equipment 480,549 464,557
Laboratory equipment 246,365 246,365
Leasehold improvements 22,322 22,322
--------- ----------
950,986 926,124
Less accumulated depreciation and
amortization 795,902 776,807
---------- ----------
NET PROPERTY AND EQUIPMENT 155,084 149,317
INTANGIBLE ASSETS, NET OF AMORTIZATION 52,976 57,357
OTHER 43,275 41,075
--------- ----------
TOTAL ASSETS $1,914,258 $2,120,158
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
3
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
August 31, May 31,
1995 1995
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
LIABILITIES
- -----------
CURRENT LIABILITIES
Notes payable, current maturities $ 826,086 $ 911,681
Accounts payable 493,627 549,295
Accrued salaries and benefits 1,106,717 1,185,641
Accrued payroll taxes and withholdings 650,012 481,576
Other accrued liabilities 463,580 392,223
Billings in excess of costs and
anticipated profits 32,888 59,594
Deferred revenue 20,424 14,444
Income taxes payable 9,560 19,860
Provision for contract losses 40,000 40,000
--------- ----------
TOTAL CURRENT LIABILITIES 3,642,894 3,654,314
NOTES PAYABLE, NET OF CURRENT MATURITIES 25,000 25,000
--------- ----------
TOTAL LIABILITIES 3,667,894 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, 5,944,416 shares
issued and outstanding 2,972 2,972
Capital in excess of par value 1,026,649 1,026,649
Accumulated deficit (2,783,257) (2,588,777)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (1,753,636) (1,559,156)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $1,914,258 $2,120,158
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
4
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue $2,317,846 $2,512,515
Operating costs and expenses:
Direct cost of services 1,441,041 1,547,592
Indirect operating cost 533,512 579,068
General & administrative expenses 381,479 360,213
---------- ----------
Total operating costs and expenses 2,356,032 2,486,873
---------- ----------
Operating income (loss) (38,186) 25,642
Other expense:
Interest expense 80,990 79,099
Compensation expense associated
with stock awards 29,688 -
Other, net 45,616 18,697
---------- ----------
Total other expense 156,294 97,796
---------- ----------
Loss before income taxes (194,480) (72,154)
Income taxes - -
---------- ----------
Net loss $ (194,480) $ (72,154)
---------- ----------
---------- ----------
Net loss per share $ (0.03) $ (0.01)
---------- ----------
---------- ----------
Weighted average number of shares outstanding 5,944,416 5,944,416
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
5
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (194,480) $ (72,154)
Adjustments to reconcile net loss to net cash
provided (used) in operating activities:
Depreciation 19,095 13,214
Amortization 5,076 18,339
Changes in assets and liabilities:
Decrease in accounts receivable 224,080 441,488
Decrease in inventory 790 562
Decrease in other current assets 312 15,591
Increase in intangible assets (695) (13,708)
Increase in other assets (2,200) (8,666)
Decrease in accounts payable (55,668) (140,809)
Decrease in accrued salaries and benefits (78,924) (4,660)
Increase in accrued payroll
taxes and withholdings 168,436 51,320
Increase (decrease) in other
accrued liabilities 71,357 (4,024)
Decrease in billings in excess of
costs and anticipated profits (26,706) (62,493)
Increase in deferred revenue 5,980 -
Decrease in income taxes payable (10,300) -
---------- ----------
Net cash provided in operating activities 126,153 234,000
---------- ----------
Cash flows from investing activities:
Capital expenditures (24,862) (27,907)
---------- ----------
Net cash used in investing activities (24,862) (27,907)
---------- ----------
</TABLE>
CONTINUED
See accompanying notes to the
condensed consolidated financial statements
6
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from equipment loan - 50,515
Proceeds of loans from receivables
assignment 1,743,939 1,982,847
Repayment of loans from receivables
assignment (1,825,948) (2,210,094)
Repayment of notes payable to bank - (25,000)
Repayment of equipment loan (3,586) -
----------- ----------
Net cash used in financing activities (85,595) (201,732)
----------- ----------
Net increase in cash 15,696 4,361
Cash at the beginning of period 15,028 32,804
----------- ----------
Cash at the end of period $ 30,724 $ 37,165
----------- ----------
----------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the quarter for interest $ 58,959 $ 78,229
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the
condensed consolidated financial statements
7
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of August 31, 1995, the condensed
consolidated statements of operations for the three months ended August 31,
1995 and 1994, and the condensed consolidated statements of cash flows for
the three months ended August 31, 1995 and 1994, 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 August 31,
1995, 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 August 31, 1995, 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 August 31, 1995, 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 statement of operations for the three months
ended August 31, 1994, and the condensed consolidated statement of cash flows
for the three months then ended have been reclassified to conform to the
August 31, 1995, presentation.
4. NOTES PAYABLE
The Company is in default of its loan agreement with its Lender pursuant to a
provision requiring it to remit all federal payroll withholding taxes as they
become due. As disclosed in Note 6, the Company was delinquent on its federal
payroll withholding taxes in the approximate amount of $607,800 as of August
31, 1995. Although the Company has not received any notice of default from
the Lender, all borrowings under this arrangement have been shown as current
notes payable in the consolidated financial statements.
8
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. RETIREMENT PLAN
At August 31, 1995, the Company had not remitted employee contributions of
$330,456. During 1995, the Company reached an agreement with its Lender,
pursuant to which the Lender has been authorized to, and has remitted the
employee contributions as they become due. Under this agreement, the Lender
deducts the current amounts due to the plan from the Company's borrowings
against billed receivables. As a result, since February 1, 1995, the Company
(through its Lender) has remitted all 1995 employee contributions as they
become due. 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
August 31, 1995, the Company had accrued interest payable of approximately
$64,400.
At August 31, 1995, the Company had not remitted employer contributions of
$173,428. The Company has informed its employees that it intends to pay
interest on these amounts at the prevailing statutory rates (approximately
5%). At August 31, 1995, the Company had accrued interest payable of
approximately $3,100.
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 increases to 75% during calendar year 1995.
Starting January 1, 1996, the percentage increases to 100%. The contract
modifications will remain in effect until all past due amounts owed the
401(k) plan have been repaid. Through August 31, 1995, $30,310 of fees earned
under these contracts had been remitted to the 401(k) plan in accordance with
the contract modifications. Although the fees generated by these contracts
will ultimately liquidate the past due amounts owed to the 401(k) 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.
6. WITHHOLDING TAXES
As of August 31, 1995, the Company had not remitted federal payroll tax
withholdings totaling approximately $607,800 relating to the fourth calendar
quarter of 1994 and the second calendar quarter of 1995. As a result, the
Company has accrued penalties and interest on those delinquent amounts
totaling approximately $220,000 through August 31, 1995. The Company has been
in contact with the Internal Revenue Service, and has informed them that it
is currently attempting to raise additional capital in order to liquidate
this obligation. The Company has also requested that a portion of the
penalties be abated, however, there has been no indication that any of these
penalties and/or interest charges will be abated. During September, 1995, the
Company remitted a $50,000 payment to the IRS. The IRS has also demanded a
$250,000 payment be made on October 27, 1995, with the balance due by
November 30, 1995. In the event the Company fails to comply with the current
payment schedule, and the IRS and the Company are unable to reach acceptable
alternate payment arrangement, all or a portion of the Company's assets would
be subject to seizure and possible sale by the IRS.
9
<PAGE>
APPLIED RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Concluded
The Company is current with all of its state withholding taxes. The Company
has remitted all of its federal withholding tax payments on a current basis
since July 1, 1995.
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 stock issued 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 has recorded compensation expense
equal to the average price between the bid and asked prices (approximately
$0.30 a share) on the date the agreements were signed. During the quarter
ended August 31, 1995, the Company accrued $29,688 of compensation expense
associated with the first 100,000 shares that were scheduled to be released
on August 1, 1995. At August 31, 1995, this amount is included in other
accrued liabilities. This amount will be reclassified to equity in September
1995.
8. SUPPLEMENTAL SEGMENT INFORMATION
The Company's operations have been classified into three business segments:
Sales to unaffiliated customers:
<TABLE>
<CAPTION>
ARM ARS ARI Consolidated
--- --- --- ------------
<S> <C> <C> <C> <C>
QUARTER ENDED:
-------------
August 31, 1995 $2,152,516 $122,386 $42,944 $2,317,846
August 31, 1994 $2,388,560 $123,955 - $2,512,515
</TABLE>
Operating income (loss) from continuing
operations before other (income) expense,
income taxes and extraordinary item:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
QUARTER ENDED:
-------------
August 31, 1995 $72,274 $(26,520) $(83,940) $(38,186)
August 31, 1994 $98,645 $(73,003) - $ 25,642
</TABLE>
Operating income (loss) equals total net revenues less operating expenses.
10
<PAGE>
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 AUGUST 31, 1995 COMPARED TO 1994
The Company's revenues for the quarter ended August 31, 1995, were
$2,317,846, or (8)% below revenues of $2,512,515 for the same period during
1994. The decrease in revenues during the quarter ended August 31, 1995, of
$194,669 is primarily attributable to the decrease in ARM's revenues of
$(236,044) or (10)% over 1994 revenues of $2,388,560. 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 August 31, 1994. Also
contributing to the overall decease in revenues was a modest decrease in
product sales by ARS of $(1,569) or (1)%, from 1994 revenues of $123,955.
ARInternet's revenues were $42,944, and partially offset the declines
experienced by ARM and ARS.
The Company's direct cost of services decreased $106,551 or 7%, from
$1,547,592 in 1994, to $1,441,041 during the same period in 1995. Of this
amount, ARM and ARS contributed decreases of $125,804 and $2,792,
respectively, while ARInternet's cost of services increased $22,045. ARM's
decrease in direct costs consisted of a $45,283 decrease in direct labor and
a $80,521 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 decrease in the amount of
amortization of previously capitalized software development costs, which were
$13,600 less in 1995 than in 1994.
Indirect operating costs decreased $45,556 or 8%, from $579,068 in 1994, to
$533,512 during 1995. Of this amount, ARM's indirect operating costs
decreased $40,710 or 7%, while ARS's decreased $4,846 or 23%. ARM's decrease
is directly related to a decrease in fringe benefit costs incurred as a
result of fewer staff, as well as a decrease in the amount of indirect labor
being charged to overhead. ARS's decrease was directly related to a decrease
in technical staff which occurred during the second half of the previous
fiscal year.
General and administrative ("G&A") expenses increased $21,266 or 6%, from
$360,213 in 1994, to $381,479 during 1995. Most notably, the G&A expenses
associated with ARInternet increased $104,839 during the quarter. Offset
against this increase were decreases in ARM's and ARS's G&A expenses of
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS FROM OPERATIONS
$43,158 or 16% and $40,415 or 42%, respectively. ARM's decrease related to an
decrease in research and development costs incurred as well as a reduction in
other G&A expenses incurred during 1995 when compared to 1994. The decrease
in ARS's G&A expenses was attributable to a reduction in marketing related
expenses and a decrease in indirect labor charged during the period.
As a result of the foregoing, the Company realized an operating loss for the
quarter ended August 31, 1995, of $(38,186) compared to an operating profit
of $25,642 for the same period during 1994. ARM posted an operating profit of
$72,274 in 1995 compared to $98,645 during the same period in 1994. The
decrease in ARM's operating margin related to lower fees (profit) being
realized on contracts during fiscal 1995 compared to the same period in 1994.
ARS posted an operating loss of $(26,520) for 1995, which loss represented an
improvement of $46,483 or 64% from the operating loss of $(73,003) during the
same period in 1994. 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 net operating loss of $(83,940)
during the quarter ended August 31, 1995, also decreased the Company's
operating margins.
Interest and other expenses increased $58,498 or 60%, from $97,796 in 1994,
to $156,294 during 1995. Net interest expense increased $1,891 or 2% from
1994. The increase in interest costs was the result of increased interest on
unremitted employee 401(k) contributions during fiscal 1995 when compared to
the same period in 1994. Other expenses also increased $26,919 during 1995.
This was primarily due to the amount of penalties accrued as a result of the
late payment of federal withholding taxes during the quarter ended June 30,
1995. (See Notes to the Condensed Consolidated Financial Statements, Notes 5
and 6). 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 $(194,480) for the quarter ended August
31, 1995, compared to a net loss of $(72,154) during the same period last
year. This loss reflects a decrease in ARM's operating margins of $(26,371),
an increase in ARS's operating margin of $46,483, and net operating loss
associated with ARInternet of $(83,940), which, in addition to the increase
in interest and other costs of $58,498, negatively impacted overall margins
by $(122,326) when compared to same quarter in 1994.
Loss per common share likewise increased from $(0.01) in 1994, to $(0.03)
during 1995, as a direct result of the decrease in operating margins,
increase in interest and other costs.
LIQUIDITY AND CAPITAL RESOURCES - 1995 COMPARED TO 1994
Total assets decreased $205,900 or 10%, from $2,120,158 at May 31, 1995, to
$1,914,258 at August 31, 1995. Total liabilities on the other hand decreased
from $3,679,314 to $3,667,894 over the same period, a decrease of $11,420.
The most significant reason for the decrease in total assets was a decrease
in billed and unbilled accounts receivable of $224,080. At August 31, 1995,
the Company had $704,685 and $864,088 in billed and
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS FROM OPERATIONS
unbilled receivables, respectively. Billed receivables decreased $363,740 or
34% from May 31, 1995, while unbilled receivables increased $139,660 or 19%
from May 31, 1995. The decrease in billed accounts receivable was primarily
the result of: a) fewer billings actually outstanding at August 31, 1995,
when compared to May 31, 1995 (see related increase in unbilled receivables),
b) a decrease in the average amount billed due to the decrease in revenues
and, c) a concerted effort to reduce the number of days that billings were
outstanding. The increase in unbilled accounts receivable was caused by an
increase in the amount of work that was unbilled (nine days) at August 31,
1995, when compared to May 31, 1994 (only two days). Consistent with the
decrease in accounts receivable, the Company decreased the current maturities
of notes payable by $85,595, accounts payable by $55,668 and accrued salaries
and benefits by $78,924.
The Company's working capital deficit continued to grow during the quarter
ended August 31, 1995, increasing from a deficit of $(1,781,905) to a deficit
of $(1,979,971). Adding to the Company's working capital deficit during the
quarter ended August 31, 1995, was an increase in unremitted payroll taxes
withheld of $168,436, from $481,576 at May 31 1995, to $650,012 at August 31,
1995. Of the August 31, 1995, balance, approximately $607,800 of federal
withholding taxes were past due.
In addition, the following also impacted the Company's liquidity and capital
resources:
- During the quarter ended August 31, 1995, the Company
purchased approximately $24,900 of property and equipment.
Included in total purchases, is approximately $15,800 of
equipment for ARInternet, representing computer hardware and
software required to provide ARInternet with the capability
of offering Internet access and services. The remaining
$9,100 of purchases represented ARM purchases of additional
computer hardware. The Company does not plan any major
additional equipment purchases unless ARInternet's growth
warrant them and is also seeking alternate equipment
financing to help finance ARInternet's equipment purchases.
- 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 the 401(k) plan in order to reduce the past due
amounts owed. The portion of fees applied to the Plan was
25% for fees earned from January 1, 1995, and increases to
75% during calendar year 1995. Starting January 1, 1996,
the percentage increases to 100%. The contract
modifications will remain in effect until all past due
amounts owed the Plan have been repaid. Through August 31,
1995, $30,310 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 3.5 years to bring all past due amounts owed
the Plan current absent additional payments from other
sources. Should the Company be successful in raising the
additional capital it is currently seeking, it intends to
liquidate as much of the remainder of this obligation as
possible from the proceeds generated from such an offering.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS FROM OPERATIONS
- During September, 1995, the Company remitted a $50,000
payment to the IRS. The IRS has demanded a $250,000 payment
be made on October 27, 1995, with the balance due by
November 30, 1995.
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 $777,800, payment of past due employee and
employer contributions, and accrued interest due to the Company's 401(k) plan
totaling $571,300, payments to subcontractors related to the Company's
Government contracts, 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, the Company may not have sufficient capital to achieve its current
business plan. Additionally, 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:
- In January, 1995, the Company signed an agreement with
a New York investment banking firm to raise between $1.0 -
$5.0 Million in capital. Specifically, the Company is
seeking to raise $1.5 Million immediately, followed by a
second round of financing, perhaps twelve (12) to eighteen
(18) months later. As compensation, this firm would receive
warrants or options to purchase Common Stock in the Company
equal to between 5% and 10% of the amount raised, at
approximately the same price that shares would be sold in
the offering. The agreement contemplates that money will be
raised on a best efforts basis. Thus, although initial
indications appear promising, there can be no assurance that
the firm will be able to raise any capital, or that in the
event the firm is able to raise additional capital, that the
money raised will be sufficient to materially improve the
Company's operations.
- During fiscal 1995, the Company completed design of its
BIO-UVB Meter instrument and was granted two (2) patents.
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 that already 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 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. Although the
Company's common stock was delisted from the Philadelphia
Stock Exchange, the Company is listed on the Over-the-
Counter Electronic Bulletin Board system. Accordingly,
these companies believes that they can find and attract
market makers for the Company's common stock. As
compensation, the Companies will each receive 50,000 shares
of the Company's common stock each month for eight months.
The Company has agreed to register with the Securities and
Exchange Commission any stock issued pursuant to these
agreements. Both agreements can be canceled by the Company
at any time.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS FROM OPERATIONS
- During the quarter ended August 31, 1995, ARM funded
approximately $29,000 of ARS expenses. During October, 1995,
ARM discontinued paying these expenses.
- During the quarter ended August 31, 1995, ARInternet
began to pay for all of its non-payroll expenses. During
October, 1995, ARInternet began to pay for a portion of its
payroll expenses, thus reducing the cash dependence on ARM.
These payments are projected to increase each
month until ARInternet reaches cash flow breakeven, which is
projected to occur during the latter half of the current
fiscal year. In addition, to ease the cash burden currently
being caused by ARInternet, during October, 1995, ARInternet
reduced its the salary expenses by 20% and the other
expenses by approximately 10%.
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 or a
large infusion of capital, the likelihood of which 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.
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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
None
16
<PAGE>
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.
/s/ S.P.S. Anand October 16, 1995
- ------------------------------------------ ----------------------
Dr. S.P.S. Anand Date
President and Chief Executive Officer
/s/ Dennis H. O'Brien October 16, 1995
- ------------------------------------------ ----------------------
Dennis H. O'Brien Date
Vice President and Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages 3, 4 and 5 of the Company's form 10-QSB for the fiscal quarter ended
August 31, 1995, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-1-1995
<PERIOD-END> AUG-31-1995
<CASH> 30,724
<SECURITIES> 0
<RECEIVABLES> 1,568,773
<ALLOWANCES> 0
<INVENTORY> 2,919
<CURRENT-ASSETS> 1,662,923
<PP&E> 950,986
<DEPRECIATION> 795,902
<TOTAL-ASSETS> 1,914,258
<CURRENT-LIABILITIES> 3,642,894
<BONDS> 0
<COMMON> 2,972
0
0
<OTHER-SE> 1,026,649
<TOTAL-LIABILITY-AND-EQUITY> 1,914,258
<SALES> 2,317,846
<TOTAL-REVENUES> 2,317,846
<CGS> 1,441,041
<TOTAL-COSTS> 2,356,032
<OTHER-EXPENSES> 75,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,990
<INCOME-PRETAX> (194,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> (194,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (194,480)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
